The International Securities Services Association (ISSA), a Switzerland based association that promotes best practices in the securities sector, has added their voice to the emerging digital asset or crypto-asset sector. This includes security tokens, payment tokens (cryptocurrencies, stablecoins etc.) and utility tokens.
In October 2018, ISSA created a DLT working group to review the emerging sector of crypto-assets. The paper explores “the issuance, settlement, safekeeping and asset servicing of Crypto Assets from a practical point of view.”
“The potential of Crypto Assets to create new investable assets and investment eco-systems is unmistakable”
While acknowledging that DLT has the potential to create new asset classes and streamline services, the group is of the opinion that “disruption is less likely to occur through the disintermediation of existing roles than originally thought.” This is due to the fact that incumbent intermediaries still play a vital role. Whether the asset is digital or not – you still need custody etc.
The DLT working group states:
“a rapid transition from the securities markets of today to a marketplace dominated by Crypto Assets issued on DLT networks is unlikely to occur. At the moment, securities markets provide trustworthy capital-raising and channeling functions that work well. Instead, permissioned and non-permissioned DLT networks are likely to arise and co-exist alongside traditional securities market infrastructures. This creates the need for them to be able to inter-operate.”
While the promise of DLT and crypto assets may be obvious, the current complexity of the traditional ecosystem makes change really hard.
“DLT has the potential to shift post-trade processing from a linear model to a networked model. It is likely to encourage the emergence of new eco-systems, some of which will link end-investors and issuers directly. Other eco-systems will likely emerge that enable new entrants and new technologies to supplant existing service providers or provide entirely new services.”
For the issuance of assets, be they securities or otherwise, the DLT working group believes crypto assest have the potential to simplify the entire process. Highly illiquid or non-traditional assets can benefit from DLT as well.
Much of the paper targets how you take the current regime of securities management and apply distributed ledger technology to potentially remove some of the friction. But the disparate regulatory approach around the world is a significant hurdle There “remains considerable legal uncertainty.” Internationalization is going to take some time. There is a need for a global standard.
The DLT working group concludes:
“The standards that will enable DLT networks to inter-operate with each other, and with legacy systems, are not yet developed. The best way to overcome these challenges is to collaborate. Every participant in the Crypto Asset industry – issuers, investors, regulators, CSDs, custodian banks, CCPs, FMIs, vendors and Fintechs – will benefit from collaboration. By working together, agreement can be reached on the definitions of Crypto Assets, the legal and regulatory frameworks which govern them, and the business and technical standards that will allow all the ecosystems to inter-operate. It is the measure of agreement on those issues that will determine the rate of growth of the Crypto Asset markets.”
This is a very good paper and a must-read for securities professionals and regulators. You may download the paper here.