The institutional adoption of digital assets and DLT is a clear signal
that a new model for trading, ready to break down liquidity silos, is
emerging.
Economists, pundits, institutions and investors often talk about the
global financial system. When stocks go up and trade thrives, they
applaud its contributions to prosperity; when the markets crash and
stocks dip, they blame its inhuman scale or its untrustworthy
manipulators. But anyone who has attempted to diversify their portfolio
with foreign stocks or acquire another nation’s bonds quickly comes to
the same conclusion: The global financial system isn’t a single entity.
“The system,” singular, is really “The systems,” plural.
How do
the pieces of the global financial system interact? Not always as well
as might be hoped, as exemplified by the economic uncertainty brought
about by the COVID-19 pandemic. In times of flux, investors diversify
their portfolios across different asset classes to protect their
investments. However, access to these diverse asset classes is often
stymied by the barriers that exist across markets.
Complex
regulation is a constant theme and, as a result, the global marketplace
is really a fragmented mosaic of different marketplaces. The complexity,
time and costs involved with transacting across these different
jurisdictions are some of the most significant sources of friction in
global markets.
Much of today’s trading infrastructure is decades
old, with many of the rules, customs and processes dating from the
analog era. In the 1970s and 1980s, national markets were a necessity
and an inevitability. The communications infrastructure supporting a
fragmented network of middlemen, each subject to the rules of his or her
respective jurisdictional regulator, was the only means of linking
far-flung investors in a less-connected world.
Today, however, the
world has grown accustomed to real-time connectivity — we communicate
across continents and over oceans in the blink of an eye. But, when it
comes to the cross-border movement of value, the existence of parallel,
siloed markets engenders administrative burdens, unnecessary costs and
vexing delays.
Increasingly, there is evidence that incumbent
institutions and major players in the global economy are breaking down
these barriers. For example, WisdomTree, one of the largest traditional
asset management firms and exchange-traded fund providers in the United
States, has made clear its intentions to make digital assets a core part
of its service offering. The firm plans to launch a series of blockchain-enabled ETFs
that will, in their tokenized form, be more readily-accessible to, and
exchangeable by, investors. Significantly, WisdomTree has made clear
that it views the automation of regulatory compliance as one of the key
means of ensuring the success of these digital assets.
Leading
market infrastructure providers for the financial services industry,
such as the Depository Trust & Clearing Corporation, or DTCC, have
also announced plans for exploring the potential of new technologies and digitalization
in revolutionizing public and private markets. The DTCC’s Project
Whitney Case Study brings a new approach to the representation of value
in capital markets through asset tokenization, and emphasizes the use of
interoperable blockchain-based infrastructure to increase efficiency in
private markets.
However, to fulfill such a vision, innovators
will first need to address the core issue of ensuring compliance with
complex regulatory requirements across multiple jurisdictions — a
significant contributing factor to the formation of liquidity silos.
Platforms that automate the process of regulatory compliance across
multiple jurisdictions will be key to this next generation of
infrastructure.
It is unlikely that any particular blockchain or
network will dominate the next generation of trading infrastructure.
Interoperability across multiple blockchains and legacy infrastructure,
within a common compliance and security framework, will be key to the
success of this new system of trading. Meanwhile, platforms providing
powerful and flexible tools to ensure that compliance with
multi-jurisdictional regulations and network interoperability will
unlock a new era of market defragmentation and broader access to global
liquidity.
Transitioning from current legacy infrastructure to a
new truly global financial marketplace will not take place overnight.
Such a transition is key, however, to maintaining the robust health of
our global financial system for the decades to come and equipping it
with the tools to cope with the economic and financial challenges that
lie ahead.
The views,
thoughts and opinions expressed here are the author’s alone and do not
necessarily reflect or represent the views and opinions of
Cointelegraph.
source link : https://cointelegraph.com/news/breaking-free-from-global-liquidity-silos-new-technology-changes-the-game
