Cutting Through Complexity

Talking Trends

Nasdaq TradeTalks is at the Global Alts Miami conference this week, speaking with a multitude of asset managers and allocators. We look forward to sharing a recap next week.

This week, however, we want to highlight a new report that builds upon much of TradeTalks coverage last year — managing risk and navigating complexity. The report, titled The New Growth Imperative: Cutting Through Complexity in the Financial System, measures the cost of complexity across the financial system and provides fresh perspectives on how institutions can adapt to the exponential growth of complexity while minimizing internal complicatedness and friction. The report, which was created in partnership with BCG, found that throughout a half-century, while external complexity had increased more than 6-fold, organizational complicatedness in response had increased more than 35-fold. More specifically, the top five challenges characteristic of excess complicatedness are: Globally divergent regulatory frameworks, overly manual processes, siloed data, legacy technology and difficultly staying current with evolving regulations.

While both external complexity and internal complicatedness have grown, so have the solutions to help manage them. The report revealed that financial institutions are turning toward strategic technology partners that offer holistic best-in-class solutions to their biggest risk and compliance challenges as a means of addressing the exponential increase in complexity. Importantly, the report found that between $25 billion and $50 billion in potential efficiency gains can be realized through targeted enhancements in banks' Risk and Compliance functions alone without compromising effectiveness.

Read the Full Report Here

Risk Management as It Relates to Regulation, Taxes, Data Privacy, and Cybersecurity

Given the new report, we’re looking back on our coverage of risk management. TradeTalks spoke with Tom Shea, Tax Principal & Digital Asset Tax Leader at EY, and Anthony Caiafa, Chief Technology Officer/Chief Information Officer of SS&C Technologies, about risk management synergies across an organization.

Managing Cybersecurity Risk and Governance in a Complex and Connected World

Notable industry executives share their insights on the importance of finding a balance between efficiency and risk in an increasingly interconnected world.

AI and Data Privacy Legislation and Governance

With AI and data privacy legislation constantly evolving, TradeTalks spoke with Sarah Hutchins, Partner at Parker Poe, and Jud Welle, Partner, Data, Privacy & Cybersecurity, Complex Litigation & Dispute Resolution at Goodwin, about best practices for data governance, as well as the evolving cybersecurity threat and response environment.

What are the biggest trends shaping digital assets today?

While many trends are at play, three stand out: regulation, institutions and tokenization of real-world assets.

The U.S. appears to be adopting a more friendly posture towards digital assets with the incoming administration. If that leads to a clearer and more transparent regulatory landscape, that will spur more adoption, exploration and innovation for the entire sector and position the U.S. to be a global leader in the blockchain ecosystem.

The Bitcoin and Ethereum ETFs have opened up access to trillions of dollars in capital that sit in trusted regulated brokerage accounts. This has made investing in crypto easier for many types of investors. Capital flows from this massive pool through current and future ETF products and may provide more stability for the asset class and create new opportunities for investors.

Blockchain's first widely successful app has been stablecoins. Stablecoins' use as on and off ramps to the digital asset ecosystem proves their utility, and we see more adoption ahead, especially with regulatory guardrails. But stablecoins are quickly being complemented by the tokenization of real-world assets. Franklin Templeton's Benji tokenized money fund products are examples of how blockchains are extending to real world assets to use alongside stablecoins for opportunities like collateral management, cross-border and peer-to-peer payments. We expect to see new and creative uses of this technology in the months and years ahead.

How do you think the digital assets space will evolve in the next decade?

Over the next ten years, we see deeper penetration of blockchain technologies to underpin capital markets, asset management and money movement. That's a powerful unlock. Asset managers will integrate blockchain technology into their operations to increase efficiencies. Blockchains facilitate faster and traceable money movement at scale and will be one of the disruptors to the current payments ecosystem. Banks that have been testing and developing more limited private blockchain networks for years may morph those networks to act more like public blockchains as they seek to process large volumes of transactions as banks benefit from regulatory clarity. Finally, continued development of active and deep crypto derivatives markets to manage risk will increase adoption by more actors seeking new asset opportunity sets.

What are the biggest challenges facing digital assets?

Outside of the regulatory challenges of the last few years, the industry still needs to weed out bad actors that make up a small percentage of the community but generate a disproportionate amount of headlines. That reputational challenge has created an unnecessary barrier to entry for more mainstream adoption.

Digital assets are growing quickly, and subsectors range from crypto currencies to stablecoins to meme tokens and central bank digital currencies. It can be challenging to sort through hundreds of projects and tokens to determine what has real, lasting value. As the sector continues to grow and mature, it will require investors to have great advice from those like the Franklin Templeton Digital Assets team who understand the underlying technology and can pair that with the fundamental research and analysis of traditional finance teams to help these investors make better-informed decisions.

We’ve been building blockchain-based technology products, running node validators and developing digital asset investment strategies since 2018. With that hands-on experience, we at Franklin Templeton are positioned to help clients navigate this new investment landscape.

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