The Journey Toward Digital Assets Institutionalization
The push for wider institutionalization of digital assets is driving significant investment in new technologies. Beyond technology, what are some of the key elements for digital asset adoption in the capital markets and beyond?
Johan Toll, Head of Digital Assets at Nasdaq, explains this and discusses a recently announced technology agreement with enterprise blockchain software firm R3.
Let’s start at a very high level. As a building block for digital assets, how do blockchain platforms support the digital asset life cycle?
JT: A blockchain connects market participants in a fully digitalized and immutable way, facilitating frictionless transactions between the participants. There’s an agreed format for interacting, workflow or process, and all participants on the platform or network follow the same rules. No one can cheat, double spend, or remove any agreed transactions. Ultimately, technology creates trust between all network participants.
What role do you currently play in the world of blockchain, DLT technology and tokenized digital assets?
JT: For several years now, distributed ledger technology, generically referred to as blockchain, has been driving exceptional innovation in the capital markets. As a technology provider for the capital markets and beyond, Nasdaq embraced blockchain early on. Since the mid-2010s, we have conducted numerous projects and proof-of-concepts embracing distributed ledger technologies that can push our industry forward while safeguarding a highly-regulated market.
Over the last few years, our Market Technology business has been bringing our mission-critical solutions across the trade lifecycle into the digital assets space to conduct low-latency, highly scalable and available trading, and to monitor markets for potential instances of abuse to strengthen integrity. Through our engagements with both traditional exchanges and start-up marketplaces, they have been vocal about the huge potential in both tokenized assets and adopting blockchain technology. For one, they provide open access to and facilitate price discovery in new types of asset classes that enable capital formation, as well as allow expansion into nascent product categories and client segments. They also can improve legacy processes by reducing the need for manual intervention and data reconciliation between multiple disparate systems.
In the coming months, we believe we will see both existing and start-up exchanges look more seriously into robust, exchange-grade systems that can evolve transparency and security standards aligned with their capital markets counterparts in order to grow liquidity and attract widespread investment from all types of investors.
How would you describe the journey toward the institutionalization of digital assets? Where are we now?
JT: Five aspects need to be aligned to institutionalize digital assets. The technology needs to be mature enough. We need to identify valid business cases where real problems can be solved. The projects must be funded properly. The regulators need to be on board. Finally, market participants need to be prepared for the transformation.
We are past the proof-of-concept stage, and the prototypes have been built. Generally, market participants feel comfortable with the technology behind digital assets, they’re confident that it’s mature enough, and they’re preparing to be part of the transformation. The discussions have already shifted from innovation centers to the business owners, who want to solve problems using modern technologies such as cloud, machine intelligence and blockchain, and they have the money to do it.
A couple of use cases are starting to gain traction in the market. First, incumbent players – exchanges and financial institutions - see an opportunity to automate and digitalize manual processes in the bilateral OTC markets. Second, there’s a use case for building new marketplaces in healthcare, shipping, insurance and logistics to trade and track existing or novel asset classes efficiently. By creating a digital representation of the assets, they can be tracked through their entire life cycle from inception and issuance to trading, settlement and delivery.
In addition, many regulators across Europe, Asia and the U.S. are now well-equipped to understand and support these changes. We see several ongoing projects where national exchanges or start-ups work closely with their regulators as they seek to implement blockchain technology with innovative new products and services on top.
Today you announced a collaboration with blockchain provider, R3. Can you talk about how your work with R3 will help in your efforts to support digital assets exchanges in their hunt for more sophisticated solutions?
This new relationship between Nasdaq and R3 will play an important role in Nasdaq’s continuous development of solutions and services that support the creation and growth of dynamic, trusted digital asset marketplaces. We initiated discussions with R3 around its Corda Enterprise platform because it is designed specifically for highly-regulated environments with stringent requirements on quality of service, and R3 is among the first blockchain pioneers to serve the world’s leading centralized financial institutions. Their platform fits well into Nasdaq’s technology ecosystem and by connecting to the platform, we can harness the power of a scalable design that delivers a new level of interoperability and ease of integration to any current legacy technology system. Working together, we are well-positioned to create an agile and resilient solution purpose-built to support the entire lifecycle of a digital asset, covering issuance, trading, settlement and custody.
Overall, our goal is to provide financial institutions with an easily accessible, complete solution to issue tokens and build trusted, digital asset marketplaces designed for high security for trading and settling them within an ecosystem that supports growing volumes, as well as business and product development. While R3 will certainly play an important role, it is useful to note that our collaboration is a non-exclusive partnership, and we continuously collaborate with other blockchain providers such as Symbiont to make sure we have solutions for the unique needs and requirements we encounter across the market ecosystem globally.
Looking ahead, how do you see digital assets developing in the future?
JT: In the near future, many processes that incumbent marketplaces currently operate manually will likely shift to a digitalized workflow, enabling market participants to connect easily with one another to trade those assets. They will also be looking to expand their product coverage by digitalizing assets traditionally dealt with bilaterally in OTC or manual and paper-based markets.
Meanwhile, new types of financial and non-financial marketplaces for trading of digital representations of physical assets and certificates will be created. Their participants will be able to trade and track assets easily through their entire life cycle by operating on a harmonized, shared platform. Not only will they enjoy a high level of transparency, but they also reduced friction because there will be no need to reconcile data between multiple participants.
Many different networks will be created across the globe, built on an array of distributed ledger technologies. Again, standards are key, and once interoperability is achieved, we will likely see some consolidation over the longer term.
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