Why Traditional and Digital Markets Will Co-Exist

We speak with Justin Chapman, Head of Digital Assets and Financial Markets Group at Northern Trust, on the formation of a new group that combines its digital assets team and one that supports innovations for traditional securities services markets, and why he thinks traditional markets and digital markets will co-exist. Chapman also talks about the need for an efficient and regulated marketplace.  

Do you see cryptocurrencies and digital assets becoming more mainstream? If so, how and when?

Development of digital currencies and the infrastructure to support them has occurred at a rapid pace over the last five or six years, and it is accelerating as more players continue to enter the field. For example, the increased use of Distributed Ledger Technology (DLT) and blockchain in particular is spurring the growth of digital assets, and the development of DeFi. 

The value of digital assets locked into DeFi services grew from less than $1 billion in 2019 to over $15 billion at the end of 2020, and $80 billion in May 2021, according to a Wharton study. Overwhelmingly, banks, broker−dealers and asset managers surveyed expect digital assets will become dominant over time.

By 2030, we expect that between 5% and 10% of Northern Trust’s assets under custody and administration will be digital assets – either cryptocurrencies, stablecoins, central bank digital currencies (CBDCs) or tokenized assets.

What are key factors shaping institutional adoption? What are still some obstacles that stand in the way of digital assets becoming more mainstream? 

Digital assets offer the potential for enhanced efficiency, transparency and liquidity in securities markets. The process of tokenization and fractionalized ownership of assets, from infrastructure to art, through digitalization will play an important role in a more democratized financial landscape.  

However, the infrastructure is still evolving. In the world of asset servicing, the move from traditional, electronic solutions and capabilities to digital ones will not happen overnight. Key to a sustainable infrastructure will be standardized and scalable market practices across the industry and global markets to create both value and peace of mind. In addition to the evolving infrastructure landscape and market practices, asset servicers will need to address other key drivers which are transforming the industry, such as regulation. 

The need for an efficient, regulated marketplace is essential in an industry juggling multiple ecosystems and stakeholders. It is also essential to maintain investor protection. If emerging digital assets are treated differently to other assets, then there is a risk that regulation could be mismatched, particularly if, globally, one jurisdiction is seen as having a more light touch than another.  

Taxonomy is also important because, as new markets develop, and operational functions become self-learning and self-functioning, and with the integration of data becoming far easier, the issue of standardization will be paramount. It is why Northern Trust is working with regulators, governments, industry peers, market associations and market infrastructure providers to build a set of standardized market practices, globally understood taxonomies and associated appropriate regulatory frameworks for digital assets.  

What role does cryptocurrencies and digital assets play in banking, institutional investing and asset servicing? 

Our clients see cryptocurrencies and digital assets as an investment opportunity. At Northern Trust, we also look at the underlying technology – whether DLT or smart contracts – and see a real opportunity to automate and revolutionize our traditional asset servicing process all the way from issuance to transactions and lifecycle management.

Ultimately, the successful asset servicer of 2030 and beyond will have bridged the gap between traditional and digital assets, and helped their clients navigate the transition between the two. They will have embraced the opportunities provided by a DeFi world, recognizing the implications of a democratizing landscape, all the while remaining solution and service-oriented.

These asset servicers will have offered their clients truly customized information and insights across all of their assets in a simple way, at any time and manner of their clients’ choosing. They will have adopted sustainable practices while anticipating operational trends in sustainable finance. They will be innovative, adaptive, and agile.  

While some in the market have sought to create distinct business lines for digital assets, Northern Trust is taking a different route. Traditional markets and digital markets will co-exist and many of our clients will hold both asset types. As a result, we believe providing and managing access to the markets should be viewed holistically and this will become a key differentiator for us in the asset servicing marketplace.  

This interview originally appeared in our TradeTalks newsletter. Sign up here to access exclusive market analysis by a new industry expert each week. We also spotlight must-see TradeTalks videos from the past week.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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