New pilots seek to re-architect the industry’s 50-year-old financial market infrastructure

Innovative technologies associated with the crypto domain are beginning to cross over and be piloted as part of the traditional financial infrastructure. Established intermediaries and servicers are exploring the utilization of blockchains, smart contracts, oracle networks, and tokenization, often with the explicit support and guidance of local regulators. This marks the first time in nearly 50 years that new approaches are being explored that would foundationally alter the way in which securities markets and payments operate.

Today’s financial market infrastructure was introduced in the early 1970s in response to the Paper Crisis that engulfed Wall Street in the late 1960s. That era’s innovative technology—computers—were introduced to re-engineer the securities industry. Innovations introduced at that time resulted in new types of intermediaries (central securities depositories, central counterparties and securities settlement systems) as well as new processes (book-order entry of securities to be held in street name, multi-lateral netting and delivery versus payment).

These capabilities have successfully supported the securities and funds industries for decades. Yet, there are shortcomings to how the system operates, particularly when compared to crypto markets.

Unlike the current securities settlement process that kicks off at the close of each day’s trading, requires multiple reconciliations, and carries on for several days beyond trade date, crypto markets are open 24 hours a day, seven days a week, 365 days a year. Every trade settles as soon as it can be independently verified that the buyer has sufficient money in their wallet to pay for the transaction and that the seller has the asset in their possession to deliver. Both the money and the asset reside on the same ledger and are exchanged as soon as the transaction is affirmed—typically within minutes.

A 2023 report from the Global Financial Markets Association (GFMA) and the Boston Consulting Group (BCG) found that using blockchain and re-engineering the current financial market infrastructure could unlock ~US$20 billion annually in global clearing and settlement costs and free up approximately US$100+ billion in collateral.¹

Europe has taken an early lead in testing these new technologies via the EU Pilot Regime launched in 2023. Euroclear has announced the launch of a new blockchain to facilitate securities settlement after demonstrating their ability to do simultaneous payment and settlement of tokenized bonds using digital currencies.² Europe has also begun rolling out an EU-wide digital wallet system to house both digital currencies and digital assets.³

The United Kingdom has announced new guidelines for the tokenization of registered funds.⁴ Hong Kong SAR and the Hong Kong Monetary Authority created a new blockchain to issue and facilitate the payment and settlement of green bonds that embed smart contracts programmed to monitor an issuer’s climate-related metrics.⁵ Singapore announced Project Guardian that will engage financial market participants and regulators across a suite of tokenized investment offerings all recorded on blockchain.⁶

Experimentation is likely to accelerate in 2024. 130 countries representing 98% of the global economy are now exploring blockchain-based, digital versions of their currencies. Almost half are in advanced development, pilot, or launch.⁷ Established industry players like SWIFT are collaborating with emerging crypto providers such as Chainlink—an oracle network that delivers data to smart contracts—to enable communications and verification of transactions across various blockchains.⁸

Meanwhile, the United States, Mexico, and Canada will reduce the window for equities settlement to T+1 in May 2024. The DTCC has already introduced a blockchain to help facilitate securities settlement in this shortened window.⁹ A survey from Citi Securities Services found that 87% of respondents see central bank digital currencies being used to support shortened security settlement cycles within the next two years.¹⁰

Tracking developments in 2024 to determine how rapidly these experiments progress will be critical. Europe is expected to decide by 2026 whether to officially migrate its financial market infrastructure to these new technologies,¹¹ and other regions and nations are likely to follow their lead.