A small group of central securities depositories (CSDs) in Europe and Asia are considering how they might collaborate on a new infrastructure to custody digital assets. These financial institutions are making a seemingly complete reversal from what the majority of the rest of the financial industry is doing. Where most attention is paid to how investments can be made in Bitcoin without actually holding the currency, these organizations are looking to store the coin itself. In this way, their function as a business remains parallel to what they were created for in the late 1980s and early 1990s.
“A new world of tokenized assets and blockchain is coming. It will probably disrupt our role as CSDs. The whole group decided we will be focusing on tokenized assets, not just blockchain but on real digital assets.” - Artem Duvanov, head of innovation at the National Settlement Depository (NSD) of the Moscow Exchange Group
The stock market boomed in the 1970s and 1980s. Because of this, the antiquated physical paper based shareholder systems were beginning to fail. Central Securities Depositories emerged to solve the problem. These financial institutions focus solely on holding stocks, bonds and securities in certificated or uncertificated (dematerialized) form in one spot, rather than the certificates of ownership needing to be physically transferred when a stock market purchase and sale is made. This is now all done electronically, which vastly improved efficiency of 5the process. However, blockchain technology will likely take this further.
Similarities to Cryptocurrencies and Blockchain
The primary functions of CSD run parallel to many of the strengths being seen with Bitcoin and the blockchain technology field that emerged from it:
Deposit and withdrawal through relationships with the transfer agent and/or issuers, along with the underwriting process or listing of new issues in a market.
Dividend, interest, and principal processing, as well as corporate actions including proxy voting Payment to transfer agents, and issuers involved in these processes
Securities lending and borrowing, matching, and repo settlement, or ISIN assistance.
Pledge - Central depositories provide pledging of share and securities. Every country is required to provide legal framework to protect the interest of the pledger and pledgee.
In almost all of these situations, use of cryptocurrencies or a blockchain network would automate the process further, with completely integrated authentication and transparency of the transfers themselves.
The group was formed last year as the International Securities Services Association (ISSA), and in that time the founding group of 15 has doubled to 30. They have set a deadline for a prototype platform to present at the annual SIBOS conference in London in October.
By: BGN Editorial Staff