Although institutional adoption of blockchain technology is progressing more slowly than many expected a decade ago, the market continues to evolve in exciting and unexpected ways.
When we began our journey at R3, we believed that the path to organizational adoption of distributed ledger technology required a single global network. The network follows the Ethereum model, but is specifically designed for regulated financial markets, providing a platform for the issuance and exchange of all kinds of tokenized assets, allowing for faster payments and business processes. Enables automation. We believed that such a network would eliminate the complexity and friction that resulted from reliance on outdated legacy systems in financial markets.
Our vision for the market has changed as we begin to work with capital market participants and solve their business use cases. We believe that no single network solution can address the regulatory requirements of global capital markets, and that we also provide the level of sovereignty that central banks, financial services companies, and other market participants must demonstrate to comply with regulations. I have come to understand that I cannot do it. they.
We now strongly believe that future digital markets will require a heterogeneous ecosystem, or “network of networks,” rather than a single network or unified ledger solution. Competition and cooperation have always been key to building more efficient markets, and we believe these two forces will continue to drive innovation in this area.
There is no one-size-fits-all model
The debate over public vs. private networks, open vs. permissioned networks, is an important, but somewhat annoying, role in the industry. The question is not which model of DLT is best overall for financial markets, but rather which model best addresses the requirements of a particular use case.
Although public permissionless networks in financial markets are believed to have many potential uses and benefits, such as the distribution of tokenized funds and other assets, they also have limitations. This is because they are transparent and censorship-resistant by their nature. In theory, anyone with an internet connection can connect and trade, usually anonymously. This poses challenges for financial institutions that need to comply with know-your-customer and anti-money laundering requirements, but successful companies, such as ABN AMRO’s use of permissionless networks to issue tokenized corporate bonds, There are also use cases.
In contrast, a permissioned ledger is managed by a designated entity, whether public or private, and has some level of control over who can access it and what requirements must be met. We provide. What these networks lose in decentralization they make up for in enhanced privacy, scalability, and data control. Our extensive experience serving regulated financial market participants means that most companies have made significant changes to their technology stack, including who has access to the network and what data is available to which participants. I understand that you want to control it. Providing this level of control typically requires a permissioned model, but there isn’t always room for that in the ecosystem. This brings us to the important topic of interoperability.
interoperability
For example, consider a regulated financial institution that wants to build a solution for tokenized money market funds. The company says that while a permissioned network is needed for regulatory compliance, customers want to be able to purchase shares using digital currencies issued on public blockchains, such as stablecoins. You might notice. Therefore, the company’s permissioned network must be able to transact with the public blockchain that stores its customers’ digital currencies. This is necessary not only to prevent asset silos, but also to enhance liquidity on these new platforms.
Similarly, these DLT networks will be used alongside traditional infrastructure for some time yet, so emerging DLT infrastructures will need to interoperate with a company’s existing non-DLT systems and current bookkeeping applications. there is. That’s why R3’s interoperability efforts are focused on making sure our network interoperates with any network our clients need.
Our work with SIX Digital Exchange has demonstrated the versatility of DLT and the successful coexistence of permissionless and permissioned networks. SDX is the world’s first fully regulated digital exchange and central securities depository, making digital assets accessible to traders, broker-dealers, custodians, and other banks. SDX’s CSD provides secure storage and eliminates the need for financial institutions to manage private keys for ledger-based securities. These digital assets can be stored alongside traditional assets such as listed stocks, exchange-traded funds, and structured products, allowing investors to use their existing bank-insured deposit accounts. Additionally, issuers can benefit by attracting investors who do not want to maintain a public blockchain custody solution.
their private securities.
In January 2023, SDX released the first native digital bond accepted by the Swiss city of Lugano for inclusion in the central bank’s eligible collateral basket. They partnered with Actionnariat to demonstrate that shares issued on the Ethereum blockchain can be converted from public ledger-based securities to bankable securities brokered on a regulated and permitted platform. I continued to prove it. Such collaborations will help blockchain interoperability set new standards for innovation in regulated markets by facilitating custody and improving the transferability of digital securities for investors in private companies. We emphasize that they play a very important role.
As another great example of the value of interoperability, in June 2024, we completed the first end-to-end test of cross-chain repurchase transaction settlement with Fnality and HQLAX. Both parties successfully completed a fully automated atomic settlement via smart contracts spanning the Ethereum-based Fnality Payment System and the Corda-based HQLAX digital collateral registry. These use cases demonstrate that the blockchains that companies choose to invest in and build on do not need to be treated as risky bets on the types of networks that will survive in the long run. Market participants need to choose the right tools for today’s challenges, and DLT technology providers need to develop interoperability solutions that maintain the ability of these networks to connect and interact with each other in the future. We need to continue working on development.
The way forward
When DLT first emerged as a financial market infrastructure solution, there were concerns that this model would disintermediate existing FMIs. Instead, incumbents like SIX Group and the many Tier 1 institutions that have supported R3 throughout our journey have become pioneers in this space. Rather than disintermediating FMIs, DLT has become a tool to improve their own operations and capabilities to meet evolving market needs and better serve their current and future customers. Masu.
To maximize the utility of this technology and accelerate industry adoption, it is important to encourage more participants to join industry efforts. More regulatory clarity is needed before traditional institutions can fully integrate DLT systems into their daily workflows, but collaboration between industry associations and regulators is underway around the world.
R3 believes that a heterogeneous DLT environment is the future of digital capital markets. Achieving this vision requires interoperability between a diverse ecosystem of DLTs with different characteristics, applications, and participants. As assets and currencies coexist on multiple different networks, solutions that enable cross-ledger transactions are essential to realize the opportunities of digital finance and the full utility of this technology.
Kate Karimson is R3’s Chief Commercial Officer.
This article was featured in OMFIF’s Digital Assets 2024 report.
