Standards and interoperability are among two of the top priorities for established post-trade providers to expand their services to digital assets, according to a new report from the International Securities Services Association (ISSA).
The report analyses how market participants can issue, settle, safekeep and service crypto assets, as well as laying out a set of recommendations and best practises to maintain compliance with current laws and regulations.
Growing investor interest in digital assets has fuelled demand for crypto-custody solutions, but very few banks are currently willing to take on the risk. This has largely been due to a number of regulatory and market structure factors.
“There is still a lot of ambiguity of their lifecycle, interoperability, and any applicable standards. The industry is looking for some guidance over these instruments, so this paper puts forth some recommendations over standards and best practice considerations,” said Urs Sauer, senior product development manager for SIX, and co-chair of the distributed ledger technology (DLT) working group at ISSA.
The working group, first formed in 2016 during the peak of blockchain and DLT related hype, sought to address the disintermediation challenge the technology poses to traditional financial intermediaries, such as custodians and central securities depositories (CSDs).
While it has become clear that this will not be the case, custodians and broker-dealers will have to evolve their current service provider model in order to function in a more digital ecosystem.
“If you trade, handle, issue and safekeep security tokens, then you have to fulfil the current regulatory framework. However, the maturity of the industry is still developing. This paper will give the industry guidance and define the differences between safekeeping of a private key and the asset itself,” added Sauer.
The crypto ecosystem, in its current format, is not seen as suitable for the largest institutional investors and post-trade providers to expand their services in this space.
A lack of interoperability has become a particular sticking point for the industry, as different regulatory regimes and conflicting definitions of servicing crypto assets have made it even harder for financial intermediaries to develop a set of principles for servicing digital assets.
Despite the initiatives such as the Australia Securities Exchange (ASX) replacement of the CHESS clearing and settlement system with DLT, and the launch of the SIX Digital Exchange (SDX) in Switzerland that are taking shape, there is still not any harmonised DLT model for market participants.
“Interoperability between these different DLT systems will make life much more simple. Interoperability is also needed between the DLT and Traditional platforms in order to drive adoption and scale,” added Glen Fernandes, group strategy for Euroclear, and co-chair of the ISSA DLT working group.
The paper has recommended a framework, based on current industry standards such as the ISO 20022 standard, as well as regulatory harmonisation efforts, will help achieve greater interoperability for digital asset platforms and post-trade services.
It also suggested the only way to get to this would be through industry collaboration with every participant in the crypto asset industry, from issuers and investors, to central counterparties (CCPs), CSDs, custodians and FinTechs.