Sponsored by Standard Chartered
Institutionalising digital assets in the GCC
Interest in digital assets is increasing among institutional investors as they search for new sources of income beyond the traditional equity and bond markets. If successful, tokenisation could make it easier for institutions to trade not just orthodox securities but illiquid assets too, which in turn would help generate much deeper pockets of liquidity.
Moreover, fractionalisation – made possible via tokenisation – would also open up financial markets to wider, retail participation. “In particular, tokenisation could play a major role in supporting the growth of Islamic financial products such as Sukuks,” says Scott Dickinson, regional head of securities services for Africa and the Middle East at Standard Chartered. Industry initiatives to deliver on this are already underway. R3, for instance, is using its Corda blockchain platform to digitalise the issuance and management of the $123 billion Sukuk market in what could reduce transactional costs and streamline the entire intermediary process.
However, there are several regulatory issues and ongoing concerns about the lack of industry-wide standards. Nonetheless, local regulators including the UAE’s Securities and Commodities Authority are consulting extensively with the wider industry on how best to create a robust supervisory framework to oversee the issuance and trading of digital assets.
A blockchain ecosystem in the GCC
For intermediaries, blockchain could offer a number of potential commercial opportunities as well as operational efficiencies; aside from providing multiple participants in a transaction life-cycle with a single, real-time transparent version of the information. A number of post-trade market infrastructures located in the GCC region are already conducting proprietary blockchain proof of concept exercises.
The technology does, however, have some limitations. A report by German-based Bundesbank in May 2019 conceded that while blockchain fulfilled its stated objectives when settling cash and securities, the process took longer and was blighted by high computational costs. Participants at The Network Forum Middle East Meeting in October 2019 echoed the Bundesbank’s blunt assessment, with several experts acknowledging it is not always cost-effective to utilise blockchain to solve operational problems especially when other proven and more economical technologies can deliver similar or superior performance.
“Even though blockchain can offer instantaneous trading and settlement, this can generate added counterparty risk because transactions need to be pre-funded. This is precisely why markets such as Saudi Arabia have migrated away from a T+0 trade settlement model to T+2,” says Dickinson.
However, Dickinson is especially bullish about the wealth of new capabilities being made possible through the wider adoption of robotic process automation (RPA), artificial intelligence (AI) and big data analytics across securities services. “AI and robotics could replace a number of redundant, manual functionalities and repeat processes. As a result, these technologies are central to Standard Chartered’s overall digitalisation strategy,” he comments.
Dickinson added AI-driven analysis of customer data is now being deployed by Standard Chartered to help the bank acquire a granular understanding about client needs and behaviours. “We have developed data lakes and we are using AI to identify some of the trends facing our clients. By interpreting this data, we can provide customers with invaluable guidance on how they can improve their operational processes. For example, we are using analytics to help clients reduce the number of settlement fails they have,” he says.
The securities services industry has accepted that its existing operating model will not suffice over the long-term, prompting organisations to embrace ambitious digitalisation strategies. While legacy systems are not going to vanish overnight, Dickinson sees the industry taking bold steps by rolling out more user-friendly technologies and supporting innovative new products and asset classes.