What CSDs can do about the tokenisation of security markets

Central securities depositories (CSDs) are a target of the tokenization evangelists. CSDs are in theory completely redundant in a system by which tokens are issued directly into digital wallets, transactions are settled token versus token (TvT) between digital wallets, changes of ownership are registered automatically on a distributed ledger, and holdings of tokens are safekept in digital wallets and serviced by smart contracts. How soon such a system could come into being is impossible to predict. What we know is that today the scale of the security token markets is trivial. A generous estimate is that token issuers have raised just US$10.3 billion since 2017, or 0.008 per cent of current outstandings in the global bond markets and 0.009 per cent of the current valuation of the global equity markets. Bitcoin alone is worth 110 times as much as the entire value of the global security token markets. In growing, tokenization faces many obstacles, including the lack of digital cash (as opposed to payment tokens) on tokenization platforms and a lingering degree of uncertainty about the legal and regulatory status of tokens. But both these barriers are now being cleared. The financial incentives - notably a lower cost of capital and the reduction of transaction and data processing costs to nugatory levels – to tokenize are strong. The additional revenue possibilities, in terms of expansion into privately managed, OTC-traded and illiquid asset classes – to say nothing of attracting new types of investor - are tempting for asset managers and asset owners. History shows that digitized markets can scale remarkably quickly. The sheer size of the global bond and equity markets means that even if tokenization garnered no more than a tenth of the market, on current valuations the global market would still be worth US$23 trillion. So it is prudent for CSDs to take the threat of tokenization seriously, formulate strategies to adapt to its potentially rapid growth and develop services that treat tokenization as an opportunity. That opportunities exist, not least to help securities market participants capitalize on the new possibilities opened up by tokenization, is a certainty. At this webinar, Future of Finance joins forces with the Americas’ Central Securities Depositories Association (ACSDA) and sponsors Percival Software, a leading provider of CSD systems, to explore the nature of the threats and the opportunities that tokenization poses for CSDs.

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