In a recent speech, Sasha Mills, executive director for Financial Market Infrastructures at the Bank of England noted that short-term lending, particularly secured lending, as an area that has traditionally been hindered by operational frictions and that existing systems make it very difficult to move assets quickly or without settlement delivery risk.
“A combination of programmable transactions and distributed ledgers can unlock the potential for more precise, simultaneous transactions that allow for securities to be pledged, borrowed or lent for short periods of time. This can lead to a more efficient use of assets (and by extension, a firm’s balance sheet), and potentially reduce the impact of settlement failure and funding squeezes. For example, Digital Financing, a blockchain-based application built on JP Morgan’s Onyx (now Kinexys) platform demonstrated a 56% reduction in operational costs and faster alternatives to receive secured intraday funding without requiring balance sheet usage,” she said in the speech.
On the broader landscape, Mills said that any future settlement regime will need to consider this and other additional use cases in the round to ensure support for growth in demand and innovation: “Wholesale financial markets involve a lot of risk, and it is important that innovation happens in a way that is safe for participants and does not propagate risk in the system. Regulation has a key role to play in ensuring our financial markets innovate while remaining safe. Public-private partnership experimentation in developing technologies is also crucial.”
In emailed commentary, Michele Curtoni, head of Strategy at SIX Digital Exchange (SDX), said: “As Mills rightly indicates, the impact of tokenization will be truly transformation for capital markets. Institutional adoption of tokenized assets will progress in stages, building on blockchain based networks leveraging secure and regulated frameworks. But innovation in this space goes hand in hand with collaboration.
“For example, in the context of CBDCs [central bank digital currencies], the Swiss National Bank’s (SNB) Project Helvetia is a fitting example of where success with tokenized bond issuance and wCBDC [wholesale CBDC] settlement was achieved via regulators, financial institutions, and an FMI, in this case SDX, collaborating in a highly secure, regulated environment. For the UK and other jurisdictions to progress use cases in the same way, as Mills alludes to, this type of industry coordination is crucial.”