2/3 SECURITIES Digitisation/Tokenisation: Accelerate economic growth with dFMI

SUMMARY I have recently been involved in a broad range of strategic product initiatives to tokenise securities in the financial services sector, generally referred to as “Securities Digitisation“. What is clear to me during this work is that there is a huge opportunity for the marketplace to bypass the use and/or the new build of traditional Financial Market Infrastructure (FMI) and leap to the next generation of digital FMI (dFMI). The benefits of doing so are wide-ranging. However, for many countries (sovereign nations) and market sectors (asset classes sub-asset classes), the potential to derive economic benefits by accelerating growth through the faster development of institutional standard securities markets using dFMI is significant.

HISTORICAL PRECEDENTS There are already examples in other industries where economies have achieved faster economic growth by leaping over intermediate stages of infrastructure development. In particular, emerging market countries and remoter communities in developed economies have always faced the challenge of restricted access to the high levels and high costs of capital required for infrastructure investment before deriving the long-term economic benefits. Three such examples come to mind:

1) ELECTRICITY DISTRIBUTION – building transmission networks is slow, costly and often completely non-viable, especially in poorer countries with large distances between urban centres and with dispersed population densities. Many countries overcame this using portable generators to bridge the demographic gap of pre-urbanised or transitioning agricultural-to-urban economies.

2) TELECOMMUNICATIONS – likewise, the move for many countries leaping from low use of telecommunications (landlines mostly in densely populated areas with limited functionality) to mass use was only achievable with the adoption directly of mobile (and the consequential benefit of smart phones – see the next point on computers).

3) COMPUTERS – the access to computers, whether desktop, laptop, tablet or smart phone, has transformed the need for the infrastructure related to the access of entire populations to education, health, business, travel, banking services, etc, all of which drive faster economic growth. (It did of course need internet access infrastructure as a minimum investment.)

SECURITIES DIGITISATION It seems that we are now on the cusp of another major industrial transformation opportunity for all countries, rich to poor, to leap to the next version of FMI, namely dFMI. I believe that it will bring benefits to the entire spectrum of countries and market sectors. It will bring efficiencies in many forms including the following:

1) INFRASTRUCTURE CAPITAL: Capital savings related to the creation of current infrastructure

2) INFRASTRUCTURE INTEREST: Interest savings on the borrowing costs of that capital;

3) INFRASTRUCTURE BARRIERS TO ENTRY: the consequential reduction in barriers to entry for countries and for new market sectors (across the spectrum of rich to poor countries);

4) INVESTMENT SECURITIES TRADING CYCLES: changes in the speed of the securities trade cycle to get money in and out of exposures quicker, by reducing barriers for cross border capital flows (linked to government FX policies on hot money in the securities markets and the slower moving Foreign Direct Investment);

5) INVESTMENT SECURITIES SETTLEMENT CYCLES: changes in the speed of settlement and the consequential immediate return of invested capital cross border.

[SOURCE: this is an extract taken from “The Emergence of a Digital Financial Market Infrastructure”, a series of thought leadership articles by Johnny D. Mattimore. For the full series see his LinkedIn Posts at: https://www.linkedin.com/in/johnny-d-mattimore-082969136/detail/recent-activity/posts/ and select “Articles”.]

FURTHER READING I recommend the following for those interested in this subject:

1) OECD (2020), The Tokenisation of Assets and Potential Implications for Financial Markets, OECD Blockchain Policy Series, http://www.oecd.org/finance/The-Tokenisation-of-Assets-and-Potential-Implications-for-Financial-Markets.htm

2) R3 (2019) , The Tokenization of Financial Market Securities – What’s next? https://www.r3.com/wp-content/uploads/2019/10/R3.Tokenization.Financial.Market.Securities.Oct2019.pdf

3) University of Oxford Research (2020) Tokenisation: the future of real estate investment? https://www.sbs.ox.ac.uk/sites/default/files/2020-01/Tokenisation%20Report.pdf