Transcript
Speaker: This is Faster Forward from Northern Trust Asset Servicing, where we explore stories, insights, and lessons learned from leaders and innovators that are driving transformation across their industries.
Speaker: This is Faster Forward from Northern Trust Asset Servicing.
Speaker: In this podcast, we explore stories, insights, and lessons learned from leaders and innovators who are driving transformation across their industries.
Speaker: I'm Patrice Sikora.
Speaker: With me today, we have Dan Sleep, Digital Asset and Financial Market Specialist, Northern Trust, and Zhu Kuang Li, Managing Director and Chief Digital Data and Innovation Officer at HSBC.
Speaker: They will be sharing insights from a recent Northern Trust and HSBC-sponsored white paper, Beyond Asset Tokenization.
Speaker: They'll discuss the power of tokenization as a true disruptor and how tokenization and the broader growth of the digital world is challenging how asset servicers operate.
Speaker: So Dan and ZK, thanks for joining us today, first of all.
Speaker: But before we start, let's talk about your career journeys and how you got your respective roles at these current organizations.
Speaker: So Dan, why don't you start us off?
Speaker: Sure.
Speaker: So in current day, I'm based in Singapore.
Speaker: So the group you mentioned, Digital Assets and Financial Markets Group, and I have an Asia-Pacific remit.
Speaker: So as part of current day and as a group, we're tasked with research, basically defining, executing on strategy, relation to fintech development, innovation initiatives,
Speaker: And that can be in the form of blockchain, digital assets, cryptocurrency, crypto custody, as well as artificial intelligence.
Speaker: And then off the back of that, market access strategies with us as a global custodian.
Speaker: So that's current day.
Speaker: I mean, I started my career out at JP Morgan in the UK, originally in the global derivatives business.
Speaker: I quickly found my way across into the projects and transformation domain.
Speaker: I made a move across in London to Northern Trust in 2010 and operated in largely in the change management space.
Speaker: So strategic change, client change, regulatory change off the back of, we won't go into that, but the GFC.
Speaker: Yeah.
Speaker: So largely in the latter end of that, I ran our change group for that region.
Speaker: I saw an opportunity to move to the Far East at Singapore in 2015.
Speaker: So I helped to lead our derivatives practice and grow the business out this way.
Speaker: Before taking a keen interest from then on, really, in 2015, when digital assets started to take prominence, very interested just on a personal basis.
Speaker: And then that started to overlap with industry events and associations and so forth.
Speaker: across the network I already existed in.
Speaker: So 2019, I saw an opportunity to move across into the group.
Speaker: We put a bit more resource into that globally.
Speaker: And I've lived that four years, moving on four years existence in the digital asset space.
Speaker: So yeah, as a change, I guess, change agent, a transformation leader, pretty deep experience in, I guess, front to back, end to end change from strategic vision through actually delivering on those strategic visions.
Speaker: And that really positioned me to kind of get stuck into that digital future.
Speaker: All right.
Speaker: Fantastic, Dan.
Speaker: ZK, tell us about your path.
Speaker: Yeah, sure.
Speaker: So hi, everyone.
Speaker: Thanks for inviting me.
Speaker: I'm ZK, Chief Digital Data Innovation Officer for HSBC Security Services.
Speaker: And my role is basically to define and to drive the digital data and partnership strategies, as well as to
Speaker: to drive the digital product vision globally as well.
Speaker: So my experience has always been in the digital space and I always make sure to keep up with the emerging technologies.
Speaker: And it is really important from my perspective to be well-versed in all these technologies, to be able to innovate and to define new business model.
Speaker: So for my current team,
Speaker: Instead of being the usual digital team, my team is actually responsible for digital product and services revenue.
Speaker: And our current area of focus actually spans across many, many areas, which includes digital product design, data analytics and AI, digital asset and blockchain, API connectivity, apps and client experience, as well as digital platforms within the innovation and the fintech space itself.
Speaker: So I've joined HSBC for one and a half years now.
Speaker: So prior to joining HSBC, I was at Standard Chartered Bank, where I was the global head of product innovation for financing and security services.
Speaker: And I have always liked the concept of
Speaker: decentralized and distributed.
Speaker: And that's the reason why I'm also currently doing a doctorate as well to really focus on writing a dissertation to focus on how does banks continue to play a role in the DeFi ecosystem as well as the opportunities and the challenges that a bank may have going forward as well.
Speaker: So that's me.
Speaker: I look forward to that dissertation.
Speaker: Well, all right, gentlemen, the rise of digital assets has really resulted in some huge changes and innovations across the entire industry.
Speaker: But from your perspective, what have been the most significant changes over the past couple of years?
Speaker: Dan, why don't you kick us off?
Speaker: Sure.
Speaker: So I guess just starting to open and recognize that the crypto landscape over the last year plus has been quite a roller coaster.
Speaker: So I wouldn't say it's just been a rise in digital assets.
Speaker: I think it's rise and falls on almost a daily basis.
Speaker: Against that backdrop and more in the institutional space, there's absolutely been some good progress made.
Speaker: Certainly in the use case kind of proposition sense, there's been a whole host of ways in which both blockchain and digital assets have been deployed to create value, to harness data, to be able to put things more into the public domain for the sake of transparency and so forth.
Speaker: So in terms of standout progress, I mean, asset tokenization, the reason we gathered today and first and foremost, that's certainly been front and center.
Speaker: Different ways, and I'll touch on a few in a while, that that's come through and showing value.
Speaker: Democratization of assets is one of the things from the outset that it seeks to provide.
Speaker: One of the other things is just sheer development of smart contract capability.
Speaker: I mean, that sits hand in hand with digital assets and embedded in them.
Speaker: So there's been a strong kind of drive towards development of those and embedding those into token protocols and standards.
Speaker: All of those things will enable things to be standardized and adoptable.
Speaker: And then some of the efficiencies that are driven off the back of those and the reasons that we all are interested in this space, whether that's going after efficiencies or distribution reach and so forth.
Speaker: So, yeah, I mean, there are a couple of call out things I would say off the bat in terms of actual institutional grade infrastructure.
Speaker: We're starting to see some some traction made there in common infrastructure.
Speaker: That's absolutely going to be the basis for our digital landscape in the years to come.
Speaker: I'd say we're still on the early part of that journey.
Speaker: With that, some of the bigger changes I think we're seeing is more in the retail and the wealth segment.
Speaker: Whilst not a core focus for Northern Trust, it's absolutely recognized that some of those segments are able to access assets and markets that they weren't historically able to.
Speaker: And that's all thanks to the likes of digitization, the tokenization that happens off that, and likewise, fractionalization of those assets.
Speaker: Yeah, so I mean, the product innovation at a headline level has been cultivated from some of these tool sets for previously inaccessible assets for some of those market segments.
Speaker: And that's really just bringing to the fore some of the beauty and the essence of the blockchain, the DLT infrastructure.
Speaker: Being able to derive value from those new ecosystems, harness the reach of those in a public blockchain setting, and then really just try and mobilize data, mobilize assets to make those work for you.
Speaker: With tokenization, let's take it another step.
Speaker: Do you see any new asset classes coming out?
Speaker: And how will the current classes continue to evolve?
Speaker: Sure.
Speaker: So I guess just at the headline level, I see a segmentation of assets which are going to become smarter.
Speaker: So there's use cases and there's more asset classes, let's say, that are right for disruption.
Speaker: Those which will get greater benefits from this new domain.
Speaker: And those are going to become smarter, move faster, be more self-governing, thanks to all of those things in that tokenization space, as well as the smart contract capabilities.
Speaker: All of those things will play into the asset servicing lifecycle and the things that we as Northern Trust and our peer group.
Speaker: So all of those things will be with the end game of bringing down cost of issuance for our clients, making it cheaper to trade, being cheaper to service, more efficient, et cetera, et cetera.
Speaker: Removing that friction makes things in a more real-time basis.
Speaker: Everything else we're doing that surrounds that is an enabler for that.
Speaker: Giving our clients and our participants, be it to partner or market participant, the ability to access assets, trade those assets safely, store those assets safely, and then report on those.
Speaker: So again, there's a data story that sits in the background here around
Speaker: really mobilizing actionable insights.
Speaker: And that's really just mobilizing data that's already out there, harnessing that and creating value back against the asset set and the asset class.
Speaker: A couple of asset classes I noted just in that space really lean into the ESG thematic
Speaker: So we're seeing multiple ways in which that can manifest, but we're seeing it in recent history through some digital native issuances of bonds, for example, some green bonds, a recent Hong Kong green bond.
Speaker: There's an AIB bond as well.
Speaker: And some of these are great for really just trying to embed some of the tracking, the goals, the proof of impact data, which you can then attribute and integrate back in truly into the assets and the portfolios.
Speaker: And that's something that's missing from the broader ESG story today.
Speaker: Keeping that ESG theme, I'd be remiss to not comment on the voluntary carbon market.
Speaker: It's something that's garnered a great deal of interest.
Speaker: We're certainly doing some research in that space.
Speaker: In the region here in Singapore and Asia, it's a hot topic.
Speaker: Again, against the backdrop of the global climate crisis, it's certainly one of those marketplaces that's come to the table as one of those things that can move the needle.
Speaker: However, the market itself lacks infrastructure and transparency.
Speaker: That's absolutely what the tokenization, the DLT infrastructure and so on and so forth can provide to that.
Speaker: So that's a match made in heaven.
Speaker: Well, then this takes us to the question of regulations, regulatory changes.
Speaker: And ZK, let's toss it to you.
Speaker: Can you take us through the differences in regulations around the globe?
Speaker: And when do you think there might be, well, some agreement or alignment among regulators globally?
Speaker: Yeah, sure.
Speaker: So this will be a long response.
Speaker: Yeah.
Speaker: So the growth in the retail and the institutional adoption of digital assets has resulted in a very rapid rise in the market capitalization and extreme volatility.
Speaker: So in 2022, we have actually witnessed a daisy chain of events that began with the collapse of stablecoin, which is TerraUSD.
Speaker: And then after that, we came across the insolvency of FTX, which has really brought about the next new wave of crypto winter.
Speaker: And according to a World Economic Forum article, so consumer businesses and investors around the world, actually, they lose more than $2 trillion in digital asset market last year.
Speaker: So this has actually fueled an increased regulatory focus on digital assets and is expected to continue in the next few years.
Speaker: So a raft of legislation is being introduced to regulate this volatile industry.
Speaker: And this actually includes the UK's financial services and market view, as well as EU's markets in crypto assets, which in short form, it is known as MECA.
Speaker: So national authorities have, on the whole, taken different approaches to regulatory policy for cryptoassets.
Speaker: So some of the jurisdictions have amended or introduced new legislation covering cryptoassets and their service providers, while some others are actually at the consultation or at the drafting stage.
Speaker: So, for instance, in the recent consultation paper that is published by the H&M,
Speaker: treasury.
Speaker: So in order to achieve the commonly held regulatory objective of same risk, same regulatory outcome,
Speaker: The Treasury is actually proposing to integrate stablecoins and other crypto assets into the existing legislative frameworks, such as the regulated activities order and the electronic money regulations, etc., etc.
Speaker: And in the case of EU's MECA regulation, many of its elements actually echoes regulations that is applicable in the traditional markets as well.
Speaker: And attempts have been made to avoid regulatory overlap.
Speaker: However, MICA fundamentally actually represent a new standalone piece of regulation with its parameters defined in part by reference to underlying technology.
Speaker: And on top of that, some authorities have also prohibited the issuance or holdings of crypto assets by residents or the ability to transact in them or use them for certain purposes such as payments.
Speaker: So in sharp contrast, right, some jurisdictions such as Singapore and Hong Kong, they have
Speaker: been much more welcoming and they hope to establish themselves as leading crypto hubs.
Speaker: So this has resulted in a fragmented global response in the regulatory treatments of crypto assets.
Speaker: And to your second question, to drive a more harmonized and consistent regulatory type of approach,
Speaker: International bodies such as the Financial Stability Board and the Buster Committee on the Banking Supervision has been working on assessing the risks and the appropriate policy responses to the rise of digital assets.
Speaker: So, for example, in February this year, the International Monetary Fund
Speaker: they actually discuss elements of efficient or effective policy for crypto assets and they provide guidance to IMF members' country on all the appropriate responses to the different policies.
Speaker: And the FSB has also proposed a framework and recommendation for international regulation of crypto assets as well.
Speaker: So...
Speaker: In a nutshell, it's really important to keep in mind that the regulatory clarity is often a journey.
Speaker: It is not a destination, and this will take time.
Speaker: So these efforts are a step forward in enabling the harmonization of frameworks across jurisdiction, which is key to lay out the limits of what is permissible and accelerate further clarity in the digital asset space.
Speaker: So basically, as crypto and other businesses
Speaker: tactics, I'll call them, evolve.
Speaker: Any kind of regulatory environment is going to have to evolve, but it's still evolving right now.
Speaker: So will it ever be resolved?
Speaker: Yeah, so of course, it is always a catching up game.
Speaker: And I think many of the banks in the financial sector, we have actually been
Speaker: slightly faster in terms of the aspiration of new technology, but we have also been working very, very closely with all the regulators to make sure that they understand what we are doing.
Speaker: And it is really important that we work very closely with our compliance team, our risk team, and our legal team to help them to understand what exactly are we doing so that they do not become the roadblocks when we want to launch new products and services.
Speaker: So this needs to be done in
Speaker: in a very in parallel to make sure that we are exploring the technology, we are working with regulators, and we are working internally on our control functions to make sure that all these three can be aligned to whatever digital strategy that we may have in place to look at new revenue streams.
Speaker: All right.
Speaker: Well, Dan, as these digital assets do become more prominent, how are asset servicers going to adapt to stay ahead of investors' expectations?
Speaker: Sure.
Speaker: So I think it's the old statement of change is the new constant and the only constant, if you will.
Speaker: So I guess the way that we break this down, and I don't think it's too different for our peers, I mean, deep research, exploratory projects, engaging with clients and peers on an ongoing basis, laterally, committing to the journey with them, I think is kind of key in that cycle.
Speaker: And just from the outset, there's investor expectations and those clients that we do these things for that are driving us are the ones that push us to innovate.
Speaker: So that's a good thing.
Speaker: In terms of how that's brought to life and I guess how we tackle that, we talk about investing ahead of the curve.
Speaker: That translates in both terms of technical capability as well as people.
Speaker: For Northern, that means building vision and strategy through my group.
Speaker: And we look at that on time horizons such as three, five, even 10 years out.
Speaker: So again, we start that cycle early.
Speaker: We are then enabled to go through a kind of staged lifecycle.
Speaker: There's an exploratory discovery end of that.
Speaker: There's a kind of commitment into proof of value type scenarios.
Speaker: And then we mobilize and look to commercialize from that into product.
Speaker: So there's a maturity curve there that we need to respect and it's difficult to shortcut.
Speaker: So we try to take everyone on that journey with us.
Speaker: Of course, because of the elongated and those strategic visions and horizons I just described, it's really important to build in pivots.
Speaker: So we need the agility in there to pivot should we need to, if we don't get something right or we see something evolve in a different direction so that we can be on the money when that time actually comes.
Speaker: So deploying new capability
Speaker: And the way that we hear a lot about this and we're no different, but we're looking at things on a component deliverable basis.
Speaker: So agile ways of working and all those good things in the technical space really translate to us developing what are ultimately kind of microservice component type deliverables.
Speaker: So we can increment capability, build that flexibility at the same time as we're building out these new ecosystems with the integration points that allow us to be interoperable, backwards, sideways compatible with different platforms and partners and so forth.
Speaker: And then it's really important to recognize that, you know, the digital products and the asset classes we described earlier in the session, those things are going to evolve, not all at the same rate of knots, and it's not going to suddenly all turn digital overnight, and it won't happen on a big bang basis either.
Speaker: So some of those things just drive us to, again, think laterally about how we need to manage the coexistence of environments between the traditional and the digital asset environments.
Speaker: And then lastly, something that I don't think gets enough coverage is actually just nurturing a culture.
Speaker: So Northern, deep in our culture, we care a lot about the service integrity and the things that wrap around that as a business.
Speaker: So for us, just embracing that digital everything as we move forward into that new world, I think it's really important and educating along that journey.
Speaker: All right.
Speaker: Well, taking that all a step further, ZK asset servicers will need to learn to support clients in this, we'll call it T plus zero operational world, execution, settlement, simultaneous, distributed ledger, single source of data for everybody involved.
Speaker: So what challenges do you see ahead for traditional asset servicers?
Speaker: Sure.
Speaker: So one of the key challenges here is actually the integration with existing systems and the infrastructure.
Speaker: So in the hybrid world, with both traditional and digital asset, asset services would need to consider how new digital asset platforms are integrated with existing systems.
Speaker: So to offer clients a seamless offering across all their assets that are under custody,
Speaker: including, for example, consolidation reporting, a connectivity layer would need to be in place to facilitate the data flows between digital asset platforms and existing custody backends.
Speaker: So there may be changes that is needed to existing system to support digital asset as well.
Speaker: So a typical example would be the number of decimal places that digital asset have is not typically supported by legacy custody system.
Speaker: So the operational processes may need to be adapted to cater for real-time processing and settlement.
Speaker: And there needs to be education and training to upskill existing operations team to better understand this new asset class.
Speaker: Last but not least, the other challenge is about the interoperability.
Speaker: So recently, there have been several tokenization networks that have been launched by different financial institutions and market infrastructure providers.
Speaker: But these platforms are generally siloed and they do not interact with each other.
Speaker: So to fully leverage the potential of distributed ledger technology, asset services should actually collaborate to ensure that their platforms exist as part of a connected ecosystem with the ability to move digital asset across the different platforms.
Speaker: And taking that another step forward.
Speaker: So asset services are going to have to work with traditional and digital asset strategies.
Speaker: ZK, do you have any examples where this kind of blended financial ecosystem has worked?
Speaker: Yeah, so for the foreseeable future, traditional and digital assets are expected to coexist within portfolios, which means that investors will need to manage both assets concurrently.
Speaker: So the ability to support multiple asset class, including digital assets, have very, very long been part of the value proposition of the top tier custodians.
Speaker: which will allow them to play a key role in facilitating asset managers and asset owners on their digital asset journey.
Speaker: So to support a blended type of financial ecosystem was actually one of our key principles in the development of HSBC Orion platform.
Speaker: So Orion is our bank's proprietary tokenization platforms and the holdings of assets that are issued on Orion are actually mirrored in our existing custody backend system with automated reconciliations between the system in
Speaker: between the system in place.
Speaker: And we recognize that in a hybrid world, right, clients would value a seamless service proposition across traditional and digital asset.
Speaker: And asset providers have to adapt their service offering to facilitate this.
Speaker: And that's the reason why we have chosen to prioritize the integration of HSBC Orion with existing channels such as Swift,
Speaker: so that the transition to the digital asset ecosystem is made as smooth as possible for custodians that are participating on our network and for our clients as well.
Speaker: Dan, in your Beyond Asset Tokenization white paper, you mentioned the importance of collaborating with other organizations when experimenting with new technologies in the digital space.
Speaker: Tell us what some of the benefits are there.
Speaker: Sure.
Speaker: So I guess from the outset, when we're tackling problems, we're looking to solve very much the same, if not very similar problems as asset servicing providers and participants in the same ecosystem.
Speaker: So I guess two heads better than one at that point.
Speaker: But no, diversity of thought and diversity of experience, I think, from collaborating and certainly that early stage, the ideation, the brainstorming certainly gives us some lateral value.
Speaker: Then I guess as you move through into kind of a lifecycle of an initiative, we try to mobilize resources.
Speaker: These things don't take small amounts of resource.
Speaker: And so just being able to pull some of that divide and conquer type efforts and then obviously the cost that goes with that and mutualizing that where possible, if delivering in partnership and working in partnership is obviously valuable too.
Speaker: Sometimes that's also partnering into technical resources.
Speaker: We're obviously blessed in Singapore with a healthy fintech community.
Speaker: So that can be in the form of network partners as well as fintech partners.
Speaker: So we've got that to tap into.
Speaker: Again, sometimes it's skill sets, sometimes it's technical capability we don't have.
Speaker: And that's really just gives us that kind of look at why build partner propositions from the way we move forward.
Speaker: Ultimately, defining and building these things in isolation is not going to move the needle.
Speaker: So I think when we look at the ecosystem type plays and the way that we can exist, operate and succeed in these ecosystems, we're looking at deploying those kind of component pieces of capability that I described earlier.
Speaker: You know, those microservices to be able to bring together kind of best in class end to end deliverables.
Speaker: And that's really what the way we look to position ourselves.
Speaker: So it's really the mission is finding those correct strategic partners for the purpose of your mission that can help you deliver that value back into the business with what they have as, you know, complementary capabilities, services, and ultimately connectivity.
Speaker: And that's really what's essential from my perspective.
Speaker: Great.
Speaker: And asset services certainly seem to be in a unique place to really drive change here in this digital asset space.
Speaker: ZK, why is that?
Speaker: What makes them so powerful?
Speaker: So the best way to see how an asset servicer can drive change and innovate in the digital asset space is by first considering its core traditional functions, which is namely safeguarding client asset to fulfill regulatory requirements and simplifying the overall investment process.
Speaker: So jurisdictions across the globe are taking concrete steps to bring regulatory clarity to facilitate the continued responsible growth of the digital asset market, including with respect to the provision of custody services by financial institutions.
Speaker: So the digital asset industry is still maturing and faces many challenges much related to its non-regulated extent and also the resulting lack of consumer protection.
Speaker: So to drive further change and innovation in the digital asset space, the emergence of an institutional-grade asset servicing ecosystem is a prerequisite.
Speaker: So asset services have a vital role to play as a trust and co in the digital asset universe.
Speaker: So as regulated financial institutions, asset services are well-placed to actually to engage with regulators and policymakers, as I mentioned earlier, on issues such as digital asset custody, trading, and settlement.
Speaker: So by advocating for clear and consistent regulatory frameworks, asset services can actually help to create a more structured environment for the development of digital asset ecosystem.
Speaker: And asset services can also provide the infrastructure to bridge digital and traditional asset.
Speaker: So for example, our clients can get access to digital asset without needing much change on their end.
Speaker: So traditional asset services can leverage their existing solution and deliver value to cater to investor demand for single consolidated portfolios.
Speaker: And traditional asset services also have large network of providers such as subcustodians to safe keep traditional asset.
Speaker: So this can be extended to cover digital assets as the network continues to evolve and grow, etc.
Speaker: And clients can capitalize and harness the benefits of the entire positive network effect.
Speaker: Well, I'll tell you, this discussion has been very informative, gentlemen.
Speaker: I thank you very much for it.
Speaker: But I've got one last question for each of you.
Speaker: What is one final thought you want to leave for listeners when it comes to the power of tokenization and the challenges and opportunities that lie ahead for asset servicers?
Speaker: CK?
Speaker: Yeah, okay.
Speaker: So I think we are now part of the revolution or the way assets are being represented.
Speaker: And there's no doubt in the
Speaker: utility, and the role for tokenization and digital asset.
Speaker: So creating a more efficient, secure, and transparent financial system for the transfer of digital assets would require collaborative efforts from various stakeholders, including technology providers, regulators, and policymakers, to establish common standards and protocols.
Speaker: for the transfer of digital assets and ensure that digital asset networks operate in a transparent and fair manner while remaining neutral and open to all participants.
Speaker: So let's all work on that.
Speaker: All right, Dan?
Speaker: Sure.
Speaker: I mean, I echo ZK's comments only to add that, I guess, undoubtedly the transformative potential of tokenization and the smart contract capability and that digital asset domain is huge.
Speaker: When you start to layer into that the data story to bring that to life,
Speaker: It is pretty exciting stuff.
Speaker: And that path is long and it will be winding and it will require the clarity and the cooperation from rule makers on a global basis to what ZK alluded earlier on in the session.
Speaker: But we will get there and I guess we look forward to the journey and the destination.
Speaker: All right.
Speaker: Dan, ZK, thank you so much for joining us today to talk about the power of tokenization and the ways that asset servicers are evolving with the rapidly changing digital assets industry.
Speaker: As I said, a very insightful discussion.
Speaker: And thank you for listening to Faster Forward from Northern Trust Asset Servicing.
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