Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: Welcome to the latest in our DigiTalks podcast series.
Speaker: We are featuring a variety of different topics that are currently trending in the digital world.
Speaker: And we now explore the implementation of blockchain solutions.
Speaker: Introducing the topic is HSBC's security services, senior product manager for trustee and fiduciary and regulation, Vary Sandeman.
Speaker: Vary, over to you.
Speaker: Thank you, Gabriella.
Speaker: We've been increasingly hearing about the benefits that blockchain technology can bring to the financial services sector, such as faster transactions, enhanced security, better transparency and reduced cost.
Speaker: When it comes to implementing blockchain solutions, there will of course be a number of factors to take into account, including the technology, the operating model and legal and regulatory considerations.
Speaker: To explore this topic further, I'm delighted to welcome two of my colleagues, Rachel Rock and Sin-Yu Tan, both product managers for digital data and innovation at HSBC Security Services.
Speaker: Thanks to you both for joining me today.
Speaker: And let me come to you first, Rachel.
Speaker: Would you be able to explain briefly what blockchain technology is and the benefits it can bring to capital markets?
Speaker: Of course, Rari, and thank you for having us.
Speaker: You can think of blockchain as essentially being a shared database.
Speaker: Unlike traditional databases where a single entity has control, the ability to update a blockchain is distributed between the participants on that network.
Speaker: This brings with it a range of benefits, particularly for capital markets.
Speaker: Operating asset networks on a blockchain can provide market participants with a single source of truth of data.
Speaker: Take bond issuance as an example.
Speaker: In today's world, issuing and settling a bond requires information flows back and forth between multiple parties.
Speaker: including depositories, exchanges, custodians, and arrangers.
Speaker: Providing a single source of truth for these participants to access and update throughout the asset lifecycle would boost efficiency and create cost savings.
Speaker: Another advantage is that smart contracts can be used to model the rights and obligations of assets issued on a blockchain.
Speaker: Smart contracts are essentially lines of code that act as instructions for how the asset works.
Speaker: This enables many processes to be automated.
Speaker: For example, settlement can automatically be triggered once specified conditions are met.
Speaker: Indeed, and in addition to improving existing systems and processes, we believe that DLT and tokenization can reshape financial markets.
Speaker: And this is because tokenization can create completely new representation of assets,
Speaker: spur product innovation and bring customized solutions to not just large financial institutions, but really the everyday investors.
Speaker: So efficiency gains that result from the use of smart contracts can make customized or bespoke asset structuring more commercially viable, creating a wider universe of investable assets in the longer term.
Speaker: For example, tokenization can bring more liquidity for assets such as carbon credits, real estate, art, and private assets.
Speaker: And tokenization can also significantly reduce the manual processes and costs involved in structuring layered products.
Speaker: So take for example, net zero tokenized gold products, where you can structure it in such a way that for each ounce of gold that you purchase,
Speaker: Sufficient carbon credit tokens can be bought to offset the carbon footprint of the gold.
Speaker: And also another innovation that has been enabled by blockchain is the decentralized finance space or DeFi for short.
Speaker: So DeFi in a nutshell is a peer-to-peer market where financial services can be delivered in an automatic, trustless manner.
Speaker: And one of its benefits is really the democratization of access to financial services, although largely around borrowing and lending today.
Speaker: Thanks Rachel and Cindy for that explanation.
Speaker: And there's obviously some really exciting benefits of blockchain.
Speaker: And I know HSBC has worked to capitalize on these benefits recently.
Speaker: The bank has operated and participated on blockchain based asset networks.
Speaker: And in 2023 HSBC launched Orion, our proprietary tokenization platform.
Speaker: When it comes to implementing blockchain enabled solutions in capital markets,
Speaker: What are some of the key factors that need to be considered?
Speaker: A key consideration is the technology stack.
Speaker: Should you use a public or a private blockchain?
Speaker: Public blockchains have benefits in terms of scalability and decentralization, while private blockchains allow for a greater degree of control over the participants and the rules on the network.
Speaker: The digital bonds issued on HSBC Orion are registered on a private blockchain that ensures privacy and efficiency, while a public blockchain mirror record provides increased transparency on an anonymized basis.
Speaker: The token standards being used and smart contract language selected to model the rights and obligations of the asset are also important choices to make.
Speaker: Interoperability is a key point to consider here to ensure that blockchain-enabled platforms do not operate in silos and can form part of an interconnected digital assets ecosystem.
Speaker: And of course, you'll be very well aware of the legal and regulatory considerations.
Speaker: Yes, Rachel, that's right.
Speaker: The legal and regulatory framework that the platform will operate under will be key.
Speaker: Platform operators need to consider whether the blockchain or distributed ledger can act as a legal record of asset holdings.
Speaker: And legal characterization of tokenized assets is key to establishing fungibility between digital and traditional dematerialized assets.
Speaker: This could be key to driving wider adoption as asset services and the wider financial industry migrates to cater for digital assets.
Speaker: The pilot digital bond issuance on HSBC Orion followed the recently adopted Luxembourg legal framework, which is tailored to enable the issuance and custody of securities on blockchain.
Speaker: And of course, regulators have been making significant progress recently
Speaker: In the case of EU's micro-regulation, many of its elements echo regulations applicable in the traditional markets.
Speaker: Jurisdictions such as Singapore and Hong Kong have also been taking the lead in this space and hope to establish themselves as leading blockchain and digital asset hubs.
Speaker: Another consideration is security and permissioning.
Speaker: Asset network operators need to ensure the security of the platform.
Speaker: They can consider how trust anchors can be established in the network to maintain appropriate guardrails around network participation.
Speaker: Trust anchors could be regulated institutions that screen and verify entities that wish to participate in blockchain networks.
Speaker: This ensures that participants trade only with verified counterparties and can prevent bad actors and potential financial crime.
Speaker: Thanks Rachel, that's really useful to have explored the considerations of implementing blockchain solutions.
Speaker: And Sin Yi, what does the future look like for blockchain based asset networks?
Speaker: Well, as the use of blockchain in the financial industry matures, we believe that the natural next step is to enable the seamless movement of assets across networks, which is contingent on network interoperability.
Speaker: And this state of infrastructure is what we call the network of networks.
Speaker: The benefits of DLT can only be fully realized when we reach this date to create a more efficient, secure, and transparent financial system for the creation and transfer of digital assets, and financial institutions have a key role to play in establishing this.
Speaker: This is the reason why, besides launching our own tokenization platform, which is HSBC Orion,
Speaker: we have also collaborated and participated in other industry projects.
Speaker: For example, we were part of the Hong Kong government tokenized green bond issuance in February this year, as well as Project Guardian, a collaborative initiative by the Monetary Authority of Singapore with the rest of the industry to explore
Speaker: and establish international standards for open and interoperable networks, institutional grade DeFi, and trust anchors.
Speaker: So ultimately, our goal is to enable our clients to access and leverage the benefits of the digital asset ecosystem through us, allowing them to transition seamlessly.
Speaker: And for the industry as a whole, I think we can look forward to continuous collaboration between the various stakeholders, including financial institutions, technology providers, as well as regulators.
Speaker: Thanks, Xin Yi.
Speaker: And recently, there's been a lot of excitement around emerging technologies like artificial intelligence.
Speaker: What do you both think about the intersection between AI and blockchain?
Speaker: AI and blockchain, when used together, can increase the security and the trust of the network.
Speaker: Blockchain can validate the provenance of the data being used by AI models, ensuring data integrity and security.
Speaker: AI currently largely uses centralized databases that the users do not have visibility of.
Speaker: how the data is used and who it is further disseminated to are largely opaque to the user.
Speaker: Lockchains, on the other hand, provide decentralized data storage that can act as a transparent record, making it possible to develop secure data sharing networks for AI.
Speaker: With decentralized internet and digital identity, we are moving towards a world where users will have control over their data and can choose what to push to trusted sources instead of applications pulling data indiscriminately from centralized platforms.
Speaker: Yep, and AI can also lower the barriers of innovation in the blockchain and digital assets space.
Speaker: Currently, in order to build applications in this space, you would need to have deep knowledge of smart contract programming, and generative AI can democratize this by allowing users to automatically generate code to write these smart contracts.
Speaker: So in the future, with further advancements in AI,
Speaker: It is exciting to consider a world where anyone may be able to build their own blockchain-based applications.
Speaker: The digital assets ecosystem is already largely open source and by boosting accessibility, AI can add a new dimension to this.
Speaker: Rachel and Cindy, thank you both so much for joining me today on the podcast.
Speaker: It's been absolutely fascinating to get your insights into implementing blockchain solutions.
Speaker: and gain the benefit of your experience in these projects.
Speaker: If clients have any questions on the subject, please raise this with your HSBC representative.
Speaker: Gabriella, back over to you, thanks.
Speaker: Thanks so much, Vary, Rachel and Zin Yee.
Speaker: This has been really fascinating for me as well.
Speaker: I would like to thank you for listening to this edition in our series of DigiTalks podcasts.
Speaker: We hope that you enjoyed learning more about implementing blockchain solutions.
Speaker: Stay tuned for more from our podcasts as we explore more trends in the coming weeks.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
