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, and we now explore the evolving nature of network management.
Speaker: Introducing the topic is HSBC's Security Services Product Manager from the Digital Data and Innovation Team, Xinyi Tan.
Speaker: Xinyi, over to you.
Speaker: Thanks, Gabriela.
Speaker: In this podcast, we will discuss the changing asset landscape
Speaker: and what that means for network management.
Speaker: I'm joined by Aditi Taskar, who leads the network management team for Asia Pacific, as well as Rajiv Tumala, who leads the digital data and innovation team for security services in APAC and Minet from HSBC today.
Speaker: Thank you both for joining me.
Speaker: Perhaps we can start with you, Aditi.
Speaker: Could you give us a brief view of how network management has evolved over the years?
Speaker: Thanks, Sini, for having me on the podcast today.
Speaker: As the financial services industry has evolved, network management as a function has also adapted and grown.
Speaker: While the fundamental risk and relationship management aspects remain consistent, some of the focus areas have developed with an increasing focus on resilience.
Speaker: Given the events over the past few years, areas such as business continuity planning and cyber risk have gained a great deal of focus.
Speaker: Increasingly, network managers need to ensure the robustness of systems and processes.
Speaker: Increasing regulation and innovation have also influenced how we do our due diligence and the aspects that we focus on.
Speaker: Additionally, during the last few years with COVID-related travel restrictions, the mode of due diligence was adapted to factor in these constraints.
Speaker: But what this did is that it highlighted the importance of data going forward.
Speaker: While the on-site review element has now resumed, the increase in remote due diligence during the COVID period underscored the importance of data, which would help us get more confidence in controls on more of an ongoing basis.
Speaker: Another industry development that would have an impact on network management is the shift to embrace digital assets.
Speaker: Thanks, Aditi.
Speaker: It does seem like network management had to evolve and adapt rapidly, especially in the last couple of years.
Speaker: And resilience and robustness are definitely key themes that will persist.
Speaker: It's interesting that you have brought up digital assets.
Speaker: That is undeniably a trend that has endured.
Speaker: And we have seen financial institutions move from proof of concepts to production-grade solutions in this space.
Speaker: Moving to Rajiv, what are your views on how asset representation has changed?
Speaker: And what does that mean for us?
Speaker: Thank you, Sini, for having me.
Speaker: You know, asset representation is an interesting concept.
Speaker: If you go back, all assets were paper-based and largely in bearer form.
Speaker: From there on, we went on to start recording asset ownership and the attributes of asset in electronic registers.
Speaker: You know, from paper to what we now call dematerialized, took quite a bit of time from 1970s all the way to early 2000s.
Speaker: I do think digital assets or programmable securities is natural evolution of asset representation.
Speaker: And tokenization is an umbrella term that we used for creation and servicing of programmable security.
Speaker: So tokenization of traditional assets can be seen as next evolution in asset representation, just as the shift
Speaker: from physical to dematerialized forms of asset representation.
Speaker: Increased liquidity contributed to increase of tremendous volumes in capital markets.
Speaker: We also saw the electronic form shrinking the settlement cycles.
Speaker: I do think the adoption of tokenization will accelerate similar innovative trends.
Speaker: Almost every asset in the world can be tokenized and represented on distributed ledgers, allowing these assets to be fractionalized and transferred across different asset networks.
Speaker: Again, change is one thing that is consistent, and changing representation is not just unique to assets.
Speaker: simply look at computing and the way it has evolved over the last 50 years.
Speaker: We all started out with very basic computing as personal computing, which started off with Apple One.
Speaker: Prior to that, there were these huge mainframes that enterprises relied on.
Speaker: Then came the IBM PC, then Microsoft PC that we all use.
Speaker: Then came laptops.
Speaker: And as recently as June 5th, a new computing platform was introduced, Vision Pro from Apple and Microsoft
Speaker: That introduced to us spatial computing, where you just have a device, you know, you have unlimited screen space in that.
Speaker: In the same way as assets, every other segment does go representation of their core tenant, which is common.
Speaker: It's just that we are associated with finance and it's a heavily regulated space.
Speaker: So we tend to move slightly slower because there's a lot more at stake.
Speaker: Thanks, Rajiv.
Speaker: That was a really on-trend reference to make.
Speaker: And I think it's clear that the financial industry, though slower to move, is clearly riding on the wave of change that digital assets has brought.
Speaker: So many institutions, including HSBC, has launched their own tokenization platforms,
Speaker: and asset services such as digital asset custody.
Speaker: As financial institutions evolve their product suite, I'm sure that network managers have to adapt to this change.
Speaker: Aditi, how do you see the role of network management transforming given the direction the industry is headed towards?
Speaker: Absolutely.
Speaker: As Rajiv mentioned, technological developments, including tokenization platforms, will lead to major industry changes.
Speaker: This also brings new and unique risks, which network managers need to be constantly alert to.
Speaker: So in response to these developments, network managers will need to acquire a deeper understanding of new technologies like digital assets and distributed ledger technology.
Speaker: Also, as technology develops, there will be a phase with the coexistence of traditional and digital framework.
Speaker: So for network managers, this means that they need to navigate across both worlds and be flexible and agile in their approach while managing the challenges across both.
Speaker: The changes in this space will also demand increasing support from subject matter experts from other departments across the bank.
Speaker: For traditional custody, benchmarks and standards are typically agreed with internal experts.
Speaker: In the digital space, network managers will find themselves often acting as coordinators because of the newness of the subject across multiple experts or business streams internally and externally.
Speaker: Thanks, Aditi.
Speaker: Clearly, there is an important role for network management to play in this new world.
Speaker: where traditional and digital assets coexist.
Speaker: And I'm sure you have some examples to share.
Speaker: But before that, Rajiv, your team has been heavily involved in emerging technology projects.
Speaker: Could you share with us what HSBC has been doing to capture opportunities in this evolving asset landscape?
Speaker: Yes, Sini.
Speaker: My team has been involved in emerging technology projects.
Speaker: exploring implications of distributed ledger technology and blockchain to security services and beyond.
Speaker: Over the past few years, we have worked together both with the industry participants and with our own internal stakeholders and have now launched HSBC Orion, which is HSBC's tokenization platform.
Speaker: The first focus of this tokenization platform is on fixed income securities.
Speaker: HSBC Orion is a fully regulated platform functioning out of Luxembourg.
Speaker: We have a significant amount of learnings of what programmable assets can do to our various business lines.
Speaker: Now, one of the important takeaway for us has been that programmable assets will eventually increase the total addressable market across different business lines.
Speaker: Tokenization will have a bigger impact than that of securitization.
Speaker: And of course, risk appetite of custodians
Speaker: And therefore, Q-religions frameworks that Aditi's team will apply will play an even more significant role on the asset networks that begin to focus on digital assets.
Speaker: The other aspect I want to briefly touch upon today is that tokenization and the underlying infrastructure can be used to either argument
Speaker: existing assets.
Speaker: That's primarily what HSBC Orion is focused on.
Speaker: It is focused on augmenting existing assets with a lot more software using tokenization capabilities.
Speaker: But the same infrastructure can be used to create a completely new virtual asset classes as well.
Speaker: Thanks for sharing, Rajiv.
Speaker: Maybe delving deeper into HSBC Orion and more on the due diligence perspective,
Speaker: Aditi, could you share with us about how network management contributed to bringing this tokenization platform to life?
Speaker: Sure.
Speaker: At the outset, when it comes to new platforms such as Orion, there could be a question regarding the relevance and applicability or even the role of network management in some new developments.
Speaker: In the context of Orion, the role of the central account keeper is played by the legal entity operating the Orion platform.
Speaker: and providing services to the direct participants or the custodians.
Speaker: The central account keeper provides some key services, including the recording and maintenance of digital bond accounts.
Speaker: Given the digital elements of the custody operations involved for the central account keeper role, network management did get involved in the tokenization project.
Speaker: In terms of the role played by network management, given the nature of the platform operator being different from traditional agents, we had to get a detailed understanding of the operating model.
Speaker: Next, network management was involved in the custody-related due diligence.
Speaker: Here we found that although the platform operator role and framework are new, not all aspects of due diligence need to be recreated.
Speaker: An important point to note is the role of the second line of defense or the risk steward, such as compliance and legal in this exercise.
Speaker: After due diligence came the support with the operationalization of some aspects of the setup.
Speaker: Network management supported the business with some of the execution steps, similar to some of the roles that network would play in a traditional scenario.
Speaker: I would imagine that navigating this new space must have been challenging.
Speaker: Were there any new learnings or takeaways from this experience?
Speaker: Definitely a lot of learnings for the team.
Speaker: With new developments of this nature, it is important for different teams, including network, to be involved right from the start, although network management needs to remain independent in terms of its due diligence role.
Speaker: As a function, we need to look into a variety of factors, including regulation, legal opinions, and understanding the detailed operational flows.
Speaker: Another learning is that in the digital world,
Speaker: Entities other than the subcustodian and depository may be involved in the servicing.
Speaker: So trying to classify new digital concepts using descriptions such as depository and custodian could be problematic at times, since new platforms could merge these concepts.
Speaker: And as a result, due diligence needs to be able to adapt and assess the possible risks from a new standpoint.
Speaker: We've been speaking about tokenization and new asset platforms for a bit and how we have approached them.
Speaker: So after enabling the origination and transfer of digital assets, the next logical step would be to think of digital assets custody.
Speaker: Given custody is a fundamental capability, what are some of our considerations?
Speaker: So as Aditi rightly pointed out, the infrastructure for tokenization is going to be either slightly different or vastly different.
Speaker: She did point out to a few roles like central account keeper, platform operator, secondary account keepers, and these are the new
Speaker: So, given this changing landscape, I do think...
Speaker: Network management team is going to help us with curation.
Speaker: So they are going to look into the different operating models, infrastructure, and inform our internal stakeholders to form an opinion on whether it is worth for a bank like us to participate in the asset network.
Speaker: The other aspect that we will have to start focusing on, and Aditi briefly touched upon, was recovery and resilience.
Speaker: there will be some digital asset networks where assets would be in bearer form and custodians would have an increased responsibility of holding onto these assets in a safe and secure manner.
Speaker: But I would also want to highlight that not all assets, not all digital assets using tokenization need to be in a bearer form.
Speaker: So recoverability of assets and the usage of infrastructure associated with that would be a key thing networked
Speaker: management function would begin to look at when they start to look at evaluating infrastructure and operating models.
Speaker: I think, as you mentioned, the partnership between the digital and the network space is extremely important in this area.
Speaker: In the digital asset space, custodians operate in a similar manner to traditional financial markets since the primary role remains the safekeeping of clients' digital assets.
Speaker: But there are important differences.
Speaker: Notably, the nature of digital assets means that secure custody is even more critical than for traditional financial assets.
Speaker: There are a number of different custody options available in the industry, including self-custody or using a third-party custodian.
Speaker: We have been working with Rajiv's team on some of the early planning and development as we understand the market and the options for digital custody.
Speaker: We need to assess the types of inherent risks vis-a-vis the traditional custody.
Speaker: For instance, cybersecurity risk is a key area that needs focus in the context of digital assets, understanding the legal structure and governance of the custody arrangement,
Speaker: as well as how insolvency risks can be managed, are some of the other important factors.
Speaker: Another major piece of work, in partnership with compliance and legal teams, is on understanding the legal and regulatory framework in different jurisdictions.
Speaker: The challenge for custodians globally is that applicable regulations vary across jurisdictions, and different regimes take quite a different view on how to treat a digital asset.
Speaker: At the same time, legal and regulatory framework is evolving at pace, so network management will need to keep a close watch.
Speaker: And finally, the other key aspect is training.
Speaker: As this space evolves, we'll need to bring our teams up the learning curve.
Speaker: So we've been working on bringing network managers up to speed on different aspects of the digital space, engaging in training on technology and risk aspects.
Speaker: There's clearly an important role for asset services to enable our clients to
Speaker: to access digital assets and related infrastructure in a safe and secure manner, and skill sets that the teams have today, including network management, will need to adapt.
Speaker: Before we go, Aditi and Rajiv, any last words for our listeners?
Speaker: Thanks, Sydney.
Speaker: This is a dynamic and constantly evolving space.
Speaker: So within network management, we need to keep ourselves current and constantly stay updated with the latest developments.
Speaker: The other point that I'd like to highlight is
Speaker: is that we also need to focus on evolving our due diligence model for traditional custodians, including the mode, frequency, and the usage of data.
Speaker: This will ensure that we can keep pace and undertake more meaningful and dynamic ongoing monitoring for both traditional and digital custodians in the future.
Speaker: From my side, what matters is the fact that function and form endure, right?
Speaker: So the process to deliver the function and form changes, and that is the change that we are currently experiencing.
Speaker: There would be many different asset networks like what we have today.
Speaker: The nature of those asset networks are going to be slightly different from what we have today.
Speaker: And how these asset networks interoperate with each other is also going to be a key point.
Speaker: We are going to have an increasing amount of responsibility to ensure that the asset networks we participate and operate are
Speaker: are safe and secure from a client asset ownership perspective.
Speaker: So the responsibilities that we have are only going to increase in the changing context.
Speaker: Thank you so much, Aditi and Rajiv, for your insights.
Speaker: And that's all the time we have for today.
Speaker: This has been a great discussion into the future of network management as we approach a new paradigm in asset networks.
Speaker: Agreed.
Speaker: Zini, Rajiv, and Aditi, I honestly think this has been super interesting.
Speaker: And I believe also our audience has been quite enlightened.
Speaker: So I would like to thank all of you for listening to this edition in our series of Digitalks podcasts.
Speaker: We hope that you enjoyed learning more about the evolving nature of network management.
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.
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