CUSTODY
The digital future of asset servicing BY LEON STAVROU
C
The asset servicing industry is simultaneously going through digitisation and digitalisation which will create new markets and products despite uncertainty about their ultimate form.
Custodians have come a long way since their origins as the guardians of assets over a century ago. As an industry, asset servicing is becoming increasingly disintermediated, integrated, and collaborative. Industry participants will need to evolve and collaborate if they want to competitively position themselves for the future. Emerging digital infrastructures, and the rapid digitisation of existing processes, are fundamentally changing the asset servicing industry, driven by increasing demand for efficiency and insight. This evolution will require that each step becomes increasingly agile and collaborative. These changes will create new markets and products which, whilst there is still uncertainty about their ultimate form, have the potential to be truly disruptive.
Change in a brave new digital world Today, custody is seen as a niche sector operated by a group of specialists, but the required skillset is evolving and is expected to change significantly by 2030. Asset servicers have been supporting their clients using artificial intelligence, cloud computing, data analytics and blockchain technology. Beyond 2030, the industry will go even further. We anticipate that new, collaborative ecosystems will emerge that allow both digital and traditional electronic solutions to exist side by side. By 2030, with the use of smart contract technology, we consider transactions could report themselves and asset servicers will have strengthened real-time assurance via blockchain to support more efficiency. Digitalisation is also a significant driver of disruption. Today, the asset servicing industry is going through a process of digitisation and
digitalisation simultaneously, though these are two very distinct things. Digitisation is the process of moving paper content forward into the digital world, using machine learning and artificial intelligence to classify, ingest and analyse even nonstructured data whilst digitalisation involves no paper in the process at all, assets, data and processes are digital native and at source. Digitalisation is being driven by the growth of distributed ledger technology (DLT) and shared infrastructure, with standardised, commoditised processes being developed on those technologies. It is bringing about the advent of digital assets and other innovations including a growing shift towards decentralised finance (DeFi). Two local examples of how this landscape is changing for securities service providers, is the Australian Securities Exchange (ASX) becoming the world’s first market infrastructure to deploy DLT at the heart of its clearing and settlement infrastructure by 2023. In February 2020, the National Stock Exchange of Australia revealed a joint venture project to introduce a blockchain-based clearing and settlement system. This will help securities services providers connect to an immutable source of data, get access to real time data and also consider operational changes that allow concurrent workflow management and a move away from sequential messaging-based workflows.
Challenges with DeFi Although the shift to a DeFi world has made digital assets more accessible to a wider group of investors, it is not without its challenges. Institutional financial structures are likely to follow the trends we’re currently seeing in the retail space with an increasing demand for
transparency and personalisation. Democratisation of investment access — enabled by advancements such as tokenisation and fractionalisation alongside the proliferation of digital assets — is likely to see the great democratisation of asset classes previously only accessible to large institutional asset managers or pension funds. Last year, Northern Trust and Singapore based BondEvalue partnered to deliver integrated asset servicing for the fractional ownership of fixed income bonds. BondEvalue’s regulated exchange facilitates the trading of fractionalised investable assets based on wholesale assets, with Northern Trust as a strategic asset servicing provider. The platform allows investors access to investments that were historically only available to larger institutions. This means any private individual, with even just a small amount to invest, can allocate to individual wholesale assets that they currently would not be able to access. By 2030, this type of service may be offered as standard by any asset servicer especially in alternative assets. However, the variety of new developments, whilst offering significant opportunity for the industry, have the potential to create operational fragmentation, resulting in the necessity to navigate and manage multiple ecosystems simultaneously. From this arises a need for greater industry collaboration and standardisation. We believe that the move from traditional, electronic solutions and capabilities to digital ones will not happen overnight and asset servicers will have a role in continuing to evolve. If investors allocate up to 10% of their portfolios to digital assets, for example, custodians will need to ensure that they have built the architecture to service and support
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