Crypto tech could support capital markets
Published: 01:11 PM,Nov 01,2022 | EDITED : 05:11 PM,Nov 01,2022
The technology that underpins crypto could help bolster traditional capital markets, according to the Bank of England. Deputy governor Sir Jon Cunliffe told an association for Financial Markets in Europe conference: “The greater impact on the financial system may well come from the transfer of technologies developed in the crypto world to the ‘real’ world”.
Post-trade services, such as clearing and settlement, could be transformed by so-called distributed ledger technologies, known as DLT, he said. “It takes nanoseconds to strike a trade. Depending on the market, these processes take at least a day and often more,” he said.
The comments came as the “crypto winter” continues to shine a spotlight on how central banks and regulators approach digital assets. The collapse of several high-profile crypto companies has wiped around a million dollars in market value. But regulators are also looking at the technology that underpins crypto and potential benefits for existing financial markets.
The post-trade process often involves multiple firms doing individual tasks, which Cunliffe said DLT could consolidate. “In the conventional trade and post-trade chain, there are layers of entities performing specific functions; in the crypto world, the functions in the chain can be brought together in a single smart contract,” he told the conference.
Trading in most jurisdictions is conducted on a so-called T+2 basis, where trades are finalised within two days of the transaction date. Within that period, there are several risks that might cause a trade to not go through, including price changes and one party being unable to complete the transaction. Clearing and settlement occurs to reduce that risk; the clearing house will guarantee the trade for both the buyer and seller.
“The potential gains in cost from consolidation could be very large. For the end investor, fewer intermediaries should mean less fees,” Sir Jon said. “A single entity and process carrying out all of these functions would require fewer participants in the chain and, in principle at least, bring resilience benefits from the simplified structure,” he added.
Using DLT to settle trades could lead to “T+now, or instant settlement of trades. Sir Jon said that clearing houses might not be needed under that scenario. However, he said adopting DLT also come with risks. DLT-based systems still need to prove they can work over longer timescales, he said, while there were also issues around instant settlement and potential fragmentation of capital markets.
The latest fintech firm to enter the digital assets sector is Plum Fintech Limited. The firm is a registered account information provider with the UK Financial Conducts Authority. It plans to start offering European customers crypto trading services in weeks to come. The money management app has completed a deal with Peter Thiel-backed crypto exchange Bitpanda to enable customers to invest in cryptocurrencies via its app.
Based in London, Plum Fintech Limited said in a statement that the move reflected “rising investor demand” across Europe for easy crypto trading. Fintechs are increasingly looking to offer crypto services, either via partnerships with industry specialists or with in-house trading options.
Challenger bank Revolut offers crypto trading and has been rolling out more tokens for its millions of customers to trade, as part of a concerted push into the space. Trading app Freetrade is also planning to move into crypto as part of a European push. The trend comes in spite of a dramatic crash in crypto prices earlier this year, which cost many retail investors their life savings and led to thousands of job cuts across the industry. (The writer is our foreign correspondent based in the UK)
andyjalil@aol.com
Post-trade services, such as clearing and settlement, could be transformed by so-called distributed ledger technologies, known as DLT, he said. “It takes nanoseconds to strike a trade. Depending on the market, these processes take at least a day and often more,” he said.
The comments came as the “crypto winter” continues to shine a spotlight on how central banks and regulators approach digital assets. The collapse of several high-profile crypto companies has wiped around a million dollars in market value. But regulators are also looking at the technology that underpins crypto and potential benefits for existing financial markets.
The post-trade process often involves multiple firms doing individual tasks, which Cunliffe said DLT could consolidate. “In the conventional trade and post-trade chain, there are layers of entities performing specific functions; in the crypto world, the functions in the chain can be brought together in a single smart contract,” he told the conference.
Trading in most jurisdictions is conducted on a so-called T+2 basis, where trades are finalised within two days of the transaction date. Within that period, there are several risks that might cause a trade to not go through, including price changes and one party being unable to complete the transaction. Clearing and settlement occurs to reduce that risk; the clearing house will guarantee the trade for both the buyer and seller.
“The potential gains in cost from consolidation could be very large. For the end investor, fewer intermediaries should mean less fees,” Sir Jon said. “A single entity and process carrying out all of these functions would require fewer participants in the chain and, in principle at least, bring resilience benefits from the simplified structure,” he added.
Using DLT to settle trades could lead to “T+now, or instant settlement of trades. Sir Jon said that clearing houses might not be needed under that scenario. However, he said adopting DLT also come with risks. DLT-based systems still need to prove they can work over longer timescales, he said, while there were also issues around instant settlement and potential fragmentation of capital markets.
The latest fintech firm to enter the digital assets sector is Plum Fintech Limited. The firm is a registered account information provider with the UK Financial Conducts Authority. It plans to start offering European customers crypto trading services in weeks to come. The money management app has completed a deal with Peter Thiel-backed crypto exchange Bitpanda to enable customers to invest in cryptocurrencies via its app.
Based in London, Plum Fintech Limited said in a statement that the move reflected “rising investor demand” across Europe for easy crypto trading. Fintechs are increasingly looking to offer crypto services, either via partnerships with industry specialists or with in-house trading options.
Challenger bank Revolut offers crypto trading and has been rolling out more tokens for its millions of customers to trade, as part of a concerted push into the space. Trading app Freetrade is also planning to move into crypto as part of a European push. The trend comes in spite of a dramatic crash in crypto prices earlier this year, which cost many retail investors their life savings and led to thousands of job cuts across the industry. (The writer is our foreign correspondent based in the UK)
andyjalil@aol.com