Risk management, compliance and governance will need to evolve alongside technology for the near and long-term.
REGULATION
By 2030, regulation will change as well. Today, regulators do not want to see technical standardisation only. They expect governance frameworks to be put in place as well. Like the industry itself, regulators are thinking about the implications of digitalisation for the near and long-term. Ultimately, regulators are concerned about standardisation of the operational market. They are also concerned about financial risk, cyber risk, and compliance.
In the aftermath of the global financial crisis, new regulations were introduced, some of which related to digital assets. But while custodians today have regulatory overheads and drags, many Fintechs do not. By 2030, the regulatory environment will catch up, and level the playing field. Regulators will be integrated into the new digital ecosystem as part of their own digital journey. They will be running their own AI algorithms to supervise market movements, while market participants themselves will be self-reporting through their technologies. Today, asset servicers report transactions to the regulator. By 2030, with the use of smart technology, transactions will report themselves.
There will always be reporting and auditing requirements in our industry. By 2030 custodians will have strengthened their real-time auditing via blockchain technology to make this process more efficient. Northern Trust did this for its private equity life cycle events in 2018, when it began working with PwC and other audit firms in Guernsey, and proved that auditors can now access fund data held on the private equity blockchain directly, in order to audit specific events.
This live audit capability – which flags up any breaches to parameters in real-time – makes a retrospective audit process, which can take place many months later, look archaic. We believe industry practitioners and regulators themselves will begin to adopt live auditing in the coming period. We also believe that in the future, markets will regulate themselves, based on algorithmic updates. The use of robo-auditors will make the market safer, even for complex assets, which in turn will further drive the widening of access to the market. Individuals will be allowed to access asset classes and adopt strategies that are currently only available to the most sophisticated institutional investors.
As we all progress into new, uncharted territory, there will be new regulations for asset types and products that don’t exist in current frameworks. They will need to sit and operate alongside the regulation that exists for the traditional electronic world. Once again, interoperability will be key, as two ecosystems co-exist in more than one regulatory environment. Eventually, the heritage environment will recede, and the industry will be left with the digital environment only.
Recent regulations with a focus on accountability and governance have already encouraged the creation of new technologies for dramatically enhancing transparency, and by 2030, questions of tax rates and repetition of associated data may well be eliminated through the intermediary chain. Similarly, in corporate actions, regulation will have eliminated competitive differentiation from corporate event announcements and disclosures – the bar will be significantly higher and custodians will have to differentiate themselves based on their service.