Democratising Finance

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 disintermediation of industry ‘middle men’.

DEMOCRATISING FINANCE

The shift to a Decentralised Finance (DeFi) world has made digital assets more accessible to a wider group of investors, and that is a noteworthy trend.

The fact that members of the subreddit r/wallstreetbets caused a 2,728% rally on the price of GameStop in January 2021^xvii, with many citing a desire to ‘democratise' finance, sent shock waves through the financial industry at the time.

We believe that the innovation curve we are beginning to experience in our digital world will be driven by the retail space, not by institutional asset managers, banks, or pension funds.

Part of the lag will occur because of the structure of wholesale financial services, the regulatory landscape and framework, and the complexity and cost of the migration of technologies to wholesale financial services architecture.

However, asset servicers will need to develop and deploy opportunities along that curve, as we see a growing democratisation in finance.

In the retail world, by 2030, individuals will be able to build products and services that centre around them, and become, in effect, their own managers.

Individuals will have access to a large amount of customised data analysis to help them make decisions on everything from shopping to their food habits, to their investment options.

They will be offered open architecture models for their investment solutions, as well as access to a greater array of products.

This democratisation of investment access is already developing, with tokenisation — where the middle men are being disintermediated — an example of the types of new solutions being offered.

We believe that in the future, fractionalisation through digitalisation will play an important role in a democratised financial landscape.^xviii

In 2020, Northern Trust and Singapore-based BondEvalue partnered to deliver integrated asset servicing for the fractional ownership of fixed income bonds, for example.

BondEvalue’s regulated platform facilitates the trading of fractionalised investable assets based on wholesale assets, with Northern Trust as its exclusive asset servicing provider. The platform allows investors access to investments that were historically only available to larger institutions.

It means that 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.^xix

DeFi and its related innovations offer tremendous opportunities for our industry, but they are not without their challenges. From an operational lens, fragmentation will bring considerations about standardisations of digital solutions and processes, for example.

Looking to 2030 and beyond, asset servicers will be supporting a number of digital and crypto-currencies, and will be continuously adding more to their service provision, as well as catering for clients with very different, individualised needs.

It’s not going to be a case of choosing between Samsung or Apple, but of navigating and managing and supporting multiple ecosystems and multiple client needs at the same time, offering both Samsung and Apple, and many more solutions as well.

CURRENT GLOBAL INDUSTRY PROJECTS

NORTH AMERICA

The Depository Trust & Clearing Corporation (DTCC) is analysing the potential of distributed ledger technology (DLT), asset digitalisation and other emerging technologies in public and private markets through two projects:

Project Ion seeks to optimise the settlement process in public markets.
Project Whitney considers opportunities to provide increased levels of digitalisation throughout the private market asset lifecycle.

EMEA

Deutsche Börse is working with Swisscom and Sygnum to build financial market infrastructure for digital assets.

SIX Swiss Exchange made an investment into Omniex which will provide the front end platform for its upcoming digital asset exchange SDX6 which aims to provide institutional clients with trading, settlement, and custody of cryptocurrencies.

In the UK, Archax became the first ever Financial Conduct Authority (FCA) regulated digital securities exchange and custodian, paving the way for digital issuances from across the world to trade on an FCA regulated secondary market.

APAC

In 2018, the Australian Stock Exchange (ASX) announced that it would be the world’s first blockchain DLT-enabled stock exchange.

In February 2020, the National Stock Exchange of Australia revealed a joint venture project to introduce a blockchain-based clearing and settlement system.

DIGITAL ASSETS

Digital assets promise many benefits beyond enhanced efficiencies. In this video, we look at the potential for improved market accessibility enabled by fractionalisation and how Northern Trust is already engaging with this innovative technology.