The Capital markets industry has already been particularly prone to digital disruption prior to the current situation with the Covid-19 pandemic – with the crisis having seemed to speed up the developments. Accenture’s Oscar Garcia and John Velissarios take a closer look.

While the industry largely needs to pivot to short-term cost management, it also needs to elastically pivot to support and drive growth. The fact that technology is playing an important role in trying to mitigate the impact of the crisis is also an opportunity for the industry to become more innovative and more efficient. With the fast-paced advancement of digital possibilities in capital markets, we need to take stock and redefine our thinking. 

New ecosystems are becoming a reality

The financial ecosystem 2.0 is a transformative marketplace that shows a strong need for new money functionalities and the creation of a broader ecosystem. Technological advancement previously has spearheaded a push to streamline and enhance existing operations and engagements. 

Oscar Garcia and John Velissarios.

However, with the newly disrupted environment, new methods of interaction, engagement and business models are emerging to catch up to the technology. Over the coming years, these changes are expected to  help put people more in control of assets and cash than has ever been seen before.

Tokenization is setting the pace

The emergence of a technologically transformative marketplace highlights the need for new money functionalities hinging on technology. Tokenization addresses the need for a dominant new format to represent goods, assets and rights – bringing about greater flexibility and liquidity.

Tokens can be claims or exhibit intrinsic value as economic goods. Importantly, they are easy and safe to issue and facilitate fragmentation of ownership when needed. Ownership and law can be written directly onto a token, allowing the token, in a sense, to execute, govern and regulate itself. For example, it can be programmed to encode the Reg D law that forbids investors to sell their tokens for at least 12 months after purchase.

CBDC as a go-to settlement medium

As central bank money remains preferred for large value transactions, a central bank issued digital currency (CBDC) or tokenized central bank money is a promising medium for token-based exchanges. CBDC functions similarly to hard currencies but with the opportunities of the digital sphere.

CBDCs can complement currency in circulation and serve as an alternative to card payments. They can facilitate diversified payment formats and allow for the exchange of tokens in central bank money, lending support and confidence to tokenization. CBDCs also facilitate the establishment of direct payment relations, which reduces the need for intermediaries and significantly reduces transaction costs. 

Greater engagement possibilities

Currently, the possibility to digitally engage with electronic central bank money is very limited to a small number of institutions, whilst everyone else has to deal with counterparty risk, friction and costs. CBDC shows great potential in digitally opening doors while still carrying the traditional legal tender status.

CBDC can work in parallel to other forms of currency, offer greater portability for use, and it has the option to embed the rights and obligations of the bearer into small contracts. Yet, the greatest benefit of CBDC is perhaps in the broader context of reshaping payment relations by integrating assets and currency on a single ledger. It can help promote financial inclusion and expand access to money – pushing towards a wholesale CBDC. 

The emergence of token-based trading platforms 

Many financial institutions in the capital market space are looking to take full advantage of the opportunities of tokenization. Token-based trading platforms would  need to emerge to provide the infrastructure for tokenized asset trading and establish a level playing field between conventional and new market infrastructures. 

This is resulting in a lot of activity both from the issuer side but also the trade side. Tokenized asset and cash exchanges offer many benefits, such as greatly improved efficiency in clearing and settlement. 

For example, using CBDCs in cross-border payments facilitates  instantaneous payments irrespective of location and offers a quick, easy injection of liquidity if needed. This can address liquidity shortages in a national currency independent of location, offering the possibility to conduct exchange market interventions.

Not only would  settlement times become more efficient in a single atomic transaction, but there are also opportunities with the types of transactions being performed.Transformative trading models can also open the door to further technological innovation in the market and access to new forms of securities and assets.

Custodial roles would also see changes within the financial ecosystem shift. The buffer function that embodies governing and regulation will likely hold fast. However, the operational aspect may not be needed anymore in its current form. This is expected to  help streamline activities and compress timelines.

What’s next for capital markets?

These trends come together with exciting possibilities, truly creating a completely new market and ecosystem across the board. However, the learning curve is steep and it’s difficult to predict who will take the lead position in the marketplace. The real innovators are putting themselves out there. But the question remains, is it a winner-takes-all scenario or is the room for everyone in the marketplace?

Oscar Garcia is Managing Director for Capital Markets Nordic at Accenture, based in Stockholm. He has more than two decades of experience in the Capital Markets industry, working with Sell-Side, Buy-Side and Market Infrastructure Financial Institutions. He is also Global Innovation Lead for Accenture Capital Markets. 

John Velissarios is a Global Managing Director leading Accenture’s Blockchain Technology initiatives on the topic of Central Bank Digital Currency, Asset and Cash Tokenisation and Custody. John’s 23 year career in consulting, coupled with a leave of absence with a Blockchain start-up and several years serving central banks and financial market infrastructures on the topic of central bank digital currencies has given him a global authoritative view in this fast moving space. John has a graduate degree in cryptography, authored many whitepapers and holds several patents in this field.