2016年-SWIFT环球同业银行金融电讯_Blockchain_has_the_power_to_resolve_the_paradox_of_infrastructural_innovation_3页_178kb

Blockchain has the Power to Resolve the Paradox of Infrastructural Innovation

Core Content

Financial Market Infrastructures (FMIs) are traditionally seen as secure, stable, and resilient systems that support the financial services industry. However, the increasing regulatory demands and the need to adapt to new market conditions have created a paradox: while FMIs are not designed for innovation, they now face pressures to innovate to remain relevant and competitive.

The 2007-08 financial crisis led to heightened regulatory scrutiny, with the introduction of the Principles for Financial Market Infrastructures in 2012. This framework, later rebranded as the Committee on Payments and Market Infrastructures (CPMI), emphasized the importance of safety and resilience in FMIs. In recent years, national regulators have further translated these principles into concrete rules, placing additional burdens on FMIs to comply with legal, credit, liquidity, and operational risk management requirements.

These compliance demands, combined with the rising importance of cyber-security, have made FMIs cautious about adopting new technologies. As a result, innovation is often treated as a secondary concern. Yet, in Europe, the implementation of initiatives such as TARGET2-Securities (T2S) and CSDR (Central Securities Depositories Regulation) has forced FMIs to adapt, even if the pace of change is slow.

Key Innovations in Emerging Markets

Emerging markets are leading the way in FMI innovation, offering valuable examples for their developed counterparts:

• KSD (Korea Securities Depository) launched Pension Clear, a platform automating corporate pension processes. This service is expected to save around $67 million annually and may be extended to wealth management, insurance, and savings accounts.
• NSDL (National Securities Depository Limited) in India enables 13.7 million investors to hold all financial assets in a single account and compute portfolio values in real-time. It has also achieved 85% electronic communication with account-holders.

These innovations demonstrate how FMIs can evolve by leveraging technology to improve efficiency, reduce costs, and enhance user experience.

Blockchain and FMI Innovation

Blockchain technology, the foundation of digital currencies like Bitcoin, is being explored for its potential to transform FMI operations. It offers a public, distributed, and transparent alternative to the traditional private and centralized systems used in financial markets. Key features include:

• Transparency: All transactions are recorded on a shared ledger, ensuring visibility into asset ownership and movement.
• Decentralization: Eliminates single points of failure, which can reduce systemic risk.
• Automation: Enables the streamlining of processes such as securities clearing and settlement, as well as corporate actions.

Despite its promise, blockchain is not yet mature enough to replace existing FMIs and custodian banks. Current limitations include:

• Scalability: Blockchain can only process seven transactions per second, which is far below the requirements of large financial markets.
• Regulatory and Legal Challenges: Issues such as KYC, AML, and sanctions screening need to be addressed to ensure compliance with existing frameworks.

Nevertheless, many FMIs are beginning to explore blockchain's potential. The ESMA (European Securities and Markets Authority) invited evidence on blockchain applications in the securities industry in April 2015, and while responses were mixed, there was agreement on the opportunities and threats it poses.

Conclusion

Blockchain technology presents a revolutionary potential for financial market infrastructures, particularly in securities clearing and settlement. While it is not yet ready to fully replace current systems, its adoption could lead to cost reductions, risk mitigation, and greater competition by breaking down traditional vertical silos. The challenge for FMIs lies in effectively integrating blockchain while navigating regulatory, operational, and technical hurdles.

Main Points

• FMIs are not designed for innovation, but face increasing pressure to adapt.
• Regulatory compliance has become a major burden for FMIs, limiting their ability to experiment with new technologies.
• Emerging markets are demonstrating innovative approaches, such as Pension Clear and NSDL's paperless system, which offer lessons for developed markets.
• Blockchain offers transparency, decentralization, and automation, but is currently limited in scalability and faces regulatory challenges.
• The potential benefits of blockchain include reducing costs and risks, and mitigating systemic risk.
• FMIs must innovate to survive, and blockchain may be a key enabler of this transformation.

Key Information

• T2S (TARGET2-Securities) and CSDR are key regulatory initiatives in Europe that are reshaping FMI operations.
• KSD's Pension Clear is a major innovation in the corporate pension space.
• NSDL in India has achieved high levels of electronic communication with investors.
• DTCC and Euroclear are exploring transatlantic collateral management and Omgeo services.
• ESMA invited input on blockchain applications in the securities industry in 2015.
• Blockchain's limitations include low transaction speed and unresolved regulatory issues.