Subscribe to Asset Servicing & Fintech Insights
Transforming the Investment Lifecycle: the Future is Digital
Digital assets will profoundly transform the financial ecosystem. Industry participants, institutional investors and asset managers will soon experience those changes and need to consider the opportunities and risks that the new digital paradigm presents to their existing approaches. It is no longer a question of when digital assets will bring change, but a question of how.
Global Head of Digital Assets and Financial Markets
It might be possible to ignore the hype around digital assets and their future impact if that future wasn’t already being shaped. Emerging digital asset classes, new products, and new infrastructures are transforming the market every day, even as regulators globally are considering how best to oversee these developments.
Industry participants cannot afford to ignore the rise of digital assets, says Justin Chapman, Global Head of Market Advocacy & Innovation Research at Northern Trust. He believes that asset managers and institutional investors should engage with the emerging digital landscape now. “Asset owners and asset managers will need to think about the future impact on their business models. Investment strategy, asset allocation and strategic decision-making will all be transformed by new products and asset classes. The risk of not engaging with digitalisation is significant,” he suggests.
There are a significant number of digital assets but we like to look at things in three categories.
By tokenizing an asset, we’re not changing the asset itself – it keeps its original form – we’re just changing how that asset is held and digitally transferred in terms of value and workflow.
This is seen as a key step in terms of digitalisation of our marketplaces where current legislation and legal agreements require certain assets to be issued in certain ways but then the benefits of electronic markets can be applied to them further downstream.
For this to happen, both the legal and regulatory framework has to recognise the asset in its digital issued state.
The digital ecosystem has the potential to increase transparency, reduce settlement times, and create stronger reporting systems, as well as drive a plethora of other innovations and developments across the value chain. Chapman points out that, unlike traditional assets, digital asset transactions can settle in real-time.
In addition, the introduction of capabilities such as tokenisation have implications for both investors and asset managers. “Tokenisation is an opportunity. It creates value all the way through the chain, from the creation of an asset, to its issuance in digital format, to its trading, and to the embedded management of lifecycle events through the life of the asset. Tokenisation also offers new ways to think about sustainability and ESG, and creates new intelligent data and insights that weren’t possible before,” he says.
As a global asset servicer, Northern Trust has long recognised that digital assets will play a crucial part in the future investment landscape. It has developed a multi-year strategy to create the building blocks needed to support the move to digital markets. This includes supporting clients’ evolving needs through all aspects of the investment lifecycle, from issuance, to trading and execution, to post-trade and settlement.
From an issuance perspective, innovations such as tokenisation and fractionalisation open up opportunities for firms to issue digital securities and debt and may reduce the cost of investing for primary market investors and help drive further democratisation in financial markets.
Market infrastructure participants continue to build capabilities in this area. Deutsche Börse Group’s D7 platform provides a fully digital alternative conventional physical issuance and processing of securities, for example. i
Last year, Northern Trust teamed up with BondEvalue to deliver integrated fractionalised ownership of fixed income bonds. BondEvalue’s regulated platform facilitates the trading of fractionalised investable assets based on wholesale assets, with Northern Trust as an asset servicing provider. The platform allows investors access to investments that were historically only available to larger institutions. ii
These types of tokenisation capabilities bring benefits over the wider lifecycle, because they have embedded triggers and actions that are related to events over that period. Smart contracts in asset tokenisation have the potential to deliver efficiency gains across automation, disintermediation, transparency, improved liquidity potential, and the tradability of illiquid assets, according to the OECD. iii
Northern Trust has developed and continues to work on an asset agnostic tokenisation capability, one which allows any asset to be tokenised and deployed and connected to any marketplace or platform.
“We believe that having a solution that is asset agnostic will be extremely important as the tokenisation environment evolves. The system allows for flexibility, agility, and adaptability. Ultimately, as markets mature and the number and types of tokens increase, solutions will have to accommodate a range of assets. Providers without flexible solutions will struggle to future proof their business,” Chapman says.
He points out that digital assets will also provide post-trade compliance and risk management opportunities for clients, who will be able to check their portfolios in real time, and ensure that their assets are achieving what they are meant to achieve.
“Trade execution, portfolio rebalancing, cash management, and asset disposal will all look different in a digital ecosystem, and innovation in digital infrastructure is driving some of these changes,” says Chapman.
For example, Northern Trust’s own distributed ledger technology (DLT) platform for private equity asset servicing, transferred to Broadridge Financial Solutions in 2019, marks a significant step towards delivering an industry-wide private equity (PE) blockchain. iv The technology is providing data and analytics tools connecting the PE lifecycle for all market participants, allowing PE firms to communicate with investors with greater efficiency, while also enhancing capital and cash flow management. The DLT PE platform has been an industry milestone, delivering real time insight and transparency to all parties, while streamlining business processes and allowing expansion for more digital growth.
More widely, several existing market infrastructures are deploying new DLT architecture to make current processes more efficient. For example, Hong Kong Exchanges and Clearing Limited (HKEX) is launching HKEX Synapse, a new integrated settlement platform using DAML smart contract technology to standardise post-trade workflows and maximise connectivity and efficiencies in a transparent way. v Meanwhile, new financial market infrastructures (FMIs) are emerging to compete in this space, unencumbered by legacy technology, and with the potential to do things differently.
Chapman also highlights the fact that the post-trade environment is also changing. Digital assets are transforming settlement, clearing, reconciliation and more. With everything occurring in real time, assured settlement becomes a reality, and investors will know where their assets are at all times. However, cash in real time also brings its challenges, not least with the need to have long balances or needing time to accommodate cash settlements.
Against this background, digital trust firms will increase in importance, believes Chapman. “Clients will need to know that everything is running properly and that all those assured transactions are transacted correctly across the whole ecosystem,” he says.
The firm is also engaging with technology and financial service partners, leveraging DLT to create a more efficient payment marketplace through the use of digital wallets. The network will use dollar-backed tokens as digital claims. These claims allow for on demand real time settlement and reconciliation, or payment on cash transactions, which can potentially mitigate credit and float risk on cash settlements.
As with other steps within the investment lifecycle, asset servicing is also evolving as new digital assets continue to emerge.
Earlier this year, SC Ventures and Northern Trust launched Zodia in order to provide services to institutional clients as a cryptoasset business. vi Zodia provides custody services for the most institutionally traded cryptocurrency assets, Bitcoin and Ethereum, which account for approximately 80% of the current institutional cryptocurrency activity. This will be followed by XRP, Litecoin, and Bitcoin Cash. vii
Northern Trust has invested and will continue to invest in new technology developments across multiple areas of its fund administration platform, says Chapman. It has built out its crypto fund administration capabilities, providing clients with support for Exchange Traded Notes (ETNs), which are also physically backed by Bitcoin. The system architecture and operating model has been designed to be scalable, with the ability to expand into other assets and support more advanced digital capabilities.
Chapman points out that innovations rarely change the world overnight, and digital assets will be no exception. “For some years, we expect to see an overlap between legacy, analogue systems, and new digital innovations. Successful industry participants will be those who can manage both ecosystems at the same time, ensuring that they are connected and embedded into one another. Managing and navigating both worlds, while remaining flexible to changing client requirements, is a key priority for Northern Trust,” he says.
i https://www.deutsche-boerse.com/d7/ As of: 15 November 2021
ii https://www.northerntrust.com/united-kingdom/pr/2020/bondevalue-northern-trust-first-blockchain-based-bond-trade Last Updated: 12 August 2020
iii https://www.oecd.org/finance/The-Tokenisation-of-Assets-and-Potential-Implications-for-Financial-Markets.pdf Last Updated: 17 January 2020
iv https://www.northerntrust.com/united-kingdom/pr/2019/northern-trust-to-transfer-pe-blockchain-technology-to-broadridge Last Updated: 26 June 2019
v https://www.hkex.com.hk/Mutual-Market/Stock-Connect/Reference-Materials/Synapse?sc_lang=en As of: 15 November 2021
vi https://www.northerntrust.com/united-kingdom/pr/2021/zodia-custody-receives-fca-registration Last Updated: 29 July 2021
vii https://www.northerntrust.com/united-kingdom/pr/2020/standard-chartered-northern-trust-launch-zodia Last Updated: 9 December 2020
Executive Vice President, Global Head of Digital Assets and Financial Markets
Confidentiality Notice: This communication is confidential, may be privileged, and is meant only for the intended recipient. If you are not the intended recipient, please notify the sender as soon as possible. All materials contained in this presentation, including the description of Northern Trust, its systems, processes and pricing methodology, are proprietary information of Northern Trust. In consideration of acceptance of these materials, the recipient agrees that it will keep all such materials strictly confidential and that it will not, without the prior written consent of Northern Trust, distribute such materials or any part thereof to any person outside the recipient’s organization or to any individual within the recipient’s organization who is not directly involved in reviewing this presentation, unless required to do so by applicable law. If the recipient is a consultant acting on behalf of a third party client, the recipient may share such materials with its client if it includes a copy of these restrictions with such materials. In such event, the client agrees to comply with these restrictions in consideration of its accepting such materials.
© 2022 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability as an Illinois corporation under number 0014019. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group or individual. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch, Northern Trust Global Investments Limited, Northern Trust Securities LLP and Northern Trust Investor Services Limited, 50 Bank Street, London E14 5NT. Northern Trust Global Services SE, 10 rue du Château d’Eau, L-3364 Leudelange, Grand-Duché de Luxembourg, incorporated with limited liability in Luxembourg at the RCS under number B232281; authorised by the ECB and subject to the prudential supervision of the ECB and the CSSF; Northern Trust Global Services SE UK Branch, UK establishment number BR023423 and UK office at 50 Bank Street, London E14 5NT; Northern Trust Global Services SE Sweden Bankfilial, Ingmar Bergmans gata 4, 1st Floor, 114 34 Stockholm, Sweden, registered with the Swedish Companies Registration Office (Sw. Bolagsverket) with registration number 516405-3786 and the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) with institution number 11654; Northern Trust Global Services SE Netherlands Branch, Viñoly 7th floor, Claude Debussylaan 18 A, 1082 MD Amsterdam; Northern Trust Global Services SE Abu Dhabi Branch, registration Number 000000519 licenced by ADGM under FSRA #160018; Northern Trust Global Services SE Norway Branch, org. no. 925 952 567 (Foretaksregisteret) [VAT if applicable], address Third Floor, Haakon VIIs gate 6 0161 Oslo, is a Norwegian branch of Northern Trust Global Services SE supervised by Finanstilsynet. Northern Trust Global Services SE Leudelange, Luxembourg, Zweigniederlassung Basel is a branch of Northern Trust Global Services SE. The Branch has its registered office at Grosspeter Tower, Grosspeteranlage 29, 4052 Basel, Switzerland, and is authorised and regulated by the Swiss Financial Market Supervisory Authority FINMA. The Northern Trust Company Saudi Arabia, PO Box 7508, Level 20, Kingdom Tower, Al Urubah Road, Olaya District, Riyadh, Kingdom of Saudi Arabia 11214-9597, a Saudi Joint Stock Company – capital 52 million SAR. Regulated and Authorised by the Capital Market Authority License #12163-26 CR 1010366439. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) are licensed by the Guernsey Financial Services Commission. Registered Office: Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3DA. Northern Trust International Fund Administration Services (Ireland) Limited (160579)/Northern Trust Fiduciary Services (Ireland) Limited (161386), Registered Office: Georges Court, 54-62 Townsend Street, Dublin 2, D02 R156, Ireland.