Digital Assets: Global Trends for Institutional Investors

Natacha Dezert, Blockchain & Digital Assets Program Manager for BNP Paribas Securities Services, and Aman Mehta, APAC Sales Director and APAC Digital Assets Lead for BNP Paribas Securities Services, discuss how digital assets are changing the business of the institutional investors with Markets Media Group Senior Writer Shanny Basar.

Natacha Dezert, Blockchain & Digital Assets Program Manager for BNP Paribas Securities Services, and Aman Mehta, APAC Sales Director and APAC Digital Assets Lead for BNP Paribas Securities Services, discuss how digital assets are changing the business of the institutional investors with Markets Media Group Senior Writer Shanny Basar.

Digital Assets: Global Trends for Institutional Investors

Shanny Basar: Hello and welcome to the GlobalTrading podcast. I’m Shanny Basar, Senior Writer at Markets Media. GlobalTrading is a Markets Media Group editorial platform.

Today we’re talking about BNP Paribas Securities Services’ move into digital assets – how the firm has expanded its capabilities in digital assets, how they are changing the business of sell-side firms, and why they are important to institutional buy-side clients. 

I’m pleased to be joined on the podcast by two BNP Paribas Securities Services digital assets experts.

First, we have Natacha Dezert, Paris-based Blockchain & Digital Assets Program Manager for BNP Paribas Securities Services.

And joining us from Hong Kong is Aman Mehta, Sales Director and Digital Assets Lead for BNP Paribas Securities Services in Asia Pacific. So let’s jump straight in with the questions.

Definition of the Digital Assets in the context of the institutional capital markets business

Natacha Dezert: Digital Assets are the new emerging asset class including assets having the same characteristics as traditional financial assets (e.g. security tokens) and also completely new kinds of assets (e.g. cryptocurrencies, non-fungible tokens, utility tokens).

On our side, we focus our efforts on digital assets with a clear regulatory framework, allowing us to provide services to our clients with the requisite level of safety and protection (ie security tokens, Central Bank Digital Currency and some forms of stable coins).

Compared to traditional assets, digital assets have intrinsic characteristics (programmability features/smart contracts, ownership/data recorded on a decentralised digital ledger shared by counterparts instead of on several private ledgers maintained by various intermediaries), which we see as great opportunities to bring efficiencies and reshape existing models and services.

Current Landscape and Evolvement of Digital Assets

Natacha Dezert: In recent periods, the overall landscape has matured and broadened beyond cryptocurrencies and the underlying technologies of cryptocurrencies to include other assets like securities tokens, which has a closer alignment to institutional investment mandates and fiduciary obligations.

The global digital asset ecosystem reached $2.1 trillion as of Q4-2021 (higher than the GDP of Italy or Canada).

On our side, we observe a growing interest and participation from institutional clients, mainly from asset owners/asset managers to invest in digital assets and integrate them into their portfolios and also from corporates/issuers (re. tokenization). These players are moving from proof of concepts to live experimentations with increasing complexity in order to confirm the expected benefits and prepare their organisations for the future.

However, various challenges remain and constrain the development of the digital assets markets: regulation is one of them. Although regulators are now intensely focused on digital assets with some clarity and integration expected in the coming years through MiCA (Markets in Crypto Assets regulation), aiming at providing harmonized rules in Europe, at the moment the legal framework for digital assets is still unclear and quite fragmented across the EU.

Also, the current lack of technological standards and of interoperability between the various blockchains and the absence of widely adopted and recognised means of payment and settlement on chain are also still significant barriers to broader adoption of digital assets.

Digital Assets in Asia Pacific

Aman Mehta: The starting point in Asia Pacific is very different compared to the US/Europe because it is far more fragmented. This fragmented landscape is creating a race between different markets to position themselves as a leader in digital assets and distributed ledger technology (or DLT).

The race coincides with Asia AuM setting to grow faster than any other region globally, with a total compound annual growth rate (CAGR) of 8.7%.

In terms of individual market, Australia led the way a few years ago by announcing the replacement of their legacy market infrastructure known as CHESS with a complete DLT solution. This was ground breaking at the time, however the project has since been delayed on a few occasions. More recently, Australia have announced that they are going to be the first market in Asia Pacific to list crypto ETF’s.

Singapore is also pushing the boundaries. We have seen digital exchanges being launched by domestic banks, with a lot of investment from Monetary Authority of Singapore, largely into different types of projects and Fintechs are deploying DLT in areas such as tokenization.

China is also breaking ground. It successfully piloted its digital currency (or e-Renminbi) and has now issued a while paper to bring the digital currency into full operation.

In Hong Kong, HKEX launched Synapse which incorporates smart contract technology scheduled to go live later this year.

Where Asia Pacific could make a strong straightforward and a difference is by having stronger governance and a harmonised regulatory environment.

BNP Paribas’s Progress in Digital Assets

Natacha Dezert: Indeed there has been a lot of progress on our side in recent periods. At BNP Paribas Securities Services, we started investigating Blockchain and digital assets a number of years ago, first with proof of concepts to explore various use cases and start our learning curve.

All these experimentations gave us the opportunity to gain a practical expertise and knowledge of the impacts, benefits and risks, to master the technology and to engage all areas of our organisation (IT, operations, legal, compliance, risk).

This allowed us to adapt our controls, procedures and processes and to build up solid foundations and capabilities to extend our services to cover digital assets.

Also, we prepare ourselves in close collaboration with our clients, counterparts, market authorities and regulators.

We are now in a position to offer services on digital assets: acting as depositary for funds investing in digital assets, being able, as transfer agent, to manage Blockchain orders in the same way as orders coming from any distribution channel, with a consolidated service for our clients.

We are also building our custody solution for digital assets (including the management of private keys), with Germany being our pilot country for this initiative, which shall be extended globally in later phases.

We are very much involved in many initiatives around cash on chain as well: Central Bank Digital Currency Programs with Central Banks and an initiative on commercial bank digital currency whereby we built a consortium with other market players and the technical providers to create a EUR stable coin.

Aman Mehta: We are driven by our clients and for sure we see an increase in focus on digital assets from our institutional clients, across buy-side and sell side.

It is then our job to provide an ecosystem for our clients to easily access and hold such assets.

Therefore, we are working hard with market infrastructure, exchanges, Fintechs and our clients to bridge the gap, build a platform to connect and strong solutions specific to the nature of digital assets.

The importance of Digital Assets as an asset class for institutional clients

Natacha Dezert: There are a number of features in digital assets that appeal to institutional clients, mainly Blockchain and digital assets have the potential to reduce risks and inefficiencies across long and complex chain of intermediaries with automated and streamlined processes thanks to smart contracts with real time visibility and enhanced reporting thanks to sharing of golden data and the opportunity to reduce costs.

Also, having the data (e.g. ESG data, pricing information, corporate action information) embedded directly in the asset itself gives great new capabilities and opportunities for innovative services and models.

Aman Mehta: In Asia Pacific, we have particularly seen clients within the alternatives segment show a lot of interest. More traditional buy-side and sell-side clients are proceeding with caution until they have a clear regulatory environment.

Digital Assets impacts on BNP Paribas Securities Services

Aman Mehta: The starting point is to understand digital assets as a simply a new asset class which means it is our job to ensure that we extend the current list of services and solutions to cover this new asset class where relevant.

To go one step further, I refer to Natacha’s comment earlier regarding the intrinsic characteristics of digital assets vs. traditional assets. This is really important. Such characteristics can be used to bring large amounts of efficiency and automation in the post trade settlement cycle as well as reducing risk.

In the end, I believe traditional and digital assets will co-exist, each bringing their own value. Our job as a Securities Services provider will be to connect and create interoperability between different Distributed ledgers and build services on top of ledgers to bring even more value to our clients while at the same time, continuing to invest in our capabilities to support traditional assets.

Partnership with smaller, specialised Fintech firms

Natacha Dezert: We believe it’s important and actually this is the model we have chosen, as it allows to bring our clients the best of the two worlds.

Fintechs have the technological knowledge and expertise and they allow us to connect to Blockchains with agility and flexibility in a very fast-moving environment.

While as a bank we have expertise and credibility in regulation, compliance, risk management plus the knowledge/understanding of our clients’ needs and their trust.

These strategic partnerships position us well to manage synergies and transition between traditional and digital assets, being a one-stop shop/unique provider for our clients, by providing them seamless, consolidated services across asset classes and minimising for them the impacts of having to handle both asset types in parallel.

Regional differences in the adoption of Digital Assets

Natacha Dezert: The main difference I think of: In the US, the business drives regulation whereas in Europe, regulation drives business.

US players tend to be less reluctant to absorb regulatory and execution risk while European players tend to have a conservative approach when they face an uncertain regulatory environment.

Aman Mehta: For Asia Pacific, the starting point is more fragmented, so it depends on market and each market is very different to the others. In general, the majority of the main markets are adopting digital assets and DLT very quickly and moving very fast.

In terms of client interest, we can see a clear pattern of increased interest and investment.

The Future of Digital Assets

Natacha Dezert: We believe that digital assets will keep rising. By 2027, the World Economic Forum (WEF) predicts that up to 10% of global gross domestic product (GDP) could be stored and transacted via DLT.

There are 2 points as key enablers for the wider adoption of digital assets. The regulatory picture will clear, providing more certainty to market participants and opening the door to their real entrance and participation in digital assets markets.

Also, cash on-chain capabilities will appear (either Central Bank Digital Currency, stable coins or alternatives solutions linked with traditional payment systems). However, it will still take time for the market to develop and reach maturity.

Digital assets should provide many advantages and benefits over the longer term, but they will increase complexity for the near term, as traditional and digital assets will co-exist for an extended timeframe, ie banks will need to manage both asset types in parallel for an extended transition period.

Timing and nature of a wider disruption are not clear, but we definitively believe that digital assets should build up over next years, creating great opportunities for financial innovation and new/reshaped business models over the longer-term.

This recording is followed by the disclaimer below:

The information contained within this recording is believed to be reliable but BNP Paribas Securities Services does not warrant its completeness or accuracy. Opinions and estimates contained herein constitute BNP Paribas Securities Services’ judgment and are subject to change without notice. BNP Paribas Securities Services and its subsidiaries shall not be liable for any errors, omissions or opinions contained within this recording. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. For the avoidance of doubt, any information contained within this recording will not form an agreement between parties. Additional information is available on request.