Waiting for regulation to be finalised should not deter preparation for the adoption of newer asset classes, finds panel

Speaking at the Post-Trade Forum 2022, panelists discussed the future of newer asset classes and the challenges associated with the clearing of these assets institutionally.

Panelists at the Post-Trade Forum 2022 offered insights into the opportunities and challenges that may be faced with the expansion of clearing into new assets classes.

Regulation and its development within new assets classes was discussed considerably as a necessary step for these asset classes to be adopted successfully.

“The challenges that I see, especially in terms of clearing new asset classes, are that although we have come leaps and bounds in the world of crypto assets – and we’re confronting these opportunities in a sort of semi adequate manner – we need to try and speed up a little bit, especially in the traditional banking organisations space,” said one panelist.

“When looking at clearing Bitcoin referenced futures and derivatives, and Etherium reference features and derivatives, traditional clearing members are still quite terrified when hearing the words Bitcoin, Ethereum, crypto or digital art, et cetera. We’re still set in the dark ages, and I think the challenge will be to get the more traditional institutions more comfortable with the risk involved in clearing these digital assets.

One panellist noted that being a heavily regulated institution helps build trust amongst clients and in turn, helps the process of clearing new asset classes. “It builds an opportunity for members to recognise classical value chains and to understand what we’re trying to do with the new asset classes. We’re trying to fill down the classical regulated pipes that everybody in this room knows. It’s not that disruptive, firms are just trying to give investors exposure to new asset classes that they didn’t have in the past, but using the regulated classical infrastructure.

Speaking on the differences between newer asset classes and more established ones, one panelist noted that they indeed have some similarities, particularly when comparing crypto with FX. “It’s really the same and when we look at Bitcoin dollar and Ethereum dollar, which are sort of 95% of what we trade, and it looks and feels very similar. Custody aside, the whole trading side of things utilises the same software, just new hardware.

In the context of newer asset classes such as high valued art, one panellist noted that firms are looking at democratising art, which is very disruptive, however, it is being done in a traditional way with no NFT focus in the business. “It’s very much a standard securitisation model, an IPO process and an issuance process with shares admitted for trading on a regulated Mifid II MTF, with central counterparty clearing as a very important part of that at that puzzle, leading to settlement in an ICSD. We’re doing something disruptive, but with a very traditional feel to it.

Newer asset classes are gaining traction, with growing appetite from institutional investors to adopt these assets. One panelist noted that “the traditional banking sector has come leaps and bounds in the crypto world, with multiple institutions embracing it – probably slower than we should be doing, but the opportunities are clear.

“I think with the upcoming regulations we’re going to be seeing in the future, the traditional banking sector will feel more comfortable with these opportunities and there will be opportunities for the custody, settlement, clearing and every aspect in the value chain of crypto assets. It’s definitely something that will be embraced, we just need to become more comfortable with it from a regulatory perspective. What we need to make sure we’re doing now is preparing ourselves for when that regulation comes in place so that we will be ready to take on board those opportunities.” 

One panelist agreed that regulation is necessary, however, noted that regulation will by necessity always be behind innovation. “That’s just the way it is. It’s not only about cash equity, but there are also so many different asset classes out there, and this regulation again provides a new opportunity. It’s true that regulation can be a burden but there’s also opportunity in regulation. We just need to find it.”

Another panelist agreed with this sentiment, highlighting the need for flexibility in order to achieve diversification. “We as an organisation need to be prepared to think out-of-the-box to be innovative while always remaining within the bounds of regulation. Our regulators watch us, very closely, but we do need to have a certain amount of flexibility and innovation in our thinking to enable new products coming onto them.” 

One panelist noted that waiting on regulation to be finalised should not deter financial institutions for preparing for the future. “I insist that what we need to do as an institution is make sure that in parallel to these regulations being formalised and implemented, we need to pick up the pace as an industry to make sure that we’re doing the necessary developments to be able to custody assets and to be able to manage the keys of crypto assets. This would ensure that when everything is in place from a regulatory perspective, we’re in a position to be able to be successfully adopt those assets as well.