WHITE PAPER: DIGITAL ASSETS
model to directly integrate primary market issuance to investor activities and those on the secondary market. CBDCs, the third segment, are
national digital currencies being launched, piloted or developed by central banks around the world. These currencies are designed to introduce digital payment methods, programmable payments, central bank trust and a future channel for monetary policies. Their potential is about more than just efficient digital payments and will be the subject of a separate paper (see also the CBDC debate on pages 32 to 36).
The digital assets custodian Each ecosystem is encouraging the formation of new market structures, with new roles and new workflows. The growth of cryptocurrencies, including DeFi, has attracted a new breed of crypto-savvy asset managers and hedge funds to meet the needs of yield-seeking investors. How the digital assets are safekept and administered can be different, although a digital asset custodian’s leading role remains centred on control over an asset to prevent its unauthorised use or loss.
DeFi and the custodian The paper explains that, so far, there have been few visible DeFi intersections with traditional finance, although Project Dunbar – a Bank for International Settlements (BIS)- led initiative with the central banks of Australia, Malaysia, Singapore and South Africa for common platforms for multiple CBDCs – mentions automated market makers (AMM), and there has been a leading proposal to collateralise stablecoin borrowing with native digital financial bonds issued on blockchain. However, as investment goals underlie DeFi borrowing- lending-staking-yield farming themes, one of DeFi’s main
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These new digital assets are gradually re-ordering the competitive dynamics
future disruptive and innovative potentials could be in asset management and hedge funds. The need to manage leverage, liquidity and systemic risks, and transparency of performance returns in these new segments, is similar to that in the traditional industry, and a digital asset custodian can be a trusted intermediary to facilitate access and protect assets to future permissioned DeFi opportunities.
Tokenised assets and the custodian Tokenised financial assets have seen DLT enable the digitalisation of assets and workflows, with smart contract automation, programmability and concurrent flows among the new competitive characteristics. Their benefits extend further, and include simplifying process flows to shrink market structure footprints, creating more versatile, compact and cost- effective operating models. The report looks forward to a future in which the custodian takes custody of asset services and tokenised financial assets, using one of three models:
• The sub-custody model: The investor’s custodian appoints a tokenised asset platform as its sub-custodian, if the private keys cannot leave the platform and the investor is active on that platform. The platform will use APIs to update the traditional custodian’s IT systems.
• The account operator model: The custodian takes on an account operator role via a node to access the platform to safeguard and operate the private keys to digital assets.
• The crypto-inspired model: The investor’s custodian may exchange the platform’s tokenised asset for a 'wrapped' version that it can directly hold. Acting as a digital depository receipt, the wrapped token will represent the unit of the underlying tokenised assets.
The ability to interoperate accessibility into the choice of permissioned platform opens a host of new roles to a digital asset custodian. These include acting as: a centralised traditional custodian, appointed by the issuing platform to hold the underlying traditional securities that back the digitally tokenised issuances; an asset tokeniser in a depository receipt model where there is already an underlying traditional asset being tokenised; and as the DLT platform operator on which issuers and investors would participate. Tokenised financial assets can lead to a list of services that resemble traditional requirements but are delivered in different digital means.
The digital asset supercycle The closing section of the report assesses the forces
shaping the digital asset supercycle, concluding that the opportunities are shaped as much by regulatory maturity and ecosystem adoption as they are by technology innovations. In the cryptoasset ecosystem including DeFi, regulation will continue as the major force in shaping its evolution. In the tokenised financial asset ecosystem, it will be the pace and level of industry adoption of DLT and/or DLT- inspired infrastructure that determines success. And, while development of CBDCs is still at an early stage, it appears likely that a potential future challenge will come from national security issues spilling over. “Each stakeholder group needs new perspectives so that progress avoids the mistake of being guided by rear-view mirrors,” the report concludes. “As the supercycle continues, participants will need deep multi-disciplinary views to ensure bold and informed decisions on the new values, risks, costs, roles and responsibilities they take on, if they are to prosper as this brave new future unfolds.”
Boon-Hiong Chan is Global Head, Fund Services Product Management; APAC Head, Securities Market & Technology Advocacy, Deutsche Bank Securities Services
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