Bankable Insights – The Custodian Edition_December 2020 – Digitalising Securities Services
Bankable Insights – The Custodian Edition: A collection of the latest insights and perspectives on topics of relevance to the Securities Services industry
*Bankable Insights*The Custodian Edition
**Digitalising Securities Services**
I'm delighted to welcome you to our fourth and final issue of The Custodian for 2020. This issue focuses on the Digitalisation of Securities Services – a topic which was core to the agenda of two pre-eminent industry conferences held virtually this year – Sibos and The Network Forum Autumn Meeting in early November.
Digitalisation, innovation, smart finance, technology and innovation were common themes running through the conference agenda for both events. And for good reason too.
In this issue, we share key takeaways from our Securities Services virtual think tank, hosted in September, where we took a long hard look at the intermediation lag and how to reduce fails, operational risk and costs in the custody chain. Leading industry expert Julia Streets facilitated the discussion with participants which included representation from across both the buy and sell sides: a stock exchange, central securities depositary, custodians, broker-dealers, an insurance firm and an asset manager. The breadth of perspectives across the value chain made for a most engaging and holistic discussion; our article identifies some common pain points as well as actions to tackle them.
We turn the spotlight on how open banking and API could transform post-trade services, where robots might be best deployed in Securities Services, and how artificial intelligence could help us make meaningful use of the vast reams of ESG investing data available.
We also look at how digital assets are transforming Thailand’s capital markets. A forerunner in digital asset innovation, Thailand is one of the most proactive in establishing a digital asset infrastructure and regulatory framework.
Last but certainly not least, Ryan Cuthbertson, our head of Securities Services product management, rounds off this issue of The Custodian with his take on the latest trends, issues, challenges and potential solutions in digital asset servicing, and shares Standard Chartered’s plans for developing our digital asset servicing capabilities.
Do join me in congratulating Ryan for winning the ‘Digital Leadership Award’ in The Asset’s Triple A Sustainable Investing Awards for Institutional Investor, ETF and Asset Servicing Providers 2020!
As always, we hope you enjoy this issue of The Custodian and look forward to hearing your views and feedback. Wishing you a good end-of-year, and I look forward to connecting with you again in 2021, hopefully in person as well as in the virtual domain. In the meantime, do visit us on CCIB News and Views for more insights on the latest industry developments.
Being able to quickly adopt and implement digital solutions is what has allowed the industry and our respective organisations to be resilient, agile and adaptive enough to carry on operating during the most unexpected confluence of events this year. Digital has proven to be THE key enabler of business during this profound disruption.
Co-head, Financing and Securities Services
<br><br>Why Straight Through Processing (STP) efforts in post-trade need to go multi-lateral
Why Straight Through Processing (STP) efforts in post-trade need to go multi-lateral
Only by aligning all players along the custody value chain in a multi-lateral effort, will we be able to make STP a reality.
The term Straight Through Processing (STP) – electronically processing a deal from execution to settlement without manual intervention – became an industry focus for securities trading back in the 1980s. One could argue that it is either a sign of true perseverance or delusion that the financial services industry is still pursuing it thirty years later. In our opinion, it’s the former.
The fact that we are still tackling inefficiencies has more to do with complex, fragmented processes, lack of synchronised steps, lack of transparency across the securities services value chain, too many platforms and the creation of ‘digital islands’, than it has with delusion or chasing the Holy Grail.
So how does the way forward look like?
A multi-lateral effort to reduce risks and costs associated with trade processing
Standard Chartered feels strongly that only by aligning all players along the custody value chain in a multi-lateral effort, will we be able to make STP a reality. That’s why in September 2020, leading up to Sibos, the Bank brought together practitioners from asset owners, asset managers, broker-dealers, market infrastructure providers, custodians and banks from across the globe in a series of virtual industry think-tanks. The goal of the discussion was clear: commitment to concrete multi-lateral actions that would address the intermediation lag in the custody chain once and for all.
Here is an overview of the common pain points identified, as well as actions outlined.
1. Agreement on common sets of data, leading to a single book of records and distributed ledger technology
The ability to leverage and analyse data in real-time and make the most of insights gained to better manage operations, continues to be a major issue for all participants. Since there are so many parties involved in processing a trade, all maintaining their individual books of record and performing their individual trade reconciliations, what is most blatantly missing is ‘one version of the truth’ which would make reconciliation efforts much more efficient.
Fragmented data conversations, too many intermediaries, all moving data around in unstandardised ways, continues to be a huge issue and increases risks and costs in trade processing. We need to tap into new technologies that, unlike traditional data bases, can provide a single source of agreed truth which is available in real time and with a focus on being value accretive to all market participants.”
Managing Director of Product Management, Securities Services at Standard Chartered
The think tank group agreed that leveraging distributed ledger technology would reduce duplication across layers and allow the industry to move one giant step closer to the creation of a single book of records. The pressing question that still needs to be answered is whether the industry – and regulators in different jurisdictions – will be comfortable with the idea of creating a consensus validated and maintained book of records.
Think tank participants agreed that this topic represented the perfect opportunity to kick off a multi-lateral exploration levering new technologies, focused on improving the efficiency of trade flows.
Technologies such as artificial intelligence (AI) and machine learning are enabling many organisations to leverage vast amounts of data already, allowing operations professionals to identify potential trade errors earlier in the process and address them. The challenge remains uniform adoption and interoperability of systems.
Just as with digital payment infrastructure, the rapid proliferation of different fintech solutions has been both a blessing and a curse. Adopters face the dilemma of either building something new and risking integration problems with existing APIs and blockchain nodes or assimilating and improving existing technologies.
We need to join forces and unify the ‘digital islands’ that are currently fragmenting our industry, and focus on interoperability.”
Managing Director of Securities Services at Standard Chartered
2. Increasing resilience by eliminating manual processes and connecting ‘digital islands’
The think tank participants unanimously agreed that there are still too many manual steps in post trade operations – and these are both time consuming and carry risk. Due diligence, KYC and client onboarding/servicing frequently require repetitive processes, reconciliation occurs at multiple stages of the custody lifecycle, and the administrative tasks related to reporting are not unified across the industry.
This became especially apparent amid the pandemic. In many jurisdictions, wet signatures are still the norm and when offices closed and work-from-home measures were imposed, there was no immediate fall back mechanism.
The group agreed that to improve resilience in trade processing, the unified adoption of digital technologies and the standardisation of data sets across the industry will go a long way.
Multi-lateral collaboration as the way forward, with an eye on ‘quick wins’
In the near-term, digitising customer onboarding and KYC, and eliminating manual paperwork and wet signatures, was deemed by think tank participants as a very achievable first step.
In addition, a shared ledger system enabling multiple players in the chain to view the same information at the same time instead of waiting for responses, or the arrival of envelopes and faxes, was agreed on as the next opportunity for process improvement.
The think tank discussion was spread over two half days, moderated by Julia Streets, a leading industry expert and commentator on post-trade issues, payments innovation and capital markets.
Standard Chartered is committed to continue playing an active role in bringing the industry together and driving concrete business outcomes to the persistent challenges around automating and streamlining post-trade operations.
This might label me as an ‘industry nerd’, but in my many years of working in the industry, I have never tired of discussing ways of improving trade flows and increasing efficiency. The agreement by all think tank participants to align and create a collective commitment on concrete actions is an important step in the right direction.”
<BR>Could open banking APIs transform post-trade services?
Could open banking APIs transform post-trade services?
From its roots in the UK and EU, open banking has become a global phenomenon as financial institutions open up access to their data to enable clients and approved third parties to exchange data and transact digitally via application programming interfaces (APIs).
While APIs are currently more widely used in retail banking, the growing suite of open APIs available in the Securities Services post-trade space could create significant benefits, both in solving existing problems and creating new service offerings.
The trend towards open banking
While open banking started life in the UK and EU, it has taken hold worldwide. In addition to regulatory initiatives, the trend towards open banking is becoming increasingly market-driven as market participants recognise the value of APIs as a means to exchange data and transact digitally, embed third party services, and leverage APIs as the ‘pipework’ on which new digital services can be built.
Consequently, open banking is not simply a regulatory or even technology issue. Rather, it reflects a new model for market participants – whether consumers or businesses – to interact and consume data and services. We have seen exponential growth in the use of APIs, particularly in emerging markets given the ubiquity of smartphones in many of these markets, with mobile apps primarily based on APIs.
A catalyst for new technology strategies
This shift in thinking, and the growing expectation of a 24/7 instant digital experience, shapes how banks look at their enterprise-wide architecture. At Standard Chartered, we are looking at how to open our channels and how to enable and leverage distribution partnerships in different ways and with different client segments. Our API strategy is a key part of this process as we look to open, augment and integrate our product suite.
We are seeing growing interest from our clients in accessing our 130+ APIs on which to build their own services. Our aXess platform provides clients, partners and fintechs open access to our APIs, applications, and libraries. This has proved instrumental in supporting our clients’ digital connectivity ambitions.
APIs facilitate the increasingly digital ways organisations do business, enabling them to meet demand for a frictionless, instant experience.
For example, APIs power greater payment choice and convenience through QR-code-based products, and users can top-up an account, access a digital service or upgrade a distributor limit instantly leveraging instant payment and instant/credit notification via APIs.
Creating an instant, frictionless experience and full data transparency for clients is an important way to create competitive advantage.
At the same time, APIs enable companies to embrace digitisation and automation in their own businesses by improving liquidity management, enhancing treasury operational efficiency, and establishing multi-bank, multi-country visibility through a single platform.
These value propositions are as relevant to institutional clients as corporations, even though the application may differ. Creating an instant, frictionless experience and full data transparency for clients is an important way to create competitive advantage. For example, a Singapore-based institution with a client in New York can use an API to avoid the impact of processing ‘down time’ that could disrupt the client’s access to data during their working day, and instead ensure 24/7 access.
Over the past 18-24 months, we have been engaging with post-trade clients on their various problem statements and opportunities. Based on these conversations, we have co-created a suite of APIs for post-trade services to help clients increase operational efficiency, reduce manual processes, enhance data communications, and access value-added services. This includes securities transaction status reporting, holdings information and market information, as well as liquidity management and multi-bank connectivity.
APIs may be an important ‘transport layer’ for bringing together data from multiple systems or stakeholders, or form the basis on which other services could be built, such as blockchain-based solutions, chatbots, data as a service or digital asset services.
For most of our institutional clients, the use of APIs complements rather than replaces their core infrastructure and existing communication channels such as host-to-host. Clients tend to explore the use of APIs and other technologies when embarking on a broader digitisation strategy, implementing new reporting or data requirements, or seeking to meet a particular operational objective.
Wherever a client may be on their digital journey, it is important to have a vision of where their industry is headed, and what role the business will play in this. Only then should they consider what they need to achieve this. APIs may be an important ‘transport layer’ for bringing together data from multiple systems or stakeholders, or form the basis on which other services could be built, such as blockchain-based solutions, chatbots, data as a service or digital asset services.
A change in digital mindsets
The open banking API ecosystem continues to expand but obstacles to its success and scalability remain, such as the lack of standardisation of API formats across banks. This could be frustrating for institutional clients with multiple banking partners. While this differentiation can help drive innovation and customer choice, standardisation is important to achieve scalability at a market level.
The connectivity opportunities that APIs offer also need to be balanced with security considerations, such as digital identities to control what data is exchanged and who can access it. Collaboration between regulators, banks and fintechs could reap considerable results in this arena. In some countries such as India, digital identity is managed at a country-level (Aadhaar) rather than bank level, which boosts speed and scalability of banking service delivery.
Open banking and APIs create new opportunities to solve problems and create new service offerings, not least in achieving instant, 24/7/365 services, and highly automated processes. Like any other technology, they are not a panacea, even though many organisations will benefit from APIs as they digitise their business models. The growth of APIs reflects a new way of thinking, co-creating and delivering digital services, not simply a new technology. Walls are being broken down across industries as they learn from and collaborate with each other. This mindset is valuable for exploring and delivering on the potential of APIs as well as the adoption of other digital technologies that may also play a complementary or even transformational role in the future.
Walls are being broken down across industries as they learn from and collaborate with each other. This mindset is valuable for exploring and delivering on the potential of APIs as well as the adoption of other digital technologies that may also play a complementary or even transformational role in the future.
Read how to ready your organisation for open banking APIs
in ESG investing
Artificial intelligence in ESG investing
With the growing amount of data related to Environmental, Social and Governance (ESG) investing criteria becoming available, technology will undeniably have a huge part to play in helping the industry navigate and manage data in an efficient and insightful manner.
Advances in Artificial Intelligence (AI) have revolutionised how companies work with data. AI’s ability to create insights from massive volumes of unstructured data and automate complex tasks at incredible speeds has allowed us to achieve a level of efficiency that would otherwise be impossible for humans to achieve on their own. Here, we explore the transformative potential of AI to help socially conscious investors evaluate potential investments, and its impact on ESG investing going forward.
AI’s ability to create insights from massive volumes of unstructured data and automate complex tasks at incredible speeds has allowed us to achieve a level of efficiency that would otherwise be impossible for humans to achieve on their own.
Insights for responsible investing
As financial institutions increasingly pledge commitment to several climate targets and principles such as the United Nations Principles for Responsible Investment and the Equator Principles, AI systems will play a crucial role in generating data and insights required to integrate ESG factors into investment decisions. AI’s ability to process massive amounts of ESG-related data enables investors to identify information missed by traditional research methodologies. It can also provide actionable insights and equip investors with the information they need to make investment decisions that are aligned to their own ESG values and the respective principles.
The role of AI in integrating ESG data in asset management covers qualitative analysis, quantitative analysis, investment decisions and assessment1. Unlike conventional financial data, accounting for environmental, social and governance factors requires more analysis and processing, given its discretionary and sometimes unquantifiable nature. Building on frameworks like the Sustainability Accounting Standards Board, AI can be used to capture ESG data and create insights easily understood by investors. This includes correlating financial data with non-financial factors and adjusting the financial forecast for ESG-themed portfolios accordingly. Over time, these ESG-based models will improve its algorithm to provide more accurate and socially responsible investment recommendations, supporting ESG strategies of various institutions.
The role of AI in integrating ESG data in asset management covers qualitative analysis, quantitative analysis, investment decisions and assessment.
Timely and accurate monitoring
The power of AI presents a huge potential in the ESG investing space with its sentiment analysis algorithms. Sentiment analysis programmes can be trained to analyse the tone of a conversation or news article, allowing users of the data to derive deep insights without having to digest all the information2. For example, a sentiment analysis programme trained to read the transcripts of a company’s quarterly call could use natural language processing to easily identify parts of the conversation related to ESG topics, and then infer from the words used how committed a company is to advocating its ESG values or mitigating its ESG risks. While sentiment analysis is not completely new to some, the application to ESG could become an extremely useful tool for investors to navigate the expanse of ESG data and attain timely alerts of any material ESG issues for an organisation.
One such tool includes using AI as a monitoring tool for portfolios, where an indication of negative sentiments may highlight ESG issues or red flags of the underlying holding. This may reduce the risk of greenwashing as investors are able to actively monitor companies’ activities in an extremely efficient manner.
While the sentiment analysis programmes will get progressively refined over time with clearer definitions and taxonomies of ESG factors, there are some limitations in sentiment analysis programmes of today. Some of these limitations include foreign language processing capabilities which affect accuracy of the programme and scope of news and media sources covered. For example, the translation of news sources – from local language to English – may alter the connotations of certain words. This will certainly have an impact on the accuracy of the processed sentiments of the local news source, the timeliness of data and value of insights to its consumers.
Standards for meaningful reporting
Industry participants are of the view that the ESG investing landscape could be significantly improved by putting in place several key requirements, with the most important being the standardisation of definitions and reporting requirements3. Standardisation means creating a consistent, comparable and financially meaningful way of communicating ESG risks and opportunities to stakeholders.
Data quality and availability are of vital importance when it comes to standardisation and the increase in reporting requirements. This is where AI comes to the fore. Through machine learning and natural language processing based on the frameworks in place, we will be able to identify, sort and filter public data like annual reports and climate disclosures into financially meaningful ESG data.
A practical use case would be identifying parts of company disclosures that relate to climate change using the Task Force on Climate-related Financial Disclosures framework and determining if it’s useful, accurate and consistent with other public data. This will vastly increase the scope of ESG data covered, considering the ability to comb through a multitude of public data across the globe. Additionally, it can improve the accuracy of data given its ability to validate, update and define relevance of such fast-moving data.
Standardisation means creating a consistent, comparable and financially meaningful way of communicating ESG risks and opportunities to stakeholders.
Going forward, AI-assisted reporting will be more relevant than ever with multiple industry initiatives afoot that aim to standardise ESG reporting criteria and to prevent ‘greenwashing’. One notable example is the EU Taxonomy – part of the wider EU sustainable finance initiative – which establishes a classification system for economic activity according to EU climate action goals. Under the EU Taxonomy Regulation financial market participants will have to complete their first set of Taxonomy disclosures by 31 December 2021 and companies will need to begin making disclosures during 2022. Besides the EU, other countries that are also developing taxonomies to encourage green investment include China, Malaysia, and Singapore. Read about how the EU Taxonomy helps define a green and sustainable future and its implications for investors and issuers globally.
Going forward, AI-assisted reporting will be more relevant than ever with multiple industry initiatives afoot that aim to standardise ESG reporting criteria and to prevent ‘greenwashing’.
The sustainability agenda is core to our business at Standard Chartered across our markets in Asia, Africa and the Middle East. We are committed to unlocking the full potential of technology and innovation to serve our clients and at the same advancing the global sustainability agenda.
Under the EU Taxonomy Regulation financial market participants will have to complete their first set of Taxonomy disclosures by 31 December 2021 and companies will need to begin making disclosures during 2022.
<BR><BR><BR><BR><BR>To bot or not to bot? That is the question
To bot or not to bot? That is the question
Robotic Process Automation (RPA) or ‘Bots’ is the new buzzword within financial services. But is RPA revolutionary? Or even new? Or is this just a clever way of characterising small improvements in efficiency? We’ve attempted to answer some of these questions here.
The word robot is relatively new with its origins only dating back to the early 20th century. It was first used by the Czech playwright, Karel Capek, adapted from the Czech word robota which translates as forced labour or drudgery!
RPA, as a function, has been around for over 20 years. When using COBOL systems, I used to often hear the words ‘let’s write a macro’ for that or ‘let’s screenscrape’ the information. These words were synonymous with making repetitive tasks more efficient by speeding up their processing and increasing productivity.
The RPA solutions of today are far more sophisticated in terms of their functionality and scalability, and they continue to bridge a gap between the intended system design and the required business outcome.
Bot basics – what is a Bot?
A Bot, in its simplest form, is the replication of a manual task. A task should be clearly understood and broken down into the individual processes needed to carry it out, and these process steps then fully mapped end- to-end across applications, and then scheduled to run as and when required on as many Bots as needed.
The Bot should allow the task to be performed more quickly, more consistently and more cost effectively than using a human and therefore have a positive impact on productivity. It should also improve the overall quality and reduce the overall risk upon integration into a workflow.
What should ‘Bots’ be used for?
Bots are deployed to fullest advantage when used to replace human labour in the handling of bespoke or repetitive tasks that are not part of a core or strategic platform. Bots, ideally, should not be deployed to handle core processing where a specifically designed and robust system should be implemented.
A good way to define or identify these types of tasks would be:
Bespoke requirements: In effect, making systems do what they are not intended to do but where there is a genuine business rationale. Bots should be built on the edge of the process and not core to the central system design.
Repetitive actions: Non-core, repetitive actions, which can be automated by an RPA are the perfect example of the benefits of utilising a Bot. This is especially beneficial where the Bot is being used for non-time sensitive tasks.
Bots, ideally, should not be deployed to handle core processing where a specifically designed and robust system should be implemented.
What shouldn’t ‘Bots’ be used for?
Bots should not be used to replace core system design or fix upstream problems. This type of strategy may save time today but will add overall cost to your investment budget over the longer term. Core processing should be handled by a system which is designed for the specific purpose and built on strategic architecture to enable it to handle the volume and volatility associated with our markets.
Bots should not be at the core of your platform design otherwise you could be storing up a bigger problem for a rainy day in the event that volatility brings a surge in volume.
Standard Chartered’s use of Bots in Securities Services
Standard Chartered has selectively introduced Bots into its Securities Services business focusing on use cases ‘on the edge’ of the core platforms:
Shanghai-Hong Kong Stock Connect – using Bots to drive new capabilities
Integrating a T+0 settlement cycle into Hong Kong’s T+2 market standard poses big challenges to global institutional investors investing into China via Stock Connect. Standard Chartered’s unique panel broker model provides clients with the enhanced ability to trade with multiple brokers, compared with the single broker models generally offered by the market. Due to the short settlement cycle making it difficult for clients to send their instructions ahead of the market deadline, Standard Chartered relies on using the broker transaction files to instruct the Hong Kong Central Securities Depository (CSD) for same day settlement.
We designed a Bot to ‘consume’ the broker files and auto-create the settlement instruction for matching. We also created a secondary Bot to extract broker transactions from the CSD and auto-create the settlement instruction should the broker be unable to send the file or to provide back up to Bot 1. This process enabled us to provide a robust and scalable solution with full straight-through-processing capability that allows clients to invest in China via Stock Connect using multiple brokers.
Due to the short settlement cycle making it difficult for clients to send their instructions ahead of the market deadline, Standard Chartered relies on using the broker transaction files to instruct the Hong Kong Central Securities Depository (CSD) for same day settlement.
Invoice processing and posting – using Bots to drive efficiencies
Invoices are simply a representation of the fees charged for a service. That said, they involve copious amounts of data from different sources and need to be 100 per cent accurate. We developed a Bot to automate the collation of data from multiple different sources to automatically prepare the invoice and load this into our automated client reporting platform. Additionally, a separate Bot was designed to create and post the accounting entries, by product type, in relation to the invoice. Both Bots significantly reduced the manual effort to produce the invoices and post the entries whilst simultaneously reducing the risk of the overall task. This led to faster invoice production and reduced errors and a material reduction in FTE cost.
A governance framework for Bots
Model: The governance models surrounding the use of Bots is increasingly important. Whilst the Bot may be simple by design, the level of governance should reflect the intended importance of the Bot process or output.
Resilience: Where Bots are used to input or extract time sensitive data, there needs to be a comprehensive business continuity plan to ensure continued coverage in a contingency scenario.
Ownership: The Bot design, use, change process and maintenance should be documented to the standards of a fully functioning system and the Bot should be appropriately owned and managed by business stakeholders – IT should in no uncertain terms be the owner of the Bot.
Performance: The performance of Bots should be actively measured on a regular basis. The business function who has overall responsibility for the Bot needs to ensure it is running as expected to ensure that any incorrect processing is spotted in real time and addressed accordingly.
Security: With cybersecurity a key concern for our industry, the security aspects of each Bot should be understood and approved to ensure this does not introduce any additional cyber risk. This is particularly crucial for Bots which are built or run on third party software / platforms.
The Standard Chartered view
It is clear that systematically deployed Bots can provide significant automation to providers and lead to enhancements to the client experience.
Standard Chartered plans to progressively integrate Bots into appropriate workflows / ecosystems, on a selective basis, which are not part of the core system design whilst ensuring that core processing capabilities continue to be serviced by our target and strategic system infrastructure. As such, it would be more accurate to describe Bots as evolutionary rather than revolutionary, as they are designed to support and complement technology-powered banking operations developed over time.
It is clear that systematically deployed Bots can provide significant automation to providers and lead to enhancements to the client experience.
<br>Digital assets: Transforming Thai capital markets
Digital assets: Transforming Thai capital markets
The Asia Pacific (APAC) region is leading by example when it comes to embracing new technology. The region’s fintech industry is setting the pace in digital asset innovation. Some regulators and stock exchanges in the region are moving swiftly to put in place new digital asset infrastructure and implement regulatory frameworks to govern trading of these new assets, with Thailand being one of the most proactive among them.
The centre of gravity of digital asset markets has moved to the APAC region, putting local regulators in the global spotlight when it comes to regulation and oversight of digital assets. Thailand was one of the first countries in the region to enact legislation regulating the offering of digital assets and business undertaking digital-asset-related activities. The Royal Decree on Digital Asset Business B.E. 2561 (2018)) – which came into effect on 14 May 20181 – regulates the offering of digital tokens, the trading of cryptocurrencies and digital tokens (digital assets), and governs the operations of exchanges and intermediaries for digital assets under the supervision of the Securities and Exchange Commission of Thailand (SEC). At the same time, the Emergency Decree on the Amendment of the Revenue Code (No. 19) B.E. 2561 (C.E. 2018) amending the Thai Revenue Code was issued to include income and gains derived from, or on disposal of, digital assets in assessable income, as well as to add a withholding tax requirement.
1 Securities and Exchange Commission (2018, May 10). Emergency Decree on Digital Asset Businesses B.E. 2561 (2018).
These regulations mentioned (collectively, the ‘Decrees’) would require all digital asset transactions, including those of digital asset exchanges, brokers, and dealers, to be registered with the relevant authorities.
Although Thailand has one of the most well-defined legislations in place to govern digital asset business operations, the SEC recognises the need to refine the Digital Asset Business Decree to ensure that the regulation remains relevant and continues to protect investors, while at the same time, encourage innovation.2
Thai regulators’ pragmatic and liberal approach has gradually helped to evolve progressive regulations and provide a regulatory framework with an objective of increasing the quality of issuers as well as protecting investor rights. With this approach, Thailand is looking to become the region’s leading digital asset hub.
2 Polkuamdee, N. (2019, November 25). SEC to amend decree on digital asset businesses. Bangkok Post.
Stock Exchange of Thailand’s digital asset ecosystem
There has been much interest in the tokenisation of real-world assets, and the use of distributed ledger technology (DLT) based tokens has been growing.3 The Stock Exchange of Thailand (SET) is keen to be one of the early movers in providing a digital asset ecosystem to enable investors to tap into these new asset classes.
- In March 2019, the SET announced its three-year strategic plan (2019-2021) which will focus on the development of a digital asset platform and ‘one-stop’ digital capital market.4
- On 3 October 2019, the SET unveiled its digital asset platform initiative.5 After working with various partners to design and build business use cases together with market participants as well as regulators during their 12-week workshop, the SET further released the 2020 roadmap for their digital asset platform.6
3 OECD (2020), The Tokenisation of Asset and Potential Implications for Financial Markets, OECD Blockchain Policy Series
4 Stock Exchange of Thailand (2019, March 19). SET ready for digital transformation, building digital asset platform.
5 Stock Exchange of Thailand (2019, October 3). Thought Leadership Program Digital Asset Platform Initiative.
6 Stock Exchange of Thailand (2019, December 20). Digital Asset Program: 3rd Digital Asset Industry Forum.
Some of the use cases identified include:
- Building a shared and decentralised infrastructure to streamline all the back-office processes for mutual fund registrars
- Providing a common infrastructure to increase the efficiency and reduce the risks of settlement and reconciliation of securities between parties in different organisations
- Providing the primary market for the issuance of tokenised securities (digital assets) and introducing a new settlement mechanism for digital assets
- Providing key technical infrastructure elements such as digital asset custody to internal and external stakeholders to help enable new DLT-based business models.
On 5 October 2020, the SET announced that it has initiated the fully integrated DLT-based digital asset investment service, spanning from a linkage with initial coin offering (ICO) portals, digital asset exchanges to digital wallets via a collaborative development with a local bank.7
In partnership with other entities, the SET is poised to create a complete digital asset ecosystem to enhance capabilities at a global level. This digital asset initiative, in compliance with the SEC’s policy, is set to go live in 2021.
The SET’s move is expected to position the bourse as the first established and regulated capital market infrastructure player to set up a digital asset ecosystem in the Southeast Asia region.
7 Stock Exchange of Thailand (2020, October 5). SET forges the first partnership with KBTG to develop an end-to-end platform for digital assets.
Bank of Thailand progresses with digital currency research
To propel Thailand to a digital economy in line with the Thai government’s Thailand 4.0 transformation strategy, and to ensure an early start with digital assets, the Bank of Thailand (BoT) has identified the rapid digital transformation of the financial system as one of the seven strategic challenges it seeks to address over the next three years.8
The development of a central bank digital currency (CBDC) remains as one of the BoT’s key focus areas. A CBDC may result in significant efficiency gains in transaction information tracing and trade settlement, enable innovative payment systems and financial services, and provide better support for the BoT’s monetary policies and financial inclusion efforts.
In August 2018, the BoT initiated Project Inthanon with eight financial institutions to explore the application of DLT. In enhancing Thailand’s financial infrastructure and improving the domestic wholesale fund transfer system’s efficiency using wholesale CBDC.9
To propel Thailand to a digital economy in line with the Thai government’s Thailand 4.0 transformation strategy, and to ensure an early start with digital assets, the Bank of Thailand (BoT) has identified the rapid digital transformation of the financial system as one of the seven strategic challenges it seeks to address over the next three years.
8 Bank of Thailand (2020). Bank of Thailand’s Strategic Plan 2020-2022.
9 Bank of Thailand (2019, January 29). The outcome and findings of Project Inthanon Phase 1 and the Project’s next steps [Press release].
In addition, to explore interoperability among ledgers, Hong Kong Monetary Authority (HKMA) and the BoT collaborated in May 2019 for Project Inthanon-LionRock, which studied the application of CBDCs to cross-border payments. The project was completed in December 2019 and a DLT-based proof-of-concept (PoC) prototype was successfully developed together by participating banks from both jurisdictions.10
In June 2020, BoT further unveiled plans to build a prototype of a payment system for businesses using CBDC.11 The prototype will be integrated into supply chain management to bring higher payment efficiency to domestic businesses.
10 Bank of Thailand (2020, January 22). Joint press release on The Outcomes and Findings of Project Inthanon-LionRock and the Next Steps [Press release].
11 Bank of Thailand (2020, June 18). The Bank of Thailand announces the prototype development project of Central Bank Digital Currency (CBDC) [Press release].
The number of active blockchain initiatives in Thailand indicates the eagerness of local regulators and market infrastructure entities to advance capital markets using emerging technologies.
In September 2020, the BoT successfully launched a blockchain-based platform for government savings bonds issuing a total of about USD1.6 billion in a week.12
Like the BoT and the SET, the SEC also revealed plans to implement DLT as part of its Master Blueprint to improve the Thai capital market and announced the launch of a pilot project for corporate bonds.13
COVID-19 is expected to provide additional momentum to modernise legacy systems and infrastructure in the market. In the months to come, local regulators and market infrastructure entities are expected to accelerate the transition from a successful PoC to full-scale implementation for various ongoing projects in the Thai capital market and step up their efforts in advancing their research in CBDC. However, some challenges remain. Despite the fresh impetus to move from PoC to implementation status, there is difficulty of resolving the ‘coopetition’ (cooperation between players who are competitors) paradox to establish common standards and achieve interoperability. The integration of existing systems with these new systems also remains a complex issue.
In September 2020, the BoT successfully launched a blockchain-based platform for government savings bonds issuing a total of about USD1.6 billion in a week.
12 Bank of Thailand (2020, September 11). New Government Bond Infrastructure launched with Blockchain Technology [Press release].
13 The Securities and Exchange Commission, Thailand (2019, November 15). SEC announces Master Blueprint for Thai Capital Market to kick off DLT platform with corporate bond as pilot project.
As Thailand continues its CBDC research, some important considerations need to be made before a CBDC can be introduced. The distribution structure of CBDC would determine if the consumers and businesses would have a direct claim on BoT depending on whether the issuance and distribution of CBDC is centralised or decentralised through the intermediaries. A detailed assessment on the costs and benefits, and potential effects of CBDC issuance on the financial system and the economy needs to be undertaken especially on the risk of disintermediation, operational challenges, cyber-security and the readiness of consumers and businesses for CBDC usage.
When designing a CBDC, an important consideration is if the CBDC would be account-based or token-based. An account-based CBDC allows for easy identification of the holders; while a token-based CBDC would normally sit on top of a blockchain, which allows for a flexible degree of anonymity, but may pose more challenges to integrate with existing financial system. If the CBDC is intended for both local and cross-border payments, it needs to be available 24/7 instead of only during business hours. BoT would also need to assess if the CBDC is going to be interest bearing, because that is likely to create an impact to existing bank deposits and asset investments. In the early stage of CBDC launch, it is advisable to limit both the value and the volume of transfer to ensure that the underlying infrastructure can be progressively scaled up to handle the load.
BoT would also need to assess if the CBDC is going to be interest bearing, because that is likely to create an impact to existing bank deposits and asset investments.
Nevertheless, the recent announcements and ongoing projects in the Thai capital market will certainly put Thailand fairly ahead of its counterparts in the region; and is a step in the right direction. This is reflective of the local regulators’ progressive attitude towards innovation and evolving market dynamics.
The distribution structure of CBDC would determine if the consumers and businesses would have a direct claim on BoT depending on whether the issuance and distribution of CBDC is centralised or decentralised through the intermediaries.
<br>Getting ready for digital asset servicing
Getting ready for digital asset servicing
Security issues, lack of standards and fragmented regulations hinder growth
Ryan Cuthbertson, head of product management, financing and securities services at Standard Chartered, is the winner of the Digital Leadership Award from The Asset Triple A Sustainable Investing Awards for Institutional Investor, ETF, and Asset Servicing Providers 2020. In this interview with The Asset, Cuthbertson shares his views on digital assets and the challenges facing traditional custodians in servicing this emerging asset class.
Please give an overview of the latest trends in digital asset servicing from the perspective of a traditional custodian like Standard Chartered.
The trends in digital asset servicing are largely the same or have not changed dramatically. We continue to see interest growing at a steady pace as investors’ attitudes shift. A recent study by Fidelity Digital Assets found that 36% of institutional investors have exposures to digital assets, while 60% agree these instruments should have a place in investment portfolios.
There is more demand for the services. The pandemic has accelerated the focus and momentum behind central bank digital currencies (CBDC). COVID-19 has accelerated the digitalisation focus in a number of areas and CBDC is seen as an area which can facilitate cross-border payments and reduce physical cash handling.
Head of Product Management,
Financing and Securities Services
Where other digital assets have raised risk concerns, CBDC is seen to carry a reduced counterparty risk as they are issued by central banks.
A number of countries have launched their own CBDC trials, including China, Canada, Singapore, France, and most recently the UK.
In addition to the trends around digital assets and the servicing requirements, the pandemic has brought greater focus to and acceleration of digitalisation efforts. We are seeing greater demand for some of the benefits that we would see from blockchain technologies or single ledgers. These benefits include a single source of truth, streamlining of roles and intermediaries, focus on key data points, and reduction in points of failure.
In addition to the trends around digital assets and the servicing requirements, the pandemic has brought greater focus to and acceleration of digitalisation efforts.
What are the issues and challenges involved in servicing digital assets from the perspective of Standard Chartered as a traditional custodian?
Security – that’s the most important issue of all. Assets must be secure for large institutionals to hold them. Then there are AML risks.
Scalability is another issue. There must be standardisation of processes, roles, regulations and definitions for digital assets to succeed as an asset class. Regulation is fragmented across markets.
Foremost among the challenges is a lack of standards and hence interoperability. The industry must reach a common view in terms of definitions of assets and how to make interoperability a reality.
While there are clear benefits to digital assets over the existing model, a fragmented approach will not add benefits.
And while there are emerging custody solutions for digital assets, there is currently a lack of service providers that can meet the equivalent asset protection standards for traditional assets. Nascent and heterogenous regulations are also an impediment to adoption.
What must be done to address these issues and challenges?
First there must be clear regulations; and direction is required to ensure greater adoption and consistent standards across markets.
The industry needs to collaborate and agree on standards around CBDCs, especially for cross-border transactions.
A large-scale approach to the issues and challenges is a huge undertaking. Perhaps the way forward to find a workable solution is to bring key groups together to focus on specific problems.
The pandemic has accelerated the focus and momentum behind central bank digital currencies (CBDC).
What are Standard Chartered's plans for developing a digital asset servicing capability, if any?
We believe there are different roles a custodian can play in developing a digital asset servicing capability. We and our clients must be ready for a change in the way we communicate with both traditional and digital asset exchanges and other participants in the industry.
Tokenisation is an area we have spent a considerable amount of time exploring and understanding. We have created an asset tokenisation platform on a permissioned blockchain which allows us to provide tokenisation and token management services for our clients, and this is extremely useful for illiquid assets. Tokenising allows them to be more liquid and attract investors who are looking for smaller-size investments or more precise exposure. The platform also allows us to issue digital assets. Using the platform, we are involved in many interesting projects across the bank where all the use cases are building on top of our asset tokenisation platform.
We believe there are different roles a custodian can play in developing a digital asset servicing capability.
We also believe that it is important that different platforms are interoperable and with this in mind we also spent time exploring a blockchain bridge solution and how to exchange value over different blockchain technologies.
We have successfully completed a DLT Bridge PoC (proof of concept) where we have created a blockchain agnostic middle layer, which is used to connect to any type of internal or external blockchains, and it translates messages between different blockchains to enable transactions or coordinate atomic swap of tokens. For example, we have seen many CBDC projects from central banks and this blockchain bridge will enable us to connect to the CBDC networks to settle both the cash and asset legs of a transaction on chain in real time.
We are also working to create a digital custody solution for crypto-assets which are created on public blockchains. The solution generates and safekeeps the private keys of clients’ wallets, as well as facilitates client settlement with selective trading venues. At the same time, we have a Net Asset Value Report service which is currently live in production for the top 50 cryptocurrencies.
This allows us to provide a comprehensive solution to our clients who are investing in crypto-assets from both a reporting and safekeeping perspective.
Lastly, as the role of a custodian evolves, connectivity will become an increasingly more important part of the servicing we can provide. We are working to create a DLT-on-Demand platform which can provide node hosting services for clients as well as allowing us to join any consortium blockchain in a fast and efficient manner.
As the role of a custodian evolves, connectivity will become an increasingly more important part of the servicing we can provide.