New Report from the ValueExchange and Digital Asset Reveals Roadmap for Successful Tokenization

In this article

Manual processes and legacy systems in the financial sector will be unable to cope with human, regulatory and technical challenges in coming decades.

November 1,  2022

A new study conducted by the ValueExchange in partnership with Digital Asset found that the manual processes and legacy systems that underpin transactions and communications in today’s financial sector will not be able to continue meeting human, regulatory and technical challenges across the trade cycle in coming decades.

The report, titled “Doing Tokenization Right”, draws on over 3 years’ worth of extensive market research and interviews with over 45 leading exchanges, depositories, brokers, custodians and service providers. The research revealed that the costs of settlement are rising 14% each year, driven largely by the growing cost of human resources. This exacerbates cost pressures and the risk of inaccuracies and errors faced by financial institutions.

The report details several factors which contribute to a slow and expensive trade cycle:

  • It takes 16 weeks and over 100 people to issue a bond.

  • Every bond issuance requires the completion of 2,000 manual tasks

  • The average trade runs through 7 systems, each reconciling with each other on a daily or even hourly basis.

  • There is almost no market system handling both cash and securities.

  • 5-10% of trades fail every day – creating daily error queues of over 10,000 failing trades.

  • It takes 25 days for a dividend to pass from issuer to the end investor

“The digital landscape in finance is changing at pace, but, to date, corporate action errors cost 70% of the market over USD 2 million per annum”, said Barnaby Nelson, CEO of ValueExchange.

“This suggests the immediate need to embrace distributed ledgers, which are able to transform historically complex, and often siloed, processes without disrupting operations by tackling specific areas of the business and creating a foundation upon which innovation can take place.”

A roadmap for successful tokenization

While the majority of the interviewees acknowledge the benefits of tokenization, including enabling businesses to reduce risk, drive cost efficiencies, and improve returns for investors, they believe it is important to first understand the business case and the potential obstacles on the journey forward.

Amid these findings, the study identified an effective a three-step industry roadmap to achieve innovation:

1. Prepare the path for the future by:
  • Educating key stakeholders and shifting / embracing a mindset for change

  • Define the problem extensively

  • Determine if distributed ledger technology is the right solution

  • Build the business case and ensure management approvals before development

  • Create a pilot or MVP and prepare to scale

2. Execute tokenization solutions by:
  • Defining the talent and internal competencies to support the build; the whole firm must see a new model beyond today’s (legacy) infrastructure and processes.

  • Understand that the project team is the whole ecosystem – i.e., behind every successful tokenization project is an empowered, customer advisory group that spans the entire market ecosystem (including regulators, counterparties and service providers, as well as the platform provider).

  • Seek out the firms (or individuals) who have the deepest working knowledge of existing processes and challenges; or the visionaries who have a clear picture of where tokenization can transform an asset class.

  • Take one step at a time as large-scale tokenization projects must be broken down into small, self-contained pieces to ensure continuing investment and engagement on the journey.

3. Design the platform by:
  • Tokenizing the asset first, then go native

  • Connect to legacy systems first, then manage switching costs

  • Determine if public chains or private chains will be used

  • Outline who will be interoperating with your platform and start discussing today

“We have to change our mindset around what we want to achieve with digital assets,” said Eric Saraniecki, Co-Founder and Head of Strategic Initiatives, Digital Asset. “The tendency today is to focus on building the platform that will lead the world. But tokenization doesn’t mean digitization – it means connecting to a bigger ecosystem. It’s about focusing on core competencies and acknowledging that I’m not the captain of every piece of the process anymore. Instead, I am becoming the master of my application within a much bigger ecosystem”

Digital Asset has created a smart contract language—Daml—and a privacy-enabled blockchain—Canton—which are both built with the demanding requirements of financial use cases in mind. With Daml and Canton, the company can bring the entire lifecycle of an asset or a workflow on-chain.

Daml Finance, launched in October, is an expansion of the smart contract platform that accelerates the tokenization process. This new, open-source offering within Daml provides users with a collection of purpose-built libraries to enable rapid development of enterprise-grade tokenization solutions. Daml Finance provides financial institutions with the tools to accelerate the innovation cycle, shorten time-to-market, and build with proven libraries purpose-built for financial workflows.

Click here to download the report. 

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