Assets under Tokenization: Can Blockchain Technology Improve Post-Trade Processing
Omri Ross – University of Copenhagen
Johanens Rude Jensen - eToro
-- The emergence and gradual proliferation of blockchain and distributed ledger technologies invites new challenges and opportunities across a vast array of sectors within the financial industries. In our recent paper - Assets under Tokenization: Can Blockchain Technology Improve Post-trade Processing? we approach structural inefficiencies in the generic activities associated with post-trade processing with the aim of examining synergies between the distinct feature-set afforded by public blockchain technology.
Through a review of professional and academic literature we find that the standardized post-trade processing regime levies a large cost-profile on market participants, generating significant revenue for institutionalized intermediary processors such centralized security depositors and clearing houses. While the institutionalized middlemen serve an imperative role in sustaining liquid and stable markets, the costs for activities associated with the post-trade cycle may reach as far as $5-10bn for clearing activities, $40-45bn for settlement, custody, and collateral management, and $20-25bn for post-trade data, according to market observers (Pinna and Ruttenberg, 2016).
Utilizing the Design-Science Research methodology, we iterate through multiple cycles of development, demonstration and evaluation, arriving at an implementation featuring:
A hierarchical permission management system involving eight roles and sub-roles assigned separate privileges and capabilities.
A data management system separating storage from functionality, such that the implementation can be upgraded while pointing to the same storage implementing iterative AML/KYC policies.
A four layered access management system, minimizing exposure to compromised external actors. Successive ‘generations’ of the implementation proxy all contracts calls to the latest deployment, adding the capacity to mitigate critical security concerns by upgrading the deployment with new features.
This study was conducted in close collaboration with the eToro Group, a regulated financial group, releasing a series of 17 digital assets on the Ethereum network, allowing users to benefit directly from low friction trade processing with instant settlement, currently supporting millions of dollars in value and growing. More broadly, our findings in this, and forthcoming, work indicate a strong cost-savings potential in a number of activities typically associated with the post-trade cycle, across a variety of asset classes. In evaluating the implementation, we submit that, while the deterministic computational environment afforded by public blockchain technology introduces a number of new challenges in post-trade processing, we find that the upside potential in leveraging a 'public blockchain' technology stack by far justifies the associated requirements for enhanced risk management.
We invite curious readers to follow along with our forthcoming publications, in which we will address, amongst other topics, the feasibility of automating transaction reporting alongside expanded models and implementations for digital asset infrastructure.