Challenges and opportunities: custody for digital securities
Kurt Zeimers: I am responsible for the go-to-market strategy and product management for German-based asset managers at BNP Paribas Securities Services in Frankfurt. We are a global custodian and asset servicer for institutional investors, asset managers, public institutions and banks. In Germany we are the market-leading depositary for investment funds with our principal focus on institutional business. In my role, I examine regulatory changes in Germany and at European level which will have an impact on the services we offer to asset managers such as custody of assets, depositary services to retail or institutional investment funds as well as fund administration and distribution. I also follow market developments closely to collate the requirements of asset managers within the German fund industry. In this context, I am closely following the emergence of digital assets. The focus of the financial industry on digital assets has increased since the publication of the long awaited German draft law on electronic securities and the publication of the European Digital Finance Package, i.e. the regulation on markets in crypto-assets and the regulation on a pilot regime for market infrastructures based on DLT.
Cashlink: BNP Paribas Securities Services has been involved with blockchain technology for years now, working with the Australian Securities Exchange (ASX) on replacing their clearing system with a DLT solution as early as in 2016. What future projects are you currently working on and what operations are planned for the future?
Kurt Zeimers: As a leading global custodian, BNP Paribas Securities Services continually seeks to anticipate its clients’ needs and is carefully preparing for the development of custody solutions for regulated digital assets, i.e. security tokens such as electronic bonds issued on a DLT. This is a significant step forward in our strategy to deliver an integrated custody solution that combines both traditional and regulated digital assets. We are well positioned to deliver an exciting new service to our clients once regulations on digital assets are in place.
Cashlink: What benefits do you see in the interaction between custodians and digital securities?
Kurt Zeimers: The value chain of asset servicing will continue to be impacted by the arrival of new technologies. Digital assets based on smart contracts are one of the key technologies triggering this impact. Asset servicing is already mainly digital – the real impact is therefore not in the digitization itself but instead in the value of the specific features of digital assets. Transparency, global reach, increased efficiency, real-time settlement and liquidity are all potential benefits, but the real “revolution” is the fact that the assets are programmable. Business logic can be embedded directly in the asset itself and performed in a consistent manner across the full value chain through smart contracts. Instead of acting upon assets, we can now program assets to take actions based upon events. This could provide potential benefits in a number of areas with automation being one of them.
Cashlink: Where do you still see challenges within that interaction?
Kurt Zeimers: The likely slow pace of regulatory adaptation and the corresponding slow uptake by the institutional investment community will certainly be a challenge for issuers who want to raise capital quickly by issuing digital securities. Another challenge for market participants will be the still missing secondary market for digital securities.
Cashlink: With the recently published draft for the Electronic Securities Act, Germany is certainly moving in the right direction. What do you think is still necessary to enable advancement in the DLT industry?
Kurt Zeimers: Regulation will continue to play an important role, not only in Germany but also at EU level and finally worldwide. A clear regulatory framework is a prerequisite for large-scale institutional adoption. Asset owners such as insurance companies, pension funds or public institutions are all regulated entities which have to follow specific investment guidelines set by law, e.g. Solvency II or IORP, and which force them to invest mainly in regulated financial instruments.
Cashlink: Finally, as BNP Paribas Securities Services is one of the biggest global custodians, we want to know your personal opinion about how custodians are going to develop in the coming years to adjust to the development of digital securities.
Kurt Zeimers: Once there is a clear regulatory framework, digital assets will have high potential for institutional investors. The asset-servicing ecosystem has an exciting but long journey ahead. Challenges and opportunities will abound as asset servicing providers have begun the long process of adjusting their service offering to cater for this new asset type. The capacity and long-lasting experience of custodians in managing risks and IT security as well as ensuring asset safety should be key for institutional investors who will wish to invest in digital assets without fully reengineering their existing global operating model.