From T+5 to T20: Why Smart Assets Are Essential For Building The Finance 3.0 World

Capital markets infrastructure is stuck at the crease of the 20th century. Over the past 30 years, the workflow that had stood us in such good stead since the early 1900s has been streamlined. Objective, regulated and (mostly) good intermediaries such as calculation agents, centralised securities depositories (and their participants), settlement agents, trade registries, brokers, authorised dealers, centralised exchanges, clearing houses, Mancos and fund administrators all add to the complexity, costs and absence of speed. Like a five-day cricket Test match – but only in the time it takes to deliver a result – markets are neither pure in form nor intent, and are mostly lost on a digitally native generation.

Protected by reams of regulation and reassuring redundant relationships, ruthless sailors of this red ocean rush to zero fees, powered by old stories of Diagonal Street and prop trading on currency or gilt runs.

Admittedly, costs have been squeezed to the absolute minimum, leaving an industry which once had swagger, margin and life, looking enviously over the fence at Cloud engineers and AI geeks. Innovation is seldom driven by the incumbents, and only the smart ones shiver at the sight of the West Indian bouncer.

However, with the advent of decentralised trust, a new network effect is being unleashed. Naysayers, still wondering about the nature of Bitcoin, wring their hard hands, and play at a delivery that lifts off a length. Edged and gone.

Enter T20, a redefined game that resembles the old, but where matters are settled almost instantly, and fast action is guaranteed. It demands a very similar and comprehensive skillset but allows no time to settle in at the crease.

In T20 markets, smart assets are the high-value all-rounders that bring star power back to capital markets. When deployed in a trusted and regulated infrastructure, they will contractually execute on promises made by issuers. Thus, they not only protect investors, but also inform them of real holdings, progress and performance.

THE PARADOX OF SMART ASSETS

As with most game changers, smart assets are often misunderstood. I put this down to three factors:

• Overzealous fans of team “BlockChainIsTheAnswer” and “RealWorldAssetTokens” have been found to be naïve.
• Industry incumbents act in a protectionist way and have deliberately dug deep defensive ditches around themselves.
• Smart assets truly are novel and require rigorous thinking to understand their paradoxical nature, which makes the step change that they bring possible.

I will now focus on four of these paradoxes

1. FLEXIBLE IMMUTABILITY

Smart assets claim centre stage in financial markets by offering issuers complete flexibility. They enable cross-asset construction (debt, equity, currency, commodity, property), and for combinations and even derivatives to be issued, easily and automatically, while still being linked to the relevant regulatory and legal constructs. Yet, once issued, Smart Assets are immutable, cast in stone, immune to tampering and adulteration.

2. TRUSTLESS GUARANTEES

Traditionally, when two parties shook hands on a deal, trust was implied by looking one another in the eye and experiencing a moment of human touch. Smart assets take this need for direct transaction and digitise the process. Advisors, custodians and other third parties are redundant. Therefore, the resulting transaction is described, somewhat contradictorily, as trustless, but the digital nature thereof guarantees (on an atomic level) delivery of smart assets against payment. This innovation, brought about by blockchain but being optimised by smart assets, is fast becoming the global standard for financial interaction.

3. PRIVATE TRANSPARENCY

The world of capital markets is essentially one of entrepreneurs making promises in return for being trusted by a community of investors, at a perceived risk-adjusted price. A great deal of trust is established through the mere fact that the smart asset exchanges digital hands in a trustless manner. However, some behaviours need to be transparent and observable by the community, as well as super community members such as regulators and credit creators.

4. INTEGRATED SIMPLICITY

Reduced bloating in any system results in better execution. Smart assets are constructed once, and then all calculations and actions are distributed to relevant participants with integrity. All actors interact with them in a decentralised, yet consistent, way. This simplicity leads to flawless execution, and to information that cannot be redundant.

IMPLICATION OF THE FOUR PARADOXES FOR MARKET PARTICIPANTS

These four paradoxes are game changers for both issuers and investors of all assets. In an unexpected twist, they are also capable of uniting a market that has been torn apart by the age-old fault lines of issuance size, asset class, investor type, and access to information and technology.

We can extrapolate, based on the growing utility set, that entrepreneurs and issuers will be empowered by the direct capital, utility, and cost reductions available. Yet, they will also be held even more accountable through immediate transparency to directly invested and fully informed community members. This possibility has free marketeers – myself included – waxing lyrical.