The Business Times

Reimagining financial market infrastructure for a faster and more efficient future 

Han Kwee Juan
Published Thu, Nov 3, 2022 · 05:50 AM

OVER the course of history, technological advancements have reshaped the nature of money and finance. The decades-long journey from analogue to digital finance has resulted in cash all but disappearing from our lives and made transactions quicker, easier, and cheaper. Most money is now digital, with users able to make payments or transfers with just a few taps on their mobile phones. The same transition has transformed capital markets, with financial instruments changing hands instantaneously in a global trading environment that is both sophisticated and complex.

However, frictions persist in areas such as cross-border transactions, with existing structures resulting in transactions that are slow, costly, opaque, and inefficient. Today, the next phase of transformation will be powered by blockchain technology, which has the potential to reimagine existing financial market infrastructure by enabling digitalisation of all asset types and automation of trading of such assets. It is early days, but with bold thinking, commitment to innovation, and constructive partnerships, a vast array of possibilities to reshape financial markets await and the time is ripe for industry players to step up and seize these opportunities.

Current frictions in financial markets

Today, the hub-and-spoke arrangement in cross-border payments often results in frictions and delays due to the sequential nature of transactions, where confirmations from multiple intermediaries are required before a settlement is considered as final. No chain can move faster than its slowest link where banks are separately performing checks for compliance and this creates inefficiencies in the payment process as well as the final settlement of other assets.  

In capital markets, while current market mechanisms allow for immediate trading, existing over-the-counter (OTC) processes for trading securities or asset swaps involve multiple intermediaries that slow down both the initiation and settlement of a trade, adding friction that costs time and money.

Potential for blockchain solutions to mitigate existing frictions

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Blockchain technology offers the potential to revolutionise existing financial market infrastructure by enabling a new way of initiating, executing, and settling transactions that improves efficiencies and removes delays and complexity. Through a distributed ledger, transaction data can be shared and acted upon simultaneously, with all parties seeing the same information at the same time.

Tokenisation allows financial and other assets to be fractionalised and securely and reliably represented on a distributed ledger. Combined with smart contracts, which allow the automatic execution of transactions when pre-determined conditions are fulfilled, these assets can in turn be traded, borrowed, or loaned across peer-to-peer networks without the need for intermediaries.

Han Kwee Juan, MD and head of Strategy and Planning, DBS. PHOTO: DBS

The sequential transaction stages of authentication of identities and assets, transfer of funds, clearing of securities and final settlement are all collapsed into a single digital event, reducing frictions that consume time and cost. This allows for a step change in the efficiency of financial markets, enabling seamless, transparent, and cheaper transactions.

Forging a new path in a blockchain-based future  

To address current points of friction in cross-border transactions, DBS has partnered with JP Morgan and Temasek Holdings to launch Partior, which offers a blockchain-based clearing and settlement platform that aims to enable atomic and real-time settlements of cross-border multi-currency payments, foreign exchange, and Delivery-versus-Payment for securities at any time of the day.

Partior leverages the programmability of smart contracts for payment pre-validation checks, where banks involved in the transaction are prompted to complete pre-checks (such as AML or anti-money laundering/CFT or Combating the Financing of Terrorism/Fraud screenings, account validity, etc) concurrently. Upon validation, the smart contract executes payment transactions automatically. If any of the pre-check conditions are unmet, the smart contract will not be executed and the transaction will be rejected upfront.

This has enabled significant reductions in settlement time for Singapore dollar and US dollar exchanges from days to seconds. It also ensures that customers and banks are not subject to cumbersome reversal journeys should there be errors in transactions, thus reducing costs, turnaround time, and improving efficiency and the customer experience. The distributed ledger on which payment information and money movement are concurrently updated provides immutability of transactions, as well as transparency and traceability for all parties involved.

In the area of capital markets, DBS has partnered with the Monetary Authority of Singapore (MAS) as well as other industry players on Project Guardian to explore applications in asset tokenisation and DeFi. We have participated in an industry pilot involving the successful trading of foreign exchange and government securities (which are primarily transacted in OTC markets) against permissioned DeFi liquidity pools comprising tokenised bonds and deposits on public blockchain.

In the pilot, the trading process is automated to enable pricing, trade conditions, and other pre-determined criteria to be stored in a smart contract that triggers an instant exchange of value and assets when those criteria are met, with all parties involved able to view the transaction at the same time. This lays the foundations for building global institutional liquidity pools that enable increased trading velocity, greater transparency, higher efficiencies, lower settlement risks, and economies of scale.

Future of financial markets

While blockchain technology allows us to enhance existing financial market infrastructure, fully harnessing the power of blockchain will require a whole-of-industry approach, with industry players and regulators coming together to collectively reimagine financial markets and mitigate associated challenges.

Industry players need to recognise the benefits of such a transformation on both their own operations as well as for customers, as well as invest and collaborate to explore and shape the possibilities that blockchain technology has to offer. This requires a fundamental shift in mindsets and operations to restructure existing inefficient processes and reimagine new forms of transactions across the financial markets value chain, from financial institutions to clients to end users.

Regulators can play a crucial role by partnering with industry players to facilitate experimentation and co-create the new financial market infrastructure with appropriate and clear regulations.

Singapore - which offers a conducive regulatory environment that supports and rewards the courage to innovate, and is one of most advanced digital markets globally - is well-placed to lead the reimagination of financial markets. It houses a sophisticated ecosystem of financial players, technology providers, and innovators who both support and lead change, buoyed by a deep pool of talent and expertise. This has created a virtuous circle that will allow Singapore to forge ahead as an innovative financial hub.

While we are in the early stages of an exciting transformation journey, with courage, imagination, and collaboration, we look forward to building a flourishing ecosystem in which industry players and regulators alike explore the multitude of possibilities to reimagine the future of financial markets.

Han Kwee Juan is managing director and group head of strategy and planning at DBS.  

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