[ U P D AT E ]
CSDs forced to
defend their
existence in a
DLT world
JOSEPH LUBIN DESCRIBED
CSDs AS A “CONCEPTUAL CON-
STRUCT” THAT CAN TAKE A
DECENTRALISED FORM, FORC-
ING EUROCLEAR TO DEFEND
THE ROLE OF ITS PEERS. or implementation of a central database;
it can be realised as a series of nodes on a
decentralised network.”
Recognising the threat of blockchain
to their current services, CSDs across the
world have been working together and with
regulators to develop blockchain technology
in the post-trade sector and establish their
future role.
he founder of Ethereum doesn’t see the
need for central securities depositories
(CSDs) to exist in their current format in a
financial system based on distributed ledger
technology (DLT).
There is a broad consensus amongst the
post-trade industry that blockchain tech-
nology will revolutionise the custody and
clearing world and could radically change
how assets are maintained and stored by
custodians and CSDs.
A decentralised DLT system could, for
example, remove the need for a market
infrastructure provider to hold a security, or
token in its own physical or electronic vault,
while also potentially allowing real-time
settlement.
While the full disintermediation of market
infrastructures has been played down in
recent years as start-up FinTechs look to
partner with incumbents, there remains
some debate about the future roles of
certain players.
“A CSD is a conceptual construct and has a
physical manifestation because that’s what
we know how to build,” said Joseph Lubin,
founder of ConsenSys and widely known as
one of the founders of Ethereum. “It can
continue to exist as a conceptual or logical
construct, but it can take on a decentralised
implementation. Global financial institu-
tions can get together, define a protocol
and build that system, but there doesn’t
need to be a central physical clearing house We exist for a reason
Some believe the involvement of CSDs in
a governance and operational role could
help increase trust of investors, and raise
the quality of the ecosystem infrastructure
underpinning these new asset classes. CSDs
could become a ‘custodian of the code’
ultimately playing a similar role in ensuring
safety and oversight within the system.
Pushing back at Lubin’s suggestion, Walter
Verbeke, global head of business model and
innovation at Euroclear SA/NV, said that ul-
timately the market looks to CSDs for safety
and efficiency, something investors need to
feel comfortable, even in a DLT world.
“As a CSD we are not a service company,
we were created by the market,” said Ver-
beke. “A capital market has inherent risks:
counterparty risk, liquidity risk, there’s credit
risk, settlement, legal risk, there are so
many risks but they are not inherent to se-
curities as compared to another asset class,
they are not inherent to a market infrastruc-
ture be it a trading venue, clearing venue or
settlement venue, they are inherent to the
capital markets.”
“Capital markets have created CSDs to
mitigate some of those risks…In a distribut-
ed world you need to organise around roles,
and controls and governance systems and
ensure the same type of safe and efficient
environment.”
In a world where securities and other as-
sets become tokenised, some have argued
T
that an intermediary will still need to issue
them and create rules.
Natural remit
Verbeke said that CSDs are aware that some
duties will fall to them and others won’t.
“Some of those roles will fall into our
natural infrastructure and we have made
our mind up that other stuff is out of our
league,” he added. “Our natural remit could
be anything around safety, notary role,
when you want someone to say ‘this is
yours’.”
A new white paper from Deutsche Bank
this week highlighted that Europe’s data
protection laws and the incoming CSD Reg-
ulation (CSDR) might also have a significant
impact on the implementation of DLT in the
post-trade area.
“CSDR mandates that the ultimate record
of ownership of securities is to be main-
tained by a CSD. Only allowing CSDs to issue
or process securities transactions clearing
restricts the use of blockchain for this pur-
pose,” Polina Evstifeeva, head of regulatory
strategy, GTB chief digital office, Deutsche
Bank told Global Custodian.
The core value of blockchain is that it is
decentralised and transparent, but the
white paper outlines these values could also
conflict with data protection laws, which fo-
cus on the importance of allowing personal
data to be removed or edited.
However, the white paper does not rule
out the implementation of blockchain by
CSDs, and rather suggests the technolo-
gy can be implemented through a hybrid
model in which the CSD can either operate
a blockchain platform itself to perform the
book entry role, or it can continue to per-
form this role off-chain, with the third-party
blockchain platform accessing those records
held by the CSD via an API (application
programme interface).
Winter 2018
globalcustodian.com
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