DLT in the Thai Capital Market — How Old Roles Change and New Roles Emerge
The Stock Exchange of Thailand (SET) is building an asset tokenization and exchange platform run by DLT. They recently revealed a blueprint for this undertaking which provides an insight into what the capital market of the future will look like. It shows that the transition of moving from a mainly bilateral, sequential way of communicating and exchanging information to a shared communication exchange model enabled by DLT will pose changes to the existing ecosystem of capital market players. Numerous existing roles of the capital market might be digitally transformed but keep the same functions. However, a whole new role compound of a Digital Asset Vault, Digital Asset Registrar, Gatekeeper, Cash-on-Ledger Issuer and Cash Tokenizer will be required to implement the DLT-based capital with all associated benefits including reduced transaction costs, increased process efficiency and improved compliance. — Authors: Christian Labetzsch, Philipp Sandner, Thomas Faber
Distributed Ledger Technology (DLT) has a considerable impact on banking industry infrastructures, roles and functions of financial intermediaries. It has already begun to restructure capital market value chains and will continue to unfold its potential within the next few years. DLT fundamentally changes the traditional assumptions of the financial value chain as it becomes possible to create trust without relying on human operations. The Stock Exchange of Thailand (SET) is building an asset tokenization and exchange platform run by DLT. It has been working with Blocksize Capital, the Cambridge Center of Alternative Finance (CCAF) and other partners to design and build the business use cases during their 12-week workshop. The recently revealed blueprint for this undertaking gives an insight into what the capital market of the future will look like.
This article is supposed to shed light on how a new information exchange model enabled by DLT will pose changes to the existing ecosystem of capital market players. While most traditional roles such as brokers, exchanges and asset custodians continue to exist, whole new roles will become necessary.
Four Reasons to Adopt DLT in the Thai Capital Market
But one step at a time. What makes DLT so interesting for the SET? As shown in Figure 1, they point out 4 dimension where DLT will deliver the added value:
The application of DLT will drastically reduce transaction costs, increase process efficiency and improve compliance leading to greater financial inclusion and potentially to global competitive advantages for Thailand.
The transition of moving from a mainly bilateral, sequential way of communicating and exchanging information to a shared communication / information exchange model enabled by DLT will pose significant changes to the existing ecosystem of capital market players.
Roles and Functions of a DLT-Based Capital Market
Most traditional roles such as brokers, exchanges and asset custodians continue to exist in a DLT-based capital market. Their relationships will not change but only be improved. On the other hand, whole new roles will become necessary. Figure 2 shows the new shared information exchange model with traditional roles in grey and new roles required for the digital asset infrastructure in blue.
As can be seen in Figure 2, there are numerous existing roles of the capital market that might be digitally transformed but that keep the same functions also in a DLT-based capital market. These existing roles are:
In addition to that, new roles emerge through a DLT-based digital asset infrastructure. These new roles are:
- Digital Asset Vault
- Asset Tokenizer
- Digital Asset Registrar
- Cash Tokenizer
- Cash-on-Ledger Issuer
Please note that these roles can be mapped 1:1 to legal entities. However, it might also be useful to consider which single legal entity could also incorporate two or more roles at the same time (e.g. the custodian and digital asset vault integrated)
To get a better understanding on what the new roles are and how traditional roles may fit into this new shared information model, each role will be discussed in view of the expected changes.
A Broker is an individual or firm that charge a fee or commission for executing an investor’s buy and sell orders. Operating with a licence issued by the financial authorities, they receive investment requests and pass them on to exchanges. To find the best price possible for their clients, brokers are connected to multiple exchanges. The current role and function of the broker is merely touched by DLT. Brokers will still play a vital role in the capital market, mainly in price discovery and executing transactions. However, they will be able to source liquidity through an improved capital market structure.
An Exchange is a marketplace for the trade of securities, commodities, derivatives, and other financial instruments. They will remain unchanged, matching counterparties and facilitating price discovery. Mainly the settlement process will change by settling trades ”onchain” by providing signed transaction data to the Ledger.
A Custodian is a financial institution that holds securities of their customers for safekeeping in order to minimize the risk of their theft or loss. In the DLT-based capital market, these companies will continue to exist since they tend to be large and reputable firms that operate on a custody license. However, as digital assets emerge, traditional custodians have to purchase and rely on new technical custody solutions (“Digital Asset Vaults”) that fit the requirements of digital assets. The main utility of such custody solutions lies in the safeguarding of private keys, which are used to conduct transactions or access crypto holdings. They are a complex and long combination of alphanumerics which makes them extremely difficult to remember. When stolen or hacked, the ownership of the digital assets is irretrievably lost.
As just described, a Digital Asset Vault (DAV) is the software or technical custody solution purchased by custodians that provide them with the required infrastructure to store private keys for digital asset accounts. This new DAV function creates a whole new industry with already 150–200 related software providers that have emerged worldwide.
While the DAV may be functionally separated from the custodian, it is also possible that a company takes on the roles of the custodian and the DAV at the same time; given they have been assigned the required license to operate as a custodian.
An Issuer is a legal entity such as a corporation, investment trust or government that offers its own securities for sale. Although the role of the issuer does not change, they are expected to significantly benefit from a reduction in issuance costs and improved direct access to the capital market.
The Asset Tokenizer is new to the capital market ecosystem and enables legally compliant issuance processes by providing smart contracts in order to tokenize financial instruments on behalf of the issuer. They file smart contracts with the digital asset registrar and execute transactions (e.g. issuing) on behalf of issuer.
The Digital Asset Registrar is another new role that is becoming relevant in the DLT-based capital market. They facilitate consensus across different stakeholders and govern the Digital Asset Registry / Contract Registry by observing, recording and validating all transactions on the platform. They register smart contracts filed by the asset tokenizer and connect digital assets with associated rights as well as possible on-chain twins in case of e.g. asset-backed-tokens. Digital Asset Registrars operate a part of the nodes in a permitted blockchain network (R3 Corda).
The Gatekeeper is a new emerging role that controls access to the capital market infrastructure. They grant and restricts access to the permissioned platform, perform initial screening of participants with the required KYC / AML checks and take care of the technical setup and on-boarding of participants.
A Bank will still be required for providing fiat accounts as bridge between Cash-on-Ledger and the existing fiat currency network. However, through the use of Cash-on-Ledger there will be fewer transactions resulting in less revenue. Banks will execute payment instructions of fiat currencies (e.g. deposits and withdrawals), safeguard fiat currencies in bank accounts and reconcile the amount of cash in fiat account with the supply of Cash-on-Ledger.
The Cash-on-Ledger Issuer is new to the ecosystem and ensures the regulatory compliance of the cash-on-ledger issuance process. They are responsible for the management of smart contracts. Moreover, they initiate fiat currency transactions through the bank and validate cash-on-ledger transactions. This could potentially even be the central bank emitting the Euro onto the chain.
The Cash Tokenizer is another new role that — mirrored to the asset tokenizer — provides the legally-compliant technical infrastructure to issue 100% collateralized cash-on-ledger for on-chain settlement (Delivery vs. Payment) for the Cash-on-Ledger Issuer. Bank, Cash-on-Ledger Issuer and Cash Tokenizer have different roles and functions, which can exist separately or coincide in one entity. This could potentially even be the central bank as issuer, using a cash tokenizer to get the smart contracts clean and compliant.
The Regulator may monitor transactions of digital assets and cash-on-ledger in real-time with a read-only DLT node. The immutable audit trail by DLT ensures improved regulatory reporting.
DLT has reached a maturity level for production ready applications and globally major players are rapidly transitioning into production mode. It is not a question “if” DLT will change the Thai capital market. The only question is “when” and “how”. A common approach regulating and implementing DLT will improve the efficiency of the Thai capital market and lead to global competitive advantages for Thailand.
This transition of moving from a mainly bilateral, sequential way of communicating and exchanging information to a shared communication exchange model enabled by DLT will pose changes to the existing ecosystem of capital market players. However, while for most traditional roles such as brokers, exchanges and asset custodians existing relationships will not change but only be improved, whole new roles will become necessary. A new role compound of a DAV, Digital Asset Registrar, Gatekeeper, Cash-on-Ledger Issuer and Cash Tokenizer will be required to implement the DLT-based capital with all associated benefits including reduced transaction costs, increased process efficiency and improved compliance.
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Christian Labetzsch is co-founder and CEO of Blocksize Capital as well as micobo. His main areas of expertise include the structuring of investment vehicles in the form of digital assets as well as the active support of securities issues on the Blockchain. As a technology consultant, Christian Labetzsch has worked on the development and implementation of blockchain solutions, Robo Advisory and digital banking solutions in the financial sector. Currently, he also supports various ICOs as an advisor. You can contact him via email and LinkedIn.
Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). In 2018 and in 2019, he was ranked as one of the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belonged to the “Top 40 under 40” — a ranking by the German business magazine Capital. Since 2017, he is member of the FinTech Council of the Federal Ministry of Finance in Germany. The expertise of Prof. Sandner includes blockchain technology in general, crypto assets such as Bitcoin and Ethereum, the digital programmable Euro, tokenization of assets and rights and digital identity. You can contact him via mail (firstname.lastname@example.org) via LinkedIn or follow him on Twitter (@philippsandner).
Thomas Faber is a research fellow at the Frankfurt School Blockchain Center and a project manager at the International Token Standardization Association (ITSA). His areas of interest include distributed ledger technology (DLT), security tokens (STOs), crypto-assets as well as blockchain ethics and blockchain-related sustainability issues. Mr. Faber holds a B.Sc. degree in Management, Philosophy & Economics as well as a M.Sc. degree in Management with a focus on digital business models from the Frankfurt School of Finance & Management. You can contact him via email and LinkedIn.
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