Deutsche Börse’s Jens Hachmeister: ‘Spotify’ digital assets infrastructure to future-proof Europe’s markets

“There are two drivers shaping the future of capital markets in Europe. One is technology and the other is regulation. Sometimes technology leads the way, while at other times regulation sets the course. Efficient and future-proof digital markets need the best of both worlds, technology and regulation, to work successfully.

Over the past decades we have electronified market models to create tools like open limit order books and electronic clearing houses. We have tried to optimize processes, but we are still in the batch-processing stage for certain processes. What we have not done is taken the capital markets’ core product (which is a security) digital.

Making markets more efficient

Future success involves shortening the distance between issuers and investors, not physically, but in terms of time. This means enabling features like instant issuance, direct distribution and seamless settlement of securities. A key aspect of the transformation is the need to fully digitize the core product of the securities industry, moving away from batch processing and towards a more seamless, digital lifecycle for securities.

The goal is to turn securities into smart digital objects that can be instantly issued, distributed and traded. Drawing a parallel to the music industry, the transition from physical CDs to digital music files (like MP3s) enabled instant distribution and sharing of content. Similarly, we need a shift from batch processing to instant access. Turning the security into smart digital object is the key to creating an efficient, instant market from issuance to redemption.

The role of market participants

In music, this transition to digital has led to the emergence of new roles and business models, such as music streaming platforms, DJs and direct artist-to-fan distribution. Capital market participants, like banks, need to do the same thing – clearly defining their roles as producers, consumers or operators of market infrastructure. It is important to focus on connecting to digital market infrastructure and aligning their product strategies to ensure that new offerings can be seamlessly integrated and traded on these digital platforms.

We are seeing the next generation of products on the horizon. The introduction of crypto and blockchain-based assets has already started to broaden the asset class mix that banks can offer. As banks and investment firms embrace crypto custody, trading and crypto-based exchange-traded funds (ETFs), they are expanding their product offerings to include these new digital asset classes. But the digitization and tokenization of assets can also make it easier for market participants to tap into new, previously inaccessible asset classes. By turning real-world assets into digital tokens, it may become simpler to create new portfolio mixes and products that leverage a wider range of asset types.

The importance of a digital strategy

Not all market participants have yet holistically defined a digital strategy, and have yet done much analysis around what a digital infrastructure means to their business model. Some are starting to embrace crypto to a certain extent, adding it to their asset class mix. Some are hooking up to crypto custody, while others are connecting to crypto trading, and if you look at the recent unlocking of crypto ETFs in the US, we’re seeing some movement there as well. But the bigger issue is how to use it to take advantage of technology – not only distributed ledger technology (DLT) but cloud, big data, multi-party workflows, event-driven architecture – to connect to this new type of ecosystem.

It is still in the very early stages – the market has not yet found its new business model. We’ve seen the transition to electronic trading. But the transition to digital is much more complex, and we are trying to do that using legacy infrastructure that is 20 to 30 years old and needs to be transformed.

Keeping up appearances

If you’re not at the vanguard, then what should you be doing to catch up? Well, there is no way to jump the learning curve. You have to undertake your own assessment, apply them to your business model, understand your role and then finally take action. You cannot skip this step – at a certain stage, you will have to get on this learning curve. And part of that means trying things, dumping them and trying new things.

But if you do not know which technology and which combination of technology works for your own use case, you will never be able to start that transformation journey towards a digital infrastructure. You should be at least starting that journey now – or it may be too late.”