DeFi: The future of market infrastructure
David Nicol, CEO of LedgerEdge, claims the potential for Decentralized Finance to improve the corporate bond market is enormous. Is it time to take the next step?
Blockchain, crypto, digital assets, DLT: recent hype and hyperbole in market discussions around these terms are reaching fever pitch in some quarters. DeFi is a term which encapsulates a new method of creating potential huge efficiencies in institutional markets that extends far beyond cryptocurrencies.
For the corporate bond market, a foundation based on distributed ledger serves a dual purpose. It allows customers to control their data flows and exposure and it also provides an ecosystem for trading of all digital financial assets and data. This second part is paramount to the future of this market. At LedgerEdge, we have a few hypotheses about the future of capital markets. These include:
- More users will issue financial assets on digital platforms. These venues will continue to improve the issuance process, better connecting issuers to investors and making the issuance workflow more efficient all the time.
- More assets will be managed through their lifecycle on DLT. Asset servicing on a DLT platform is more efficient and allows custodians to offer new services to investors while cutting costs.
- Digital assets will self-represent more accurate information (conditions, maturity, etc.) due to this new asset lifecycle management infrastructure.
- Users will want to trade these assets even more frequently than they do today. With more functional exchanges like LedgerEdge, liquidity will be less of a barrier to mobility.
- Improved asset mobility will make a wide range of operations more efficient: posting collateral, loaning assets, managing risk, among others.
- Users will see value in new, blockchain-based settlement methods. Using settlement assets, users can reduce risk, cost, and time associated with one of the most expensive parts of capital markets.
This transformation will occur across all asset classes, starting with those where the benefits of mobility and automation will be most significant.
The corporate bond market, where LedgerEdge operates, has work to do in adopting technology in comparison to currency or stock markets. The innovation of DLT helps solve the historic structural problem in this market of locating counterparties for illiquid assets, without the data leakage and price impact that occurs using today’s methods.
Until now, it has not been possible to create a rules-based distributed computing system to solve this problem in a way that satisfies users’ concerns about data leakage, price discovery, data ownership and control, preserves recognized trade flows, meets pre-trade price discovery requirements, and addresses post-trade data and regulatory reporting.
There needs to be a fundamentally better secondary market for illiquid assets in corporate bonds. LedgerEdge aims to be a more effective market to support the movement of any digitized asset – any time a market participant wants to interact with another one regarding a digital asset (searching, pricing, negotiating, trading). Our vision is to build a better ecosystem for this interaction. We are providing solutions that fit the workflows of modern capital markets.
Our system incorporates all the security and performance requirements for regulated, institutional markets. We are labelling data throughout the ecosystem to make it clear to all users, and most importantly we are giving users control and ownership of their own data. Control, clarity, and better execution, built for the future of digital capital markets.
Practically, we will deliver on this vision by first launching a best-in-market exchange for corporate bond trading. We will then look to integrate to digital asset issuance platforms, starting with fixed income and FI-like assets. We will also look to allow users to settle however they would like. This could be T+2 as we know it today, or T+1 or DvP using a digital settlement asset. We will allow users to agree between them how they plan to settle.
As users increasingly see the benefits of sharing their orders, holdings, inventory, and data in general with the market, we will facilitate increased automation of this asset mobility. Once the network effects become apparent, user firms should be able to auto-trade, quote, respond –etc. based on conditions in the market and the lifecycle events of financial assets. Finally, we will work with regulators and market participants to expand these capabilities to new asset classes, including digital assets.
If DeFi finance is to take over financial plumbing, it is imperative to integrate and work with applications no matter what blockchain platform they use. This is a challenge we take seriously, and we will build seamless interoperability between primary issuance and settlement solutions on all types of platforms (including legacy tech, which we are doing today).