Murray Bender: RBC Investor & Treasury Services is pleased to present insights on the future of asset and payment services across the globe.
Coming up on today’s podcast is Ian Sinclair, Head of Digital & Crypto Assets at RBC Investor & Treasury Services, discussing how digital assets could change the asset servicing business and the potential impact on institutional investors.
Welcome, Ian.
Ian Sinclair: I’m pleased to be here, Murray.
Murray Bender: To start, Ian, how would you define digital assets?
Ian Sinclair: Well, I’m glad that you’ve used the term digital assets rather than crypto assets. The reason for that is crypto has connotations with a lot of people that is around the sort of Bitcoin end of the spectrum. But digital assets are essentially assets that are managed or represented on a distributed ledger technology, so they’re related to the underlying technology. And those assets are effectively cryptographically secured on that technology.
And they cover a very large spectrum, ranging from, as we all know, at one end, the very basic Bitcoin. But we move through a whole continuum of Stablecoins, tokenized assets, which could be tokenized real estate, or bonds or something along those lines, through to central bank digital currencies potentially.
And in fact, you can go right down the far end of the spectrum where you could essentially have identity documentation which is digitized. We’ve heard about nonfungible tokens. Even things like games that we play on systems today, you can digitize some of the assets that belong on those systems, such as the skins that people earn in games now. We’re getting into an area that is way beyond me when we’re talking about games. But you can see that this is a whole way of representing a series of assets that covers a very large spectrum in a specific way.
Murray Bender: In your view, Ian, what are the key benefits of digital assets?
Ian Sinclair: So, I think if we looked at—and I’ll be biased here, coming at this from a financial services angle, but it probably reads across to all of the potential use cases. In many ways, the financial markets that we live with today are a relatively automated version of what used to be a highly manual process 30, 40 years ago. And if we were to start from scratch today, I’m pretty certain that we would not be creating markets in the way that they are today with the layers that they have and the participant structures that they have in them today.
Rather, we would use technology in a way that allowed us to be much more real time, much better at compressing all of the different layers that exist within financial services today, whether that is depositories, sub-custodians, global custodians, transfer agents, different counterparties, different clearing houses, et cetera, all those could be compressed down on modern technology.
And also, we would look at making availability 24/7 so you have much greater asset mobility, such as for use around collateral, et cetera. But also, if you make it 24/7 available, the chances are you’re going to get far better price discovery, and depth and width of the market will be much better for assets that are generally out there.
So DLT has that potential to move us into a much, I would say, 21st-century, more automated environment where we can actually start really getting the benefits of a global operating model out of this technology.
Murray Bender: On the other hand, what do you consider to be the key risks of digital assets?
Ian Sinclair: A couple of areas that we need to look at on this. One is that it is a relatively novel technology. It’s really only come into being in the last 15 years or so, and it is evolving very fast. And as a result of it being novel technology, there is understandable nervousness about the application of that technology within the wider financial ecosystem. In fact, to the degree where central regulation is actually looking at putting infrastructure surcharge of search knowledge on using this technology whilst it is still deemed to be relatively nascent by the regulators.
So that novel technology also leads us into legal and regulatory uncertainty surrounding the technology and how it’s used. And because we’re kind of breaking the mold of the old way of doing things, we have to evolve our legal, our regulatory, our risk considerations, et cetera, into this new world and understand what that means for us.
Now, one of the great things, and I said one of the benefits to your previous question was that we could be 24/7 and potentially jurisdictionally, operationally agnostic on how we use this technology. But of course, the world we live in is broken up into lots of jurisdictions with their own rules and regulations. So there will be a conflict there that needs to, over time, get worked through, and all those significant players in the financial services market need to work their way through this and understand how that will evolve, and look for consistency to the degree that we can.
And then probably the other major risk from my perspective is, how do we go from old infrastructure to new infrastructure. If you try and do a big-bang approach, nobody’s going to write off their old legacy investments that they’ve made in legacy infrastructure. So I don’t see a big-bang approach.
But on the other hand, if you do an incremental approach, are you ever going to get sufficient liquidity in the new environment that people will use that versus using traditional infrastructure?
So that whole migration and transition process will be interesting to watch. And I think it’ll happen in various ways, but we need to look for some form of interoperability as we go from legacy to this newer technology over time.
Murray Bender: So you’ve touched on this a bit. But how do you see digital assets changing the asset servicing business?
Ian Sinclair: So again, if we look at the benefits but also the advantages that go with this, if we talk about real-time compression of ledgers, redefining roles and responsibilities in the financial services sector because of technology evolving in this way, then I think what we’re going to see is we are going to start seeing much more of a 24/7—and it may not be 7, it may be 24 by 5 days a week or whatever it may be—but there will be a much more focus on a global approach to how servicing of assets will
take place. And potentially even the ability to reuse assets throughout the global day in different jurisdictions because you can move things so much more quickly.
What that means, though, is that organizations are going to have to rethink operationally how they discharge that. But equally as well, it’ll start bringing in new considerations around risk, around managing your risk, et cetera, as you go through the sort of 24/7 working day. And that’s operational and it’s potentially also around things like credit, et cetera.
There will also be technology risks that we need to consider in this space. But also, you’re going to have different counterparties potentially that you’re going to be playing with as well.
And then I think the other thing just to bear in mind is that we actually do a lot of digital assets activity today. An example that I will bring is, if you look at transfer agency, which is effectively tokenizing a fund structure, we do that today. We just happen to do it on infrastructure that is not the best possible infrastructure that you can have today.
So this isn’t a revolution; this is a little bit more of an evolution. And it’s just understanding how that evolution will hold together over time.
Murray Bender: So, how is all of this going to affect institutional investors?
Ian Sinclair: So I think with investors, as they look at this, there’s a couple of things. One is that potentially, assets are available for trading at much longer time periods. So they could be available 24 hours a day, if you used a tokenized real asset that’s available on a 24/7 infrastructure.
So the question then is, from an investor perspective, how do I make my decisions about investing into that environment. Today typically you look at a—if you’re a European-focused equity investor, you look at the European working day; you make your determinations around that.
But if you’re suddenly going to get into a 24/7 environment, you’re going to have to think a little bit differently about how you assess, manage and operate your business in that degree. And to do that, you also then have to think about, how do you evolve from the sort of traditional infrastructures to these new digital infrastructures over time. And how do you get there? Do you do it all yourself? Do you work with critical partners that allow you to move over relatively seamlessly into those environments?
And how do you manage your risks around all this—your execution risk, your credit risk, your technology risk, et cetera? Again, do you do that all yourself? Or do you do that with partners?
Again, it is probable, as with anything that comes along that is net new, that we start seeing fragmentation first before we see consolidation. And I think people also have to be pretty eyes wide open about when this will all happen and when it will impact. Because I think as all things happen in the financial services world, change always happens slower than people think until it changes and then it happens incredibly rapidly. So people have to plan ahead, don’t over commit, but be ready to move once it’s time to move for your particular business.
Murray Bender: Thanks for helping us to better understand digital assets, Ian. We really appreciate your time today.
Ian Sinclair: It’s been my pleasure, Murray.
Murray Bender: For additional insights on topics relevant to corporate investors and financial institutions across the globe, including our previous podcasts, visit rbcits.com/insights.
I’m Murray Bender. Thanks for listening.
This content is provided for general information and does not constitute financial, tax, legal, or accounting advice, and should not be relied upon in that regard. Neither RBC Investor & Treasury Services nor its affiliates accepts any liability for loss or damage arising from use of the information in this podcast.
Coming up on today’s podcast is Ian Sinclair, Head of Digital & Crypto Assets at RBC Investor & Treasury Services, discussing how digital assets could change the asset servicing business and the potential impact on institutional investors.
Welcome, Ian.
Ian Sinclair: I’m pleased to be here, Murray.
Murray Bender: To start, Ian, how would you define digital assets?
Ian Sinclair: Well, I’m glad that you’ve used the term digital assets rather than crypto assets. The reason for that is crypto has connotations with a lot of people that is around the sort of Bitcoin end of the spectrum. But digital assets are essentially assets that are managed or represented on a distributed ledger technology, so they’re related to the underlying technology. And those assets are effectively cryptographically secured on that technology.
And they cover a very large spectrum, ranging from, as we all know, at one end, the very basic Bitcoin. But we move through a whole continuum of Stablecoins, tokenized assets, which could be tokenized real estate, or bonds or something along those lines, through to central bank digital currencies potentially.
And in fact, you can go right down the far end of the spectrum where you could essentially have identity documentation which is digitized. We’ve heard about nonfungible tokens. Even things like games that we play on systems today, you can digitize some of the assets that belong on those systems, such as the skins that people earn in games now. We’re getting into an area that is way beyond me when we’re talking about games. But you can see that this is a whole way of representing a series of assets that covers a very large spectrum in a specific way.
Murray Bender: In your view, Ian, what are the key benefits of digital assets?
Ian Sinclair: So, I think if we looked at—and I’ll be biased here, coming at this from a financial services angle, but it probably reads across to all of the potential use cases. In many ways, the financial markets that we live with today are a relatively automated version of what used to be a highly manual process 30, 40 years ago. And if we were to start from scratch today, I’m pretty certain that we would not be creating markets in the way that they are today with the layers that they have and the participant structures that they have in them today.
Rather, we would use technology in a way that allowed us to be much more real time, much better at compressing all of the different layers that exist within financial services today, whether that is depositories, sub-custodians, global custodians, transfer agents, different counterparties, different clearing houses, et cetera, all those could be compressed down on modern technology.
And also, we would look at making availability 24/7 so you have much greater asset mobility, such as for use around collateral, et cetera. But also, if you make it 24/7 available, the chances are you’re going to get far better price discovery, and depth and width of the market will be much better for assets that are generally out there.
So DLT has that potential to move us into a much, I would say, 21st-century, more automated environment where we can actually start really getting the benefits of a global operating model out of this technology.
Murray Bender: On the other hand, what do you consider to be the key risks of digital assets?
Ian Sinclair: A couple of areas that we need to look at on this. One is that it is a relatively novel technology. It’s really only come into being in the last 15 years or so, and it is evolving very fast. And as a result of it being novel technology, there is understandable nervousness about the application of that technology within the wider financial ecosystem. In fact, to the degree where central regulation is actually looking at putting infrastructure surcharge of search knowledge on using this technology whilst it is still deemed to be relatively nascent by the regulators.
So that novel technology also leads us into legal and regulatory uncertainty surrounding the technology and how it’s used. And because we’re kind of breaking the mold of the old way of doing things, we have to evolve our legal, our regulatory, our risk considerations, et cetera, into this new world and understand what that means for us.
Now, one of the great things, and I said one of the benefits to your previous question was that we could be 24/7 and potentially jurisdictionally, operationally agnostic on how we use this technology. But of course, the world we live in is broken up into lots of jurisdictions with their own rules and regulations. So there will be a conflict there that needs to, over time, get worked through, and all those significant players in the financial services market need to work their way through this and understand how that will evolve, and look for consistency to the degree that we can.
And then probably the other major risk from my perspective is, how do we go from old infrastructure to new infrastructure. If you try and do a big-bang approach, nobody’s going to write off their old legacy investments that they’ve made in legacy infrastructure. So I don’t see a big-bang approach.
But on the other hand, if you do an incremental approach, are you ever going to get sufficient liquidity in the new environment that people will use that versus using traditional infrastructure?
So that whole migration and transition process will be interesting to watch. And I think it’ll happen in various ways, but we need to look for some form of interoperability as we go from legacy to this newer technology over time.
Murray Bender: So you’ve touched on this a bit. But how do you see digital assets changing the asset servicing business?
Ian Sinclair: So again, if we look at the benefits but also the advantages that go with this, if we talk about real-time compression of ledgers, redefining roles and responsibilities in the financial services sector because of technology evolving in this way, then I think what we’re going to see is we are going to start seeing much more of a 24/7—and it may not be 7, it may be 24 by 5 days a week or whatever it may be—but there will be a much more focus on a global approach to how servicing of assets will
take place. And potentially even the ability to reuse assets throughout the global day in different jurisdictions because you can move things so much more quickly.
What that means, though, is that organizations are going to have to rethink operationally how they discharge that. But equally as well, it’ll start bringing in new considerations around risk, around managing your risk, et cetera, as you go through the sort of 24/7 working day. And that’s operational and it’s potentially also around things like credit, et cetera.
There will also be technology risks that we need to consider in this space. But also, you’re going to have different counterparties potentially that you’re going to be playing with as well.
And then I think the other thing just to bear in mind is that we actually do a lot of digital assets activity today. An example that I will bring is, if you look at transfer agency, which is effectively tokenizing a fund structure, we do that today. We just happen to do it on infrastructure that is not the best possible infrastructure that you can have today.
So this isn’t a revolution; this is a little bit more of an evolution. And it’s just understanding how that evolution will hold together over time.
Murray Bender: So, how is all of this going to affect institutional investors?
Ian Sinclair: So I think with investors, as they look at this, there’s a couple of things. One is that potentially, assets are available for trading at much longer time periods. So they could be available 24 hours a day, if you used a tokenized real asset that’s available on a 24/7 infrastructure.
So the question then is, from an investor perspective, how do I make my decisions about investing into that environment. Today typically you look at a—if you’re a European-focused equity investor, you look at the European working day; you make your determinations around that.
But if you’re suddenly going to get into a 24/7 environment, you’re going to have to think a little bit differently about how you assess, manage and operate your business in that degree. And to do that, you also then have to think about, how do you evolve from the sort of traditional infrastructures to these new digital infrastructures over time. And how do you get there? Do you do it all yourself? Do you work with critical partners that allow you to move over relatively seamlessly into those environments?
And how do you manage your risks around all this—your execution risk, your credit risk, your technology risk, et cetera? Again, do you do that all yourself? Or do you do that with partners?
Again, it is probable, as with anything that comes along that is net new, that we start seeing fragmentation first before we see consolidation. And I think people also have to be pretty eyes wide open about when this will all happen and when it will impact. Because I think as all things happen in the financial services world, change always happens slower than people think until it changes and then it happens incredibly rapidly. So people have to plan ahead, don’t over commit, but be ready to move once it’s time to move for your particular business.
Murray Bender: Thanks for helping us to better understand digital assets, Ian. We really appreciate your time today.
Ian Sinclair: It’s been my pleasure, Murray.
Murray Bender: For additional insights on topics relevant to corporate investors and financial institutions across the globe, including our previous podcasts, visit rbcits.com/insights.
I’m Murray Bender. Thanks for listening.
This content is provided for general information and does not constitute financial, tax, legal, or accounting advice, and should not be relied upon in that regard. Neither RBC Investor & Treasury Services nor its affiliates accepts any liability for loss or damage arising from use of the information in this podcast.