The funds industry will not reap the transformational benefits of digital assets until it addresses two fundamental challenges – the ability to scale and a lack of interoperability.

This is the headline finding from a white paper produced by financial market infrastructures (FMIs) – Euroclear, Clearstream and the Depository Trust and Clearing Corporation (DTCC).

The paper, Advancing the Digital Asset Era, calls for more industry collaboration to solve these challenges.

It highlights fragmented standards, varying regulation, limited integrations with institutional-grade payment rails and siloed liquid as “liming factors to the further digitalisation of global financial markets”.

While the paper points to an increased number of digital assets initiatives, it also references the small scale of these deployments that have resulted in isolated pools of liquidity on proprietary blockchains, creating obstacles to growth.

For example, in 2023, almost three quarters (74%) of DLT projects in the capital markets sector had fewer than six participants.

Furthermore, most of the digital asset initiatives are highly disparate with different approaches to settlement, custody, governance and supervision.

Unsurprisingly the paper highlights the role that FMIs can play as “well-regulated, neutral players to provide trust, resilience and standardised connectivity”.

It also hails what it refers to as a “unique collaboration” between the three FMIs that will “drive digital asset adoption”.

In some ways the paper reflects how established FMIs have modified their position on blockchain technology and digital assets over the years, from an initial wariness to the current advocacy.

However, it also shows how slow progress has been given that the same points about a lack of coordination and a need for more collaboration were made back in 2016.

A white paper from the DTCC back in 2016 stated: “The industry hype and research into this new platform has been unprecedented but also generally uncoordinated up to this point. As a result, the industry is at risk of repeating the past and creating countless new siloed solutions based on different standards and with significant reconciliation challenges – essentially a new system with the same challenges we face today. To avoid this, the industry should engage in a collaborative rearchitecture of core processes and practices to ensure standardisation.”

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