Article | August 17, 2021
Powered by Ledgers: Leading Market Experts Predict How Exchange 4.0 will Digitally Transform Financial Market Infrastructure
The move to Exchange 4.0 is well underway, with profound implications for financial markets.
Forward-thinking firms are already positioning themselves for a DLT-fuelled future. But behind the buzzwords, there are lingering questions. What benefits will digitalisation bring, both to trading venues and the market participants they serve? What are the main obstacles to Exchange 4.0, whether they stem from outdated thinking or misaligned stakeholder incentives? And what sort of step-changes can we expect as digitalisation takes off?
In a recent report, Hirander Misra, Chairman and CEO of GMEX Group, and the Realization Group interviewed experts at firms pioneering the new world of crypto asset trading
Alokik Advani, Managing Partner, Fidelity International Strategic Ventures
Charles Kerrigan, Partner, CMS London
Jessica Naga, Director Responsible for Legal and Compliance, SECDEX
Anoop Nannra, Global Blockchain Segment Leader, Amazon Web Services
Nicholas Philpott, Director, Zodia
Duncan Trenholme, Head of Digital Assets, TP ICAP.
We summarise the key highlights and perspectives from virtually every stakeholder group involved in the trend towards digitalisation.
Introducing Exchange 4.0
Just as the world is experiencing a fourth industrial revolution, sometimes called 4IR, financial exchanges are beginning their own technological revolution. The 4IR concept is the driving force behind the Internet of Things, where AI and web technology combine to create smart products. A similar idea is taking hold in the world of financial market infrastructure enabled exchange trading, as DLT, smart contracts and tokenisation make it possible to facilitate true asset portability while linking far-flung liquidity centers.
But there is a great deal of confusion as to how distributed technology will change financial market infrastructure so that it can make the transition, be fit for purpose and what benefits it will bring. There are also significant roadblocks, either in terms of old-fashioned thinking or stakeholders defending their turf. Experts say it is only a matter of time before these obstacles are overcome. The first step, they say, will involve trading venues and participants developing a new mindset, one that embraces open-source practices. As Exchange 4.0 becomes better understood, and as firms move from proof of concept to bottom-line benefits, we can expect a rash of major changes. New trading centers, new products, new ways of doing business and new ways of enabling post trade are all on the way.
Creating the network effect
A growing number of exchanges and trading firms are embracing distributed ledger technology (DLT) and tokenisation, recognising a surge of interest in crypto asset trading from both retail and institutional investors. But many of the venues are replicating silo-based models and missing out on the most important lessons from the digital revolution. DLT, tokenisation and crypto asset trading offer a chance to create much larger market ecosystems by enabling participants to transact across borders more easily and by facilitating asset portability. Rather than divvying up the pie, it’s all about making the pie much larger.
“The key thing about this is asset portability,” says Hirander Misra. “If you look at marketplaces in this space, there are lots of exchanges across the world and there’s tumbleweed growing through most of them. How do you create that network effect? But then also, how do you focus on what you’re really good at?”
Misra says the problem starts with exchanges adopting a silo mentality, where they seek to service clients exclusively rather than building a more collaborative model. Trading, clearing and settlement end up being offered in a closed-in environment. “Essentially these exchanges are just pockets of their own liquidity.”
But the future could soon look very different. “You’re going to see exchanges, custodians and other services interconnect more seamlessly, with the ability to swap services and assets across jurisdictions and across different types of users to get that network effect. This is a construct that I have labelled Exchange 4.0,” Misra says.
What the Experts Expect
Provided that network effect can be created, what sort of benefits can firms look forward to? The list is long and varied.
Alokik Advani:“You have to try this in pockets of smaller assets, where it can be really efficient – private markets, alternative assets, private equity, venture capital, real estate, private debt. All of these things are obscenely inefficient. They trade like bulletin boards today. If you wanted to bring that to some level of an exchange-like infrastructure with a DLT backing and speed of clearing and settlement, it’s a revolution.”
Charles Kerrigan: “You are seeing the move towards digitalisation as a prime example of capitalism forcing change. You are talking about another wave of creative destruction. We have digitalised the front office of financial institutions – what you see as a customer – but the real benefits will come from digitalising the market infrastructure. Crypto shows how this can be done. Payments have learnt from that. Securities issuance is following. We are simply following the logic of the information economy. This is a big one.”
Hirander Misra: “With Exchange 4.0, say you’re an existing exchange and you have existing infrastructure. You may want to set up a digital exchange, but you may not want to replicate everything you have. You may not need another matching engine, you may need digital custody or you may need issuance. The thing about Exchange 4.0 is that you can combine the services you have with services others have or augment what you already have. So, you’re not beholden to creating yet another siloed infrastructure.”
Jessica Naga: “There is something to be said for the countries that take the jump and do this now fast. They will have first movers’ advantage, if they build the necessary legal framework and infrastructural ecosystem in a sustainable way. The clear advantage of technology and FinTech companies is that their business is cross border and therefore from one centre, they can service the world.”
Anoop Nannra: “We look at Exchange 4.0 and the opportunities in terms of creating digital assets on virtually any aspect of our business. I think it’s really exciting, being able to create a futures index based on real-time solar energy production. Right down to the second. You create new patterns and opportunities for liquidity to occur. Capital historically will move to the environments where liquidity is most easily had.”
Nicholas Philpott,: “The locations and the cities that succeed in the future may no longer be the same as the ones at present. It’s a much more even competition now. If you can spin up a virtual exchange with none of that physical infrastructure that opens up the possibility of some very interesting developments as far as the new trading centres of the future are concerned. You’re broadening the market across a bigger spectrum of participants. More people can have access.”
Duncan Trenholme: “It’s possible that some of the private permissioned blockchains get traction in certain areas and solve certain use cases, but over time we believe the open permission-less blockchains will eat market share. The idea of running your own distributed ledger, in a centralised manner, just misses the point of what this technology can do. It’s repeating the limitations of vertical silo’s all over again. As people do connect, they’ll increasingly experience the benefits of transacting on an open, interoperable, and programmable financial system.”
A way forward
All of this leaves traditional venues and market participants having to prepare for a wholesale change in the way they operate while still conducting business in the here and now. At the same time, scores of new exchanges have sprouted up with DLT technology and digital assets that can only be traded on one platform.
By forging the DLT-based world of the future while still servicing traditional assets in traditional ways, we will see a hybrid model which bridges the gap between digital and traditional financial market infrastructure. This will serve to eradicate the current silos and fragmentation to facilitate better portability of assets by interconnecting the whole capital markets value chain of participants, across international nodes (jurisdictions), to more easily trade, clear and settle.
Article | August 17, 2021
The effects of Coronavirus on humanity, and what it is doing to the health and well-being of those around us, is very clear. We see the devastating effect it is having on people’s lives, and the level of fear is growing each day. I do not wish to add to this with another article based on the risks posed to people if they go outside. For me, it is important to discuss ways in which life can be improved during this moment, and I hope to do just that. However, before I do, I would like to extend wishes of health, peace of mind, and give my thoughts and prayers to those who are dealing with the difficulties we are all facing together as human beings.
Article | August 17, 2021
The Fintech industry is consistently regulating itself since its inception. The industry has become a game-changer since the pandemic caused every consumer to look for convenience in daily transactions. Recent situations have created a necessity for Fintech companies to empower financial institutions as digital transactions soar to an all-time high, with the Indian Fintech sector at the forefront, contributing the highest in CAGR (Combined Annual Growth Report) globally.
According to the market research report of March 2020, Indian and Chinese markets contributed the highest in Fintech adoption rate (87 percent) out of all emerging markets worldwide. These numbers are a green signal for the industry to roll up its sleeves as market researchers expect the Fintech market to reach INR 6207.41 billion by 2025 in India.
As the Fintech world sees an all-time high upsurge, this article covers the list of 5 Fintech trends to look out for that will shape the banking industry. But before that, let's take a look at what Fintech is, and what value it can provide.
What is Fintech
Fintech is an abbreviation of Financial Technology and refers to the emerging technologies in finance that provide improved business solutions to clients, and a convenient way to transact. Fintech helps customers to interact and exchange value with businesses more efficiently.
Fintech is neither a software, nor a brand name. You can describe Fintech as a collection of technological advancements in the financial sector to ease up transactions. Fintech trends help customers do banking in a faster, smarter, and efficient way.
Fintech is on a bull run with the ongoing pandemic covering the finance industry and making users pay without wasting any time or physically being present. With Fintech, financial institutions use technologies like blockchain, artificial Intelligence, biometrics, electronic and mobile payments, etc., to make their business more efficient, helping them interact with their customers effortlessly.
New upgrades and innovations in Fintech allow businesses to integrate their financial accounts with secure mobile applications. Receiving and making payments, alerts, and tracking invoices have become swift due to this integration and allow users to undertake time-intensive activities within seconds. With the help of Fintech, you can sell or buy products and pay for them from anywhere around the world—that is how Fintech is changing the world.
5 Fintech Trends That Are Shaping the Future of Banking
Financial firms are aggressively taking on Fintech
Financial firms and banks are adding new features in their cashless transactions to fit this pandemic-hit economy. Fintech offers convenience to customers as it has multiple options to choose for cashless transactions like mobile wallets, QR codes, contactless payments, etc. It provides a speedy process for payments and digital loans and can create dynamic growth in financial services. This acceleration will continue to groom the investments until banks and Fintech become interwoven. Now, it is just a matter of time for Fintech to emerge as one of the most booming industries.
Blockchain and Big data
Although blockchain and big data are on a bull run, there are miles to go before it enjoys a major slice of the market. This full swing of blockchain and big data may disrupt if challenges like cyber-attacks and fraudulent activities don't get addressed. To help overcome these obstacles, financial services adopting blockchain technologies can utilize Fintech. This implementation will help reduce fraudulent activities, phishing, and cybercrimes while generating trust with the customers. Looking at all the advantages that Fintech offers, banks adopting blockchain technologies will benefit the most out of it.
Artificial Intelligence & Machine Learning
Additional fields where the Fintech industry has to shift its attention are AI (Artificial Intelligence) and ML (Machine Learning), where there is a lot of room for growth. Progressively, Fintech brands rely heavily on AI technologies to reduce costs and monitor transactions closely.
Experts predict AI will lower the cost of financial services up to 22 percent in the next five years. Through Machine Learning, banks can offer ease of use to their customer with speedy transactions, automated trading processes, and secure payment processing.
Providing multiple services on a Single Platform
Instead of downloading a separate app for each financial service, any customer would prefer to have a single platform that can do everything. Many banks have already taken a step to offer multiple services across one app. It may increase the cost of building such apps with powerful API integration, but soon enough, it pays off as most financial services will turn to those banks that offer 'single platform, many features' apps. Some financial institutions may not deliver this kind of app, but the Fintech industry is sufficient to meet their demands.
Fintech becoming 'the new normal.'
The Fintech industry is slowly taking a step towards the general community of consumers. As the need for secure payment processes and easy accessibility of transactions keeps increasing, so does the value of Fintech serving these demands.
Adoption of data analytics will garner a massive Fintech market in the upcoming days. According to market research experts, banks have already started providing financial services with a customized and local offering to their customers by closely watching market movements and data analytics.
What should we expect from here?
As the need to balance the demand and supply of financial transactions keeps increasing, payments and the banking sector need to keep up the speed. It is only a 'wait and watch' game to see to what extent the Fintech market grows.
Frequently Asked Questions
What is the next big thing in the Fintech industry?
AI and blockchain are the next big thing that would take over the Fintech industry by storm. Artificial Intelligence like chatbots reduce the front-desk manual work and can be available 24/7 to help the users. Blockchain provides security on every customer transaction on payment platforms.
What's new and trending in the Fintech industry?
Financial institutions are focusing on financial literacy to enhance the banking experience for users. They have more control over their expenditure and savings through innovative features of Fintech, like income and expense analytics.
What are the benefits of Fintech for banking?
Through new Fintech innovations, the Fintech industry is reaping the benefits of improved global money transfers. Here are some of the benefits banks get through Fintech:
• State-of-the-art security and compliance
• Better speed in transactions
• Enhanced transparency
• Reduced costs
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"text": "AI and blockchain are the next big thing that would take over the Fintech industry by storm. Artificial Intelligence like chatbots reduce the front-desk manual work and can be available 24/7 to help the users. Blockchain provides security on every customer transaction on payment platforms."
"name": "WHAT'S NEW AND TRENDING IN THE FINTECH INDUSTRY?",
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State-of-the-art security and compliance
Better speed in transactions
Article | August 17, 2021
What does it mean to be financially literate? Is it more important to be able to balance a checkbook or to understand the power of compound interest? Does a financially literate person pay down student debt or consumer debt first? And does a truly financially literate person even take on debt in the first place? A growing number of fintechs – many of them Finovate alums you’ll meet below – have devised innovative ways to help young people in particular, become better earners, savers, spenders, and investors.