Euroclear/Fnality: tokenised stocks and bonds have clear advantages

Mass mobilisation is needed for any successful revolution. On Monday, Euroclear added a little extra weight to the movement to bring new digital assets into the mainstream. The clearing giant is investing in Fnality, a payments consortium whose members include Nasdaq and UBS. The deal paves the way for financial institutions to clear and settle dealings in digital securities using a distributed ledger system.

Euroclear, in common with other traditional finance institutions, cannot afford to get left behind as digital assets are used more widely. Blockchain-based securities could supplant the conventional stocks and bonds Euroclear handles. They may feature as proxies for the latter as well as outright alternatives.

Existing systems of clearing and settlement involve verification by a centralised body that are both time consuming and costly for participants. Proponents say that it, in contrast, it should be possible to settle large volumes of digital asset transactions using blockchain technology in real time, much faster and more cheaply.

Nearly instantaneous transactions clearly bring benefits. But the biggest savings could come from reductions in cash liquidity requirements for participants. Using synthetic central bank digital currencies, another potential development, would enable this change. This reduces the financing strain and cost for banks on either side of transactions and in theory lowers overall financial stress from funds tied up in the system.

Euroclear settled almost a quadrillion (1,000 trillion) euros of securities transactions last year. It has chosen Fnality for a reason. Set up in 2019, the payments company already has the backing of some of Europe’s largest banks, including Barclays and Santander.

Regulated assets are currently a tiny part of decentralised finance, which is dominated by cryptocurrencies and non-fungible tokens. That is slowly changing as regulators bring tokenised equities and bonds into their jurisdictions. Volumes are currently small but they could account for over a quarter of listed trading volumes by 2030, according to analysts at Quinlan & Associates. That is too big an opportunity — or risk — for established infrastructure providers to overlook.

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