The potential applications for blockchain in the capital markets have captivated the financial services industry for the last four years and the allure is obvious: the settlement date would come on day one instead of day three, and it would streamline middle- to back-office operations, potentially saving billions in the process. Now that the industry has had the time to both test the potential and observe the limitations of blockchain technology it’s worth taking a closer look at the role of it in financial markets, specifically municipals.
That will require a deeper dive into the issue. As we read in a March 19 Bond Buyer article (“Does Blockchain Stand a Chance in the Muni Market?”), actual implementation has been slow and faces particular challenges in the muni market, but blockchain could somehow obviate the need for CUSIPs.
That is not likely. In fact, having done some viable work in the space, we are quite certain that established standards such as CUSIP will continue to play a critical role in ensuring efficient markets as blockchain initiatives proliferate.
Take, for example, CUSIP’s recent collaboration with Templum Markets, a registered broker-dealer and alternative trading system (ATS) specializing in secondary trading of digital and tokenized securities. In support of Templum’s blockchain-based trading platform, we provide CUSIPs for each digital security (or tokenized asset offering) listed. This allows Templum to bring the same functionality to the blockchain world: a common language for tracking and trading securities, as well as the standardized reference data that market participants require in their security master files.
Applying that same logic to the muni market, consider a municipal bond that has been digitized into a smart contract or smart security. A blockchain platform could efficiently execute a trade and capture ownership in an unambiguous fashion, but then what? How does an asset manager interrogate a pricing service with a smart security or run it through a portfolio accounting system? How would it be included in a regulatory filing like a 13F, which requires detailed, position-level disclosure to the SEC for all asset managers with $100 million or more under management? What would appear in a client statement from a brokerage? Market participants focused on the execution and ownership aspects of the ledger often ignore these downstream requirements, but they are essential to efficient capital markets.
Indeed, unlike the cryptocurrency space where blockchain originated, securities — digital or not — will always need to interact seamlessly with environments outside of the venue of trade execution, which, at its heart, is what blockchain provides. Setting aside the challenge of effecting corporate actions in a protocol that is supposed to be impervious to centralized editorial control, blockchain simply cannot fulfill these goals on its own. Established standards can help bridge the gap, allowing the new technology to better fulfill its promise.
Four years into the hype cycle, it’s clear that blockchain will need to evolve to meet the needs of the more traditional capital markets. The initial wave of distributed ledger technology projects, in-house labs and consortia has ebbed considerably as numerous initiatives, usually those without a rock-solid use case, have been quietly abandoned or shelved.
Whether in the municipal market or otherwise, we are confident that established standards like CUSIP are not going to be replaced by blockchain; in fact, they are essential to allowing this new technology to flourish.
Matthew Bastian is senior director, market development, at CUSIP Global Services.
