The Coexistence of Digital assets and TradFi IT Architecture opens a huge topic. Many different things are required for digital assets and TradFi to successfully coexist. The assets need to be bankable, the right technology needs to be chosen to fit your environment, and one needs to invest in one’s own staff. Sascha Ragtschaa at his latest presentation at Crypto Assets Conference 2022 in Frankfurt discusses technology, regulation and compliance, blockchain interoperability, integration with the core banking system, monitoring interfaces, and token issuance workflows. Also, the recent “Merge”, Ethereum 2.0 has driven the industry and WeOwn as well, to utilize opportunities of Ethereum for their own technology solutions and products. After focusing on the own blockchain, WeOwn has shifted to opening the product suites and integrating and supporting EVM blockchains.
What are the challenges and how can tokenised assets coexist within traditional finance?
The biggest starting point is that all assets need to be bankable. Tokens on assets need to be embedded in the administration services, reconciliation process, and reporting. Digital assets should be treated as distinct asset type and should also be reflected in the many systems and services.
As organizations introduce digital assets into existing environments, “traditional” finance teams struggle with the transition. Management needs to understand that legacy is a burden and takes a lot of time. It’s difficult to adjust and implement in a way that requires a cautious approach.
A lot of people talk about real-time clearing and settlement. In the equity space, any traditional financial institution tells that their systems work. There are no issues, it just takes some time: settlement can take anywhere from a day to two weeks, but ultimately, they work. When technology providers introduce digital assets or new technology, they must find something that doesn’t perform.
What does blockchain bring to traditional finance?
In the registry space are massive problems with reconciliation. All the systems are managed by hundreds of people. Digital assets introduction requires working with existing housekeeping backend services. To operationalize these elements, management should give the right tools to the teams. It is crucial to productise. In the digital assets space, we’re in the very early stages. All the pilots are running in silos and on multiple blockchains. Unfortunately, they’re not embedded, which means they don’t ultimately deliver business value.
Introducing a new technology: How to manage that every day?
Work with technologists and financial services experts. To tokenise certain assets, companies must understand the business environment and the domain, and the technology.
Talent investment. Blockchain skills are very rare now, and in that space, employees need to be upskilled, they need to be quite aware of what a wallet, private key, or blockchain is. Nurturing the talents and bringing them along on the journey is crucial for any new technology adoption.
Consider existing capabilities and integrate vertically and horizontally. For example, banks have a middle-layer technology solution, and digital asset capabilities and technologies should be integrated into that environment. Therefore, they need to look at the horizontal layout, the infrastructure, the data centers, and whether they want to run it as a private, public, or hybrid network.
Right technology selection. Every week a new blockchain comes out that is hyped, and many pilots are running with multiple blockchains. Enterprises should stick with one or two and follow through with the trial and try to make it productive.
Existing operations environment integration. Institutions might have a network operation center, a service desk, helper tools, and housekeeping routines – they need to integrate new systems into the existing environment and educate the staff.
In terms of regulations and compliance, how can these things coexist?
When any business leader wants to introduce new technology, dealing with the risk and compliance teams is necessary: taking them on the journey, making sure the risk and compliance team understands aligned with strategy. New measures, new certifications – all those things are helpful. It is important to provide the right monitoring and transaction tools and the right KYC / AML tools, and make teams understand that the environment is going to be very dynamic.
Germany has done well, Liechtenstein started with the Blockchain Act, and now MiCA could be around the corner, and eWpG + equity could come next year. There are a lot of changes happening at the EU level. As dynamic as technology is, so is regulation.
How this problem could be solved from a technological perspective?
WeOwn has built a crypto or digital asset gateway that connects to the core banking systems. The team has built adapters, interfaces, a messaging layer, a messaging bus that communicates with the traditional systems, and the solution is able to give reporting, data, and analytics tools to the operational teams. WeOwn has also developed monitoring interfaces that make it easier for internal teams.
In terms of the token, WeOwn provides a sophisticated registry solution for tokenized assets, customers can define parameters and data with a token to define voting right. If it’s a security token, customers can define the voting share class weighting, demographic information, and all that, and then deploy it as an ERC 20 or UC721, and it will eventually deploy to the blockchain through a smart contract assembler. WeOwn has all of this as a platform with capabilities around reporting and monitoring, that can be embedded into traditional IT infrastructure.
What are the key success factors for a combined crypto/TradFi offering?
No one knows which blockchain will win or if will there be one. As it was in the past in IT, there are multiple operating systems, and they will likely have an existence. The same is true for blockchain. If companies need liquidity when they tokenize an asset, they should probably go with a very liquid blockchain like Ethereum or another EVM-blockchain. If companies need a more private, centralised, or governed network, they can use a private network. Integration with core banking systems and traditional systems is critical. Choose the right blockchain, which is sustainable and carbon neutral. Fortunately, Ethereum 2.0 meets the criteria for the future. Flexibility is critical also, not only for the technology team, but also for the operations team, for the business team, because the environment is constantly evolving, and institutions need to be as agile as possible.