TECH TUESDAY: Digital Assets Give CSDs New Relevance

TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.

Central securities depositories (CSDs) play an important part in the capital markets infrastructure as providers of registry, safekeeping, settlement and asset servicing. With the ever-increasing interest in digital assets, CSDs are well-positioned to expand their business model to service investors with access to digital assets and simultaneously help enhance trust and governance within these markets and networks.

Financial institutions are gradually warming up to the utility and potential of digital assets, ranging from cryptocurrencies and NFTs (non-fungible tokens) to asset-backed tokens, commodities, settlement coins and more. But firms need assurance from regulators and market infrastructure providers that participation in digital asset markets is as reliable, safe and secure as stocks, bonds and other traditional secondary markets. 

That’s where CSDs, a critical, proven and trusted component of market infrastructure, can help bridge the gap between the present and future.  

Andreas Lundell, Nasdaq Marketplace Technology

“The current ecosystem supports traditional assets in a local context, which is systemically important for the local market, attracts international investors and drives harmonization and standardization for the local market,” Andreas Lundell, Head of Product, CSD Technology, at Nasdaq Marketplace Technology, told Traders Magazine. 

Lundell continued: “The future ecosystem could incorporate digital assets, providing one platform and one point of access for multiple networks, facilitating settlement between asset and liquidity pools, as well as a consolidated view for all assets,” which spans issuance, settlement and registry of digital assets, custody of cryptocurrencies and connectivity to payment networks.

More than four in five, or 81%, of institutional investment managers, expect to increase their holdings of digital assets over a two- to five-year time horizon, according to an October 2021 State Street survey. The biggest concerns cited about the emerging asset class were cybersecurity, transparency and regulation.

CSDs can help allay those concerns, as state-of-the-art CSD technology is flexible, designed for high security standards, based on international best practices and ISO-compliant.

Aside from including digital assets service capabilities with existing infrastructure, benefits of CSDs include increased flexibility, reliability and security via the cloud, as well as new business opportunities from expanding data accessibility.    

“With the growing adoption of digital assets trading, there are several opportunities for CSDs to expand their position and scope by facilitating efficient integration of digital assets into their existing portfolios,” Lundell wrote in a May 2022 blog post co-authored by Johan Toll, Vice President, Nasdaq Marketplace Technology. “CSDs’ unique position as regulated entities operating with known rulebooks, market practices, and participant structures, as well as established market connectivity, can provide a solid foundation for them to capture mindshare in the digital assets space while supporting changing client needs, increasing wallet share and enhancing trust and governance within the overall ecosystem.” 

“CSDs hold a strong position with market participants and regulators, with trust and infrastructure built up over decades, and could potentially leverage their regulatory approvals into the DLT-based ecosystem,” the blog post stated. “They have a unique opportunity to help banks and their clients get access and tap into the digital assets space through established access points.”