Where Finance Finds Its Future


CBDCs are poised to administer the coup de grace to the payments business of the banks

Season 1, Ep. 110

Cross-border payments are, in the now familiar mantra of the G20, slow, expensive, opaque and inaccessible. This matters because, despite a slowdown in the rate of growth of world trade, cross-border payments are becoming more important, not less. Remittances and e-commerce are more than making up for any shortfalls in exchanges of physical goods. Consultants BCG predict the value of cross-border payments will increase from US$150 trillion in 2017 to US$250 trillion by 2027 – a two thirds increase in just a decade. As it happens, 2027 is the date set by the Financial Stability Board (FSB) for the achievement of four quantitative targets designed not only to cut the costs, increase the speed and enhance the visibility of the costs of cross-border payments but widen access to competitive cross-border payments services as well. The four targets are just one of 19 “building blocks” laid down by The Committee on Payments and Market Infrastructures (CPMI) in July 2020 as the foundations of a better, faster and cheaper cross-border payments system for the world economy. Unfortunately, the targets are also the only product of the 19 building blocks which can readily be grasped amid the miasma of surveys, analyses, consultations, task groups, workshops, liaisons, hackathons and vague but extendable deadlines which surround alleged progress in other areas. Yet fast and measurable progress is desperately needed. Cross-border payments represent a continuous and hefty toll on international trade and capital flows. Transactions can take several days, cost ten times as much as a domestic payment and devour 10 per cent of the face value of a payment. Although the work of the FSB reads as if the problem is extremely complicated – and it is, not least because of the number and range of the parties involved – the origins of this tax on commerce are now well-understood. The CPMI labels them as seven “frictions”: legacy technology; long transaction chains; funding costs; weak competition; fragmented and truncated data formats; complex compliance checks; and limited operating hours. The G20 made fixing these frictions a priority. In many jurisdictions, competition to provide cross-border payments services cannot work because cost opacity means payers cannot distinguish between the costs of different ways of paying; most domestic banks can do no better than take prices from a coterie of 15 major global banks; and non-bank service providers are denied access to the central bank real-time gross settlement (RTGS) system. Likewise, replacing laborious customer due diligence tests with digital identities is an obvious way to cut costs dramatically and speed up the processing of payments, but the FSB now seems more interested in creating centralised data utilities than in re-designing a failed procedure. Allowing assets in one jurisdiction to secure liquidity in another would not only ease cross-border payments blockages but free up resources trapped in excess liquidity buffers, but private sector initiative to solve this problem are unmentioned.

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Data provides the prices that drive activity in tokenised asset markets

Season 1, Ep. 119
Liquidity in privately managed assets is hampered by a lack of reliable and timely data about asset values. If value is hard to discern, privately managed assets are more difficult to buy and sell, harder to use as collateral and suffer from a less favourable accounting treatment. It is also difficult to develop secondary markets in which the assets can be traded. A distributed technology such as blockchain is well-adjusted to capturing, validating and then distributing data scattered across multiple databases, within as well as between institutions. It enables Inveniam to deliver the data needed to value private managed assets regularly, frequently and reliably without the need to centralise it in a single data warehouse.The data garnered by Inveniam is used by orthodox valuation agents such as Cushman & Wakefield, CBRE, Houlihan Lokey, Mercer and others to mark privately managed assets to market on behalf of their buy-side clients. The data enables the valuation agents to provide a faster, more frequent and more reliable valuation service to their clients. Where privately managed assets such as real estate, infrastructure and private equity can be marked to market daily, weekly, monthly or quarterly, by an independent third party and at low cost through the use of technology to retrieve and process data from widely distributed and highly variegated systems, two-sided markets can develop to facilitate price discovery.Accessible, reliable data improves valuations and makes two-sided markets possible, but liquidity ultimately depends on the engagement of market-makers with tokenised asset classes. They have already engaged with the cryptocurrency markets and can be expected to engage with the security token markets once issuance volumes gain sufficient momentum.The emergence of two-sided markets on blockchain-based networks will attract issuers of privately managed assets and funds invested in privately managed assets in tokenised form, because better functioning markets will lower the cost of raising and servicing capital (for example, paying dividends). Estimates indicate savings of between 20 and 50 basis points.Real estate will pioneer the tokenisation of privately managed assets in the United States because the impact of more accurate, frequent and independent valuations in reducing the capital financial institutions must allocate to the asset class is so dramatic. Similar benefits will accrue to holders of infrastructure and private equity investments as well.Reliable valuation data also cuts the cost of fund accounting or calculating the Net Asset Value (NAV) of a fund. If the cost of the NAV is borne by the fund, it lifts returns. If it is borne by the management company, it widens margins for general partners (GPs). With independent valuations, it also becomes easier to post fund units as collateral for margin loans.In the United States, the Decentralised Autonomous Organisations (DAOs) that issue tokens to raise funds and use smart contracts to service the tokens are now obtaining formal legal recognition. Three states have granted DAOs legal status and the leading jurisdiction for publicly traded corporations (Delaware) is expected to follow suit.