This is a guest opinion post from Jens Hachmeister from Deutsche Borse clear streamwhere he is Responsible for Issuer Services and New Digital Markets.

It’s hard to overstate the disruptive potential of digitization for any industry. Take the music industry for example: CD album sales in the United States are now 95 percent lower than they were at their peak in 2000. Why? Because the product has been fully digitized. The advent of mp3 and streaming has made the physical medium obsolete, providing instant access to everyone, from anywhere in the world at any time, without the risk of losing your favorite songs to a scratched CD.

Digital stocks are still relatively nascent, but they hold as much potential to change financial markets and connected business models as seen, for example, in the music industry. However, for the digitization journey to really take off in the financial industry, proper foundations are needed. In other words, the reliable, robust and scalable technical infrastructures that are now available, backed by appropriate regulatory frameworks. In addition to this, current business models will need to be reconsidered and new approaches that cater to tomorrow’s markets will need to be developed and implemented, always ensuring market stability.

rhapsody regulation

The best music streaming service would fail without a clear legal framework. No artist will want their music available if the copyright or royalty situation is unclear. The same applies to financial markets: market participants need clear rules that fit their purpose. Strong regulation underpins credibility and trust in the capital markets, as it aims to create a level playing field for all participants. European regulators have been working to create regulatory frameworks that work for various national markets as well as at the EU level (see the German Electronic Securities Act (eWpG) or the Luxembourg law on digital issuance or the Digital Finance Package of the EU (Blockchain Act II), just to name a few).

Stair to Market Adoption

Despite these positive signs from regulators providing guide rails for the market to move more freely towards digitization, we have seen relatively slow uptake of the opportunities and potentials among market participants thus far. Market readiness is key to the progress of digitalization, but while most financial institutions have expressed their intention to adopt digital securities, only 10-15% have so far begun to actively invest in the segment. .

Technology investment is expensive, especially new technology, particularly when legacy infrastructure cannot be fully retired and therefore still needs some level of investment for some time. And what’s worse: there is no guarantee of success or immediate return on investment. But in the end, what good is a streaming platform if nobody has a smartphone to play the different songs? It takes courage to tackle the long journey of digitization if your investment committee doesn’t immediately thank you for doing so. Courageous pioneers are needed who share the vision of future-proof digital markets and do not shy away from the responsibilities that come with it. The challenge is not to digitize our old processes, but to digitize the product itself: the financial instrument. At Clearstream we have been driving this development with our D7 digital post-trade platform.

As always, technology must be tailored to the needs it seeks to address or the obstacles it seeks to overcome. DLT and blockchain have been the talk of the town for a few years now, but there is no holy grail for all the industry’s problems. DLT-based systems offer a great deal of transparency, consistency, and standardization that we sorely need. But more importantly, market propositions must recognize customer needs, whether they can be solved through centralized or decentralized systems to form a digital financial ecosystem that works for all participants. Neutral market institutions, such as central securities depositories, play a crucial role in safeguarding this trust in financial markets along with the appropriate regulatory framework.

More than a technology

Technology should be a means to an end, not technology for technology’s sake. In the context of financial markets, the ultimate question of digitization must be: How can it improve the functioning of financial markets today and tomorrow and enable new products and services to be provided to the industry?

The most obvious benefit that digitization brings to the market is increased operational efficiencies, which is crucial for overall market efficiency and profitability. However, it would be myopic to stop there. Digital solutions also provide an enhanced user experience and room for new approaches, which in turn opens up possibilities for future growth and product creativity. From a business perspective, digitization enables accessibility, liquidity, and asset mobilization across the financial market ecosystem. Such efficiencies and flexibilities support the development of very new business models, as well as product and service propositions. A music streaming platform becomes more and more attractive the more styles can be found there and the greater the variety of artists adding songs and tunes to the platform.