The securities services arm of Standard Chartered has a three-pronged strategy for adopting blockchain. Its first product is a DLT-based transfer agency system that’s already live. The second offering, a solution for digital asset custody, is onboarding initial clients. It’s currently working on the third planned step of tokenizatio, including financing and collateral.
Speaking during the SIBOS banking event, Ying-Ying Tan, Global Head of product management for the division, said the new transfer agency system is 60% more efficient than the legacy one, meaning that it is already profitable.
When we first published this note, we overlooked that Standard Chartered didn’t build the transfer agency system from scratch, they partnered with Deutsche Börse owned FundsDLT.
A DLT transfer agency system
Transfer agents are responsible for recording the beneficial owners that invest in funds. “Transfer agency in the fund industry is known to be very high cost, very laborious, and it’s not a product that you can sell on a standalone basis. You attach it to other fund products like accounting services,” said Ms Tan. In some countries you have to provide transfer agent services in order to land contracts for other fund management business.
The goal was to replace the legacy system with a DLT platform that was more cost efficient. So far it is live in five countries with another two planning to roll out soon. With a 60% reduction in costs, the solution is now profitable.
While the initial objective was purely to save costs, the bank is considering whether you could now change the industry model and sell it as a solution because it’s so cost effective.
“That gives us some good learnings in terms of how we can make DLT a much more pervasive topic. How do we do the sales process within our own ecosystem to get more people to come along with us on the journey?” said Ms Tan.
The timing of the transfer agency launch was also fortuitous. The UAE was chosen as the first location, shortly before the country changed the fund management rules. One of the new UAE requirements is that the funds have to be locally domiciled before they invest outwards, requiring a local registrar. Rather than launching a legacy infrastructure, it made sense to start from scratch with the DLT system. The solution allowed Standard Chartered to stand out.
Digital asset custody
On the digital asset custody side, the challenge was making the internal business case. Cost savings are easier to estimate because they’re within the bank’s control. Revenues are harder to predict because of the dependencies on clients, ecosystems and even the regulator. Taking into account the regulatory approval process, the journey took longer than anticipated.
Stepping back, Ms Tan bemoaned many industry participants who are creating new silos. “Everyone one is building their own fantastic aeroplane, but everybody forgot that actually the plane can’t land because the runway is too short,” said Ms Tan. In order to create secondary markets, there needs to be an ecosystem with enough participants that are up to speed.
Meanwhile, Standard Chartered divides DLT projects into enablers versus those that unlock an ecosystem. While the transfer agency system might now be commercialized, the original plan was to create a utility for internal use. So the ecosystem aspect was lower priority. Digital asset custody partly works standalone, but also needs ecosystem connectivity. However, for tokenization and particularly secondary markets, it’s all about building an ecosystem.
Funding tokenization redemptions
In walking through some of the product oriented issues for tokenization, Ms Tan stumbled across an issue raised in the recent Financial Stability Board paper on tokenization – redemption. Today fund tokenization tends to involve digital twins. Often the conventional fund shares are tokenized and fund redemptions usually happen once a day.
With tokenization and 24/7 real time redemptions, who finances the timing difference between the redemption request and the normal once a day redemption? We previously raised a similar issue with stablecoins and some of the public blockchain money market funds.
Update: added that the transfer agency system is based on FundsDLT
