Financial and Monetary Systems

Safety by design: Lessons in mainstreaming digital assets with resilience

A diagram of decentralized blockchain nodes: Fintech innovation can aid financial market infrastructures with safety by design embedded.

Fintech innovation can aid financial market infrastructures with safety by design embedded. Image: Unsplash/GuerrillaBuzz

Valérie Urbain
Chief Executive Officer, Euroclear
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Financial and Monetary Systems

  • Successful integration of new financial technologies, such as tokenized assets and digital currencies, requires effective public-private partnerships to ensure safety by design.
  • Financial market infrastructure, such as distributed ledger technologies, requires alignment with regulatory standards and market needs.
  • Partnerships between fintech firms and established financial market infrastructures are crucial for innovation, effective operation and resilient systems.

Not long after the inception of the locomotive railway were railway inspectors brought in to monitor its safety and new features such as signalling and sealed windows were introduced to prevent accidents.

Train transport had a transformational impact on the economy and society and the adoption of this new infrastructure soon required stringent standards and proper government oversight.

This dynamic is not unique. Transformative innovations often follow a similar trajectory as new technology is shaped by societal forces and progressively embedded, based on commercial attractiveness and often, the catalyzing influence of the state.

As the eminent innovation scholar Carlota Perez writes, “The space of the technologically possible is much greater than that of the economically profitable and socially acceptable.” Inventions like the steam engine are deployed and diffused because of an economic logic; regulatory responses occur mainly when system-wide risks and the public’s welfare are at stake.

A resilient future financial system

As central banks, development banks and market participants explore the potential of tokenized financial assets and central bank digital currency, Euroclear – as a financial market infrastructure – is working with these clients towards the co-creation of tomorrow’s financial system – one that’s open, inclusive, efficient and resilient.

Trust and confidence in financial markets are essential, particularly in the context of evolving and escalating threats, cybersecurity not least among them. For global markets to function, infrastructure must be secure, scalable and interoperable – without these features, fragmentation and attendant risks to market integrity and financial stability inevitably arise.

Whether in generative AI, quantum computing, or other fields, responsibly adopting technology at scale while the pace of innovation accelerates is a challenge. Here is what we have learnt about safety by design and how.

Have you read?

Digital transformation in financial market infrastructure

Much like in financial markets, timing is everything. As an infrastructure, Euroclear must bring stakeholders on an innovation journey; launching an elegant solution too early can prevent a great product from finding its market. In the case of distributed ledger technology, we participated in several experiments and proof-of-concept exercises before launching our Digital Securities Issuance platform in 2023.

In devising this platform – part of a multi-year journey as we further focus on efficiency benefits for the ecosystem – we assimilated the lessons of the past and feedback from clients, particularly concerning requirements for legal and regulatory certainty and market liquidity.

We have consequently built distributed ledger issuance rails that comply with European Union regulatory requirements and English securities law. We have also devised a means to ensure liquidity according to a hybrid model underpinned by traditional secondary markets and collateral management practices.

As governments contemplate the next-generation financial system, it’s clear that the way forward must involve as much a spirit of endeavour as ‘safety by design.’

Valérie Urbain, Chief Business Officer, Euroclear Group

Public-private collaboration

Now, we are enabling multilateral agencies such as the World Bank and Asian Infrastructure Investment Bank to issue bonds on-chain and working with governments across Europe to help them understand how their debt management programmes can benefit from innovation in the secure and resilient environment they expect.

This public-private collaboration is at the heart of cross-border financial market infrastructure, which relies on a combination of commercially-orientated innovation and state and intergovernmental frameworks to succeed. Still, the adoption of distributed ledgers and associated technologies is occurring slowly and piecemeal.

As an infrastructure, we see convening participants to understand factors holding the market back and develop remedies as part of our contribution to the overall ecosystem. These remedies often revolve around standard-setting, interoperability and achieving high confidence in asset protection. That is why we have partnered with other international financial market infrastructures – DTCC and Clearstream – "to advance the digital asset era together."

Fintech and financial market infrastructure partnership

Clearly, 21st-century innovation does not happen in a silo and we hugely admire the agility and creativity that the fintech community brings to innovation in our sector. So, we work with innovative incumbents and emerging players to add value to the system. Sometimes, this means an acquisition or strategic partnership; other times, we go to fintechs as vendors when they offer market-leading solutions that we require.

In line with our vision to act as a catalyst in transforming the financial industry, we look forward to continuing our work to plug more and more fintech apps into our ecosystem. The partnership between fintech and financial market infrastructure is potent as our network, expertise and reach can set off a hockey stick trajectory for product adoption.

This approach is well-established in the retail marketplace environment; in wholesale financial markets, the pace of change is slower but would be profound at the inflection point. As governments contemplate the next-generation financial system, it’s clear that the way forward must involve as much a spirit of endeavour as “safety by design.”

An optimal approach strikes a balance between the enabling frameworks of the state, the resilience and protection of financial market infrastructure, and openness to various innovations that add value to the financial markets. It is our collective responsibility to get this right so that markets can continue enabling citizens and businesses to manage their risks so the rails of capital can keep the global economy motoring more effectively.

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