When HSBC’s Rajeev Tummala first  appeared on Metaco Talks in October 2021, he made a bold prediction: all assets would eventually be programmable and reside on distributed ledgers. While that view may no longer appear as radical in light of recent institutional adoption of blockchain technology, we have yet to achieve mainstream adoption at scale.

As Tummala, the Head of Digital & Data (Asia & MENA) at HSBC’s Securities Services business, explained during his return to Metaco Talks in January 2024, this will set the stage for a paradigm shift for the financial industry, in much the same way that widespread adoption of smartphones laid the groundwork to reimagine how we live, work and interact with the world.

Three steps to reimagination

According to Tummala, the first step towards a paradigm shift for reimaging a business is transitioning existing processes onto new infrastructure. So, for example, he believes computer  mainframes offered an “incremental” shift but not a “paradigm” shift. It was, however, the  “graphical user interface” that transformed consumers’ interaction with technology, giving rise to the personal computing revolution and, ultimately, a paradigm shift.

Enabled by this type of new infrastructure, we saw the transformation of service delivery – for example, displaying real-time updates on when taxis will arrive or managing demand using surge pricing. Then came the reimagination of the business itself, with the introduction of the smartphone, leading to the paradigm shift for transportation represented by modern ride-hailing apps.

The financial industry has entered the transition phase of its own reimagination journey, but because it is highly regulated, the pace of transformation might be slower than in other industries. That makes timing the arrival of a new  paradigm shift for financial services harder to predict.

“I can’t say whether it’ll be five years from now or seven or ten, but it’s going to be an exciting phase,” said Tummala.

When it does arrive, reimagination will result in a step change in efficient and productivity.

One of the “reimagination applications” Tummala is most excited about is “affordable diversity.” Essentially, this refers to the ability for investors to spread their portfolios across a much broader range of assets at much smaller ticket sizes than currently possible. And that also implies democratized access to new asset classes for smaller investors. For example, “I could invest $50 into a private equity fund, $50 into S&P 500, and $50 into something else that specializes in emerging digital assets.”

No longer hype

Despite all the fanfare surrounding digital assets , institutional investment in tokenization infrastructure is becoming a reality and gathering momentum. Tummala pointed out that previous hype had come with a “silver lining”, establishing the capacity to implement the technology. For example, banks now benefit from an abundance of relevant talent.

At first, it may be just a case of tokenizing the $100 trillion-plus worth of existing traditional assets, opening the door to a host of as-yet-unimagined possibilities.

The industry “recognizes the potential of this particular technology and the efficiencies it can bring,” said Tummala. “More importantly, it enables accessibility to assets. You don’t need to go out and create a new algorithmic asset. You can take the traditional asset and, owing to efficiencies, you can begin to trade small tickets.”

The reimagination phase will kick off once the infrastructure becomes commoditized, said Tummala. “We have seen significant upgrades to the infrastructure, but it is still looked upon as a specialty infrastructure.”

Another current limitation is that the infrastructure does not yet support the full asset lifecycle. The introduction of software libraries on blockchain to support the full asset lifecycle would mark an important milestone in commoditization of the infrastructure. That could well be hastened when the US market moves to T+1 in May, increasing the urgency for quicker, more efficient settlement.

Averting fragmented liquidity

As adoption grows, the need for standardization and interoperability will become more pressing to prevent fracturing liquidity. To that end, public blockchains could serve as a vital interoperability layer, Tummala suggested, establishing the scale and critical mass of users necessary to support a paradigm shift.

Activity on permissioned or private blockchains has helped the industry become comfortable with the technology – especially in light of the lack of regulatory clarity about public blockchains. While institutions could continue performing many sensitive internal operations on private chains, they should prepare themselves to interface with others via public blockchains, which constitute “a utility that’s not controlled by anyone,” as Tummala put it.

“We have to get comfortable with infrastructure that is not owned by anyone, that is truly distributed. That’s something that not all of us are yet comfortable with in the ecosystem. That’s primarily where the choke points are right now.”

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