Despoina Koutentaki: Could you start by telling us a little about your role and the research you’re currently undertaking at State Street Global Advisors?

Elliot Hentov: I lead macro policy research at State Street Global Advisors, and our work primarily focuses on traditional macro and policy drivers relevant to financial markets. However, we recognise that the evolution of digital assets has significant implications for the financial industry, so we’re currently conducting research to better understand the systemic changes that are likely to occur as a result of blockchain and other digital
innovations. This relates first and foremost to the trading and settlement vehicle, be that stablecoins or CBDCs one day. But commercially, we are most excited by the prospects for tokenisation, custody, and fund administration.

DK: What is the outlook for digital assets on the buy side?

EH: As an industry, we can’t simply jump in and focus on our preferred digital assets, such as those with the highest margin. Instead, we need to ensure that the financial architecture aligns with regulatory and prudential requirements. This means that we need to address basic infrastructure questions such as custody, settlement, and clearing before we can fully
embrace digital assets.

Regulators need to commit to standards and best practices before we can proceed with confidence. We are now finally arriving at a regulatory inflection point. In Europe, draft regulation is likely to take force in 2024, several other financial centres (e.g., UK and Singapore) also have advanced the regulatory framework – and this will facilitate actual digital market making where the buy side can use its traditional strengths.

DK: What advice can you give to the buy side who are interested in investing in digital assets?

EH: Custodial arrangements are critical to any digital asset strategy. We need to ensure that solutions work not just 99% of the time, but 100% of the time. It’s also important to understand that the distribution of fees will be affected by tokenisation, which will erode some high-margin businesses that have benefited from high barriers to entry. In terms of implementation, I would caution that the operational challenge is not only complex, but
differs from the traditional skill set found in our industry. Consequently, there is a need to bring in talent from other fields, not just from other areas of finance.

DK: What excites you the most in this area?

EH: Tokenisation seems to be the most attractive value proposition for the buy-side industry, as it expands the total potential market. However, it’s important to understand that this will have a distributional effect on fees. High-margin businesses that have benefited from high barriers to entry will be eroded, which will result in a more level playing field. At the same
time, tokenisation holds the promise of a much-expanded market by lowering the barriers to entry for smaller retail investors. That growth should probably outweigh any margin compression in the process and thus the industry should collaborate to enable the growth of new well-functioning markets.

DK: What are the prospects for regulatory clarity?

EH: I believe that regulators will rely on existing financial regulation wherever possible. In instances where digital assets mimic existing financial products, regulation will be faster and more coherent. However, in other instances, it may take many years for regulatory clarity to emerge. We can see in current drafts that regulators are largely adopting a proportionate
and risk-based approach to digital assets, but with a greater focus on the most liquid assets and the ones most similar to conventional financial products.

DK: Finally, what regions do you believe look most promising for the industry?

EH: Surprisingly, developments in the US are stalling, which presents an opportunity for the rest of the world to advance more quickly in this space. As a regulatory superpower, the EU draft of MiCA (the regulatory package) could help anchor global norms. At the same time, the UK, many Gulf states and Singapore are also providing government support to the industry. I do not believe this can dislodge the US from its leadership role, but will increase pressure inside the US to accelerate a predictable policy framework.