Q&A with Patrick Campos, Chief Strategy Officer at Securrency.

We're hearing growing concerns about market liquidity. Some Goldman Sachs strategists have been voicing that supply of liquidity has been poor, with top-of-book market depth in several places "close to its worst levels in five years." Firstly set the scene for us: What is happening in the markets, and why does it matter?

"Sure thing, and great to be speaking with you. This boils down to market turbulence and emergency intervention. We've seen interest rates rising rapidly, triggering some unexpected liquidity events. One example of this has been the problems associated with leveraged debt in the UK pension sphere. Low liquidity impacts everyone. From the institutional perspective, you can expect high transaction fees and difficulty trading. It's also going to get harder to extract value from assets. It cripples efficiency, and ultimately, it's bad for the entire financial ecosystem, as we've seen recently."

Addressing liquidity concerns is almost, by definition, reactionary. How do we react better?

"Over the years, we have seen reactionary chains of liquidity events in the bond, treasury, and leveraged instruments markets where governments have had to implement emergency measures to protect financial markets. Some examples that come to mind are UK gilts, mortgage-backed securities (MBS), treasuries, and German bonds. As you correctly note, until now, this has been reactionary - but that's changing. The combination of tokenization and distributed ledger technology (DLT), a form of blockchain, means that, for the first time in history, we are capable of developing the tools needed to evolve past this reactionary cycle. We can now get greater visibility into the ownership, composition, and tracking of complex assets like mortgage-backed securities and leveraged debt instruments. Alongside this, we can also use tokenization to embed intelligence into assets. So it's a two-pronged approach: transparency and visibility on the one hand and intelligence on the other.

One way we like to think about this is analogous to how we've improved the global supply-chain system. As a product journeys from the distribution center to its final destination, we attach smart trackers that tell us where the package is, who possesses it, and what rules it has to oblige by at any given moment. Through advancements in tokenization and DLT, we can similarly make assets smart, while tracking where those assets are, who holds them, ownership history, as well as jurisdictional regulation - all in real-time."

Distributed Ledger Technology (DLT) advocates might argue that it can bring added transparency into capital markets. How does this increased transparency help, and what do you see as the knock-on benefits for the financial system at large?

"It's really about combining real-time insights with blockchain-based verifiability. This idea that we can have access to real-time information and data is absolutely key. By tokenizing assets and representing those assets on DLT, we can track ownership of complex financial instruments and investments as they are combined, collateralized, or resold. This newfound transparency into the owners' size, value, and exposures is giving institutions and investors a better understanding of the risk they are taking. It's important to consider that this engineered transparency also gives investors insight into potential Ponzi schemes, rug pulls, and all sorts of other issues that result in people losing money. Another area in which tokenization and DLT can improve the overall health of our capital markets system is through identity verification. Cross-referencing a full history of asset ownership and issuance adds a quality check to the data investors can now expect.

What's exciting is that this work is already taking place. By inserting the systems and intelligence into the assets themselves, we're working with large institutions to tokenize assets with embedded compliance rules, just like the supply-chain example, that will prevent that same over-collateralization that has led to some of those global liquidity events. By having a single control location that knows the complete list of asset owners and their architectures at all times, we can now eliminate the constant reconciliation of systems that are crippled by interoperability issues.

Can Decentralized Finance (DeFi) be trusted to boost liquidity on a global scale? On the one hand, this is extraordinary technology, but on the other, the space has been known for its volatility.

“This is a really important question as it gets to the core of recent innovation in the digital assets space. The answer to this question is 'yes,' but also that there are key differences in the approaches one can take when they think of DeFi. We see this remarkable technology as a tool to secure a compliance-first approach. Think about an asset that exists in a global set of competing systems and rules. At present, it's complicated to trade on a global scale. Tokenization allows us to rethink the relationship between assets and systems. Until now, assets have existed in those systems, but by flipping that relationship and placing the system into the asset, we can make that asset smart. That means we can embed compliance rules as well as track ownership at a level previously unimaginable. You can examine mortgage-backed securities (MBS) as an example: By the time an MBS has been bundled, collateralized, and resold, investors may need more visibility into what they are holding or, as a result, the risk they're taking on. Tokenization is transforming this process, giving investors new capabilities for inspection and analysis. When you combine that with blockchain technology that brings heightened levels of verifiability, you're left with a very powerful combination. Embedding this intelligence into our capital markets will help solve some of the liquidity constraints currently faced by society. If we don't, we will keep running into the same issues, particularly when we consider how complex financial instruments are becoming. This is the future.

It's also true that with heightened volatility comes heightened interest from global regulators. From the regulatory perspective, DeFi and regulation can and must coexist. This technology allows us to bring institutional standards to DeFi innovation. Much of that conversation today focuses on crypto, which, to be sure, is a volatile form of asset. More importantly, the culture of innovation in the DeFi and crypto spaces will transform the traditional finance sphere through newly unlocked efficiency, speed, compliance, and verifiability as applied to traditional asset classes. There is a lot of work still to be done to educate investors, institutions, and the wider public on how this process will impact the wider financial ecosystem, but it's less about doing something radically new and more about using this remarkable technology stack to iron out inefficiencies in the capital markets system."

What's next for the industry, and how does it use this technology to move forward?

"I think we will initially see the tokenization of real-world assets (RWAs). This unlocks entirely new asset classes and really speaks to this rapid evolution in how tokenization will transform traditional finance and ultimately form the foundation of tomorrow's capital markets. From there, we will see a new ability for atomic settlement between financial institutions, as tokenization dis-intermediates middle and back office functionality. That, in turn, will create a global liquidity network that, ultimately, will lead to more financial freedom for all."