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The foundations of the financial system as we know it today can be traced back to 14th-century Italy,[1] when double-entry bookkeeping[2] was introduced, along with nostro and vostro accounts[3] to facilitate the settlement of foreign trades across separate, independent ledgers[4].
Although today’s financial markets are highly complex and sophisticated, the fundamental practice of bookkeeping across ledgers has remained largely unchanged and continues to exert a significant influence on existing market structures. For example, at each stage of the securities life cycle, banks, brokers, information providers and other market participants play an essential role in intermediation. This complexity comes at a cost: research shows that on the whole, financial intermediation costs in advanced economies have increased since the late 1960s.[5]
In Europe, this complexity is compounded by regulatory fragmentation across the continent, resulting in the ongoing fragmentation of capital markets. For example, there are 35 different exchanges for listings and 41 exchanges for trading.[6] Some effort has been made towards integration in the post-trade sector, including through the creation of the TARGET2-Securities (T2S) platform, which can be used to transfer securities and cash between investors across Europe[7], and through common platforms used by central securities depositories (CSDs). But the lack of harmonisation in the legislative and regulatory framework regarding custody, asset servicing and tax-related processes, for example, prevents the sector from reaping the benefits and synergies that an integrated European market could bring.[8]
The European Union (EU) has taken steps to address the regulatory barriers that exist in order to create deeper and more integrated capital markets.[9] But many obstacles still remain, such as insufficient regulatory harmonisation, the absence of unified supervision[10] or the lack of a permanent safe asset and integrated banking system[11]. This has led to multiple calls for renewed efforts, including from euro area finance ministers[12], EU institutions[13] and Enrico Letta and Mario Draghi in their recent reports[14].
But there is one crucial dimension that has often been overlooked, and that is technology. My aim today is not to discuss how to create a capital markets union for traditional assets, but to discuss how to create one for digital assets from the outset....
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