Finadium: Transcend, Canton, and the race to bridge TradFi and DeFi collateral

Finadium: Transcend, Canton, and the Race to Bridge TradFi and DeFi Collateral

This article originally appeared on Finadium.com.

In a further sign of the times for collateral management technology vendors, Transcend announced it’s connected to the Canton Network to support real-time mobility of tokenized assets. We examine emerging competitive dynamics as adoption of distributed ledger technology (DLT) networks grows and firms look to optimize across a hybrid world of on-chain and traditional rails.

The move expands Transcend’s strategy of supporting interoperability and collateral optimization across different venues. It positions it as a central orchestration layer for collateral and liquidity and follows initiatives by other collateral vendors such as Nasdaq to connect to the Canton Network. Transcend claims it is the only collateral platform that can connect its clients to an entire ecosystem of more than 45 central counterparties, five triparty agents and now DLT networks like Canton.

“We see a clear shift toward a hybrid financial system where traditional and decentralized models will coexist for a period of time. Transcend’s strategy is to act as the interoperability layer between these worlds, giving clients the ability to manage, optimize, and mobilize collateral seamlessly across both traditional infrastructure and emerging DLT networks.”
— Bimal Kadikar, CEO of Transcend

As more activity moves to DLT, firms will need to manage two different sets of technology, cost structures, and data formats. This includes two-way translation between systems based on real-time vs. batch settlement. And they will need to manage the fragmentation that arises as more networks emerge. In addition, they must deal with friction and latency when on and off-ramping from DLT to traditional rails. More native issuance and greater number of counterparts on chain will allow firms to deploy and stay on the DLT network rather than on- and off-ramping. But DLT infrastructure and traditional rails will need to coexist in parallel for some time. Transcend is looking to solve these issues with its connection to Canton, while also paving the way for collateral optimization across traditional and DLT rails.

A new dynamic in collateral optimization

Transcend’s move highlights a new trend in collateral technology: the ability to optimize allocation decisions across both tokenized and traditional pools. If a client holds tokenized US Treasuries on Canton alongside traditional holdings at a CSD, an optimization engine that can see and mobilize both pools will add more value. The vendor that can route a margin call to whichever pool settles fastest, cheapest, or with the least balance sheet impact will create real cost savings for users. As intraday liquidity management using DLT accelerates, collateral allocation will also become a real-time control problem rather than periodic optimization cycles, adding complexity.

Canton Network use for TradFi still in the early stages

Transcend’s announcement comes as more market participants and market infrastructures run pilots and onboard to the Canton Network. Despite this activity, we are not yet seeing much evidence beyond pilots that firms are using Canton to interoperate across different underlying DLT networks for real-world assets.

According to analytics firm rwa.xyz, all of the real-world asset volume on the Canton Network comes from Broadridge’s Distributed Ledger Repo platform. But these are “represented assets” rather than “distributed assets” on Canton, suggesting that Broadridge’s solution is using Canton as a record keeping layer rather than using the network as a distribution layer that allows on chain transfer. It therefore appears that market participants are not yet using Canton at scale to atomically settle the securities leg of a repo on one DLT network and settle the cash leg on another platform using digital cash such as JPM coin for example.

We expect this to change as more natively issued assets come on chain. DTCC has announced it will tokenize DTC-Custodied US Treasury Securities on Canton. Meanwhile, J.P. Morgan says it will natively issue its deposit token, JPM Coin, on the network. More technology vendors like Transcend connecting to Canton will also create a feedback loop where connectivity drives adoption, adoption drives liquidity, and liquidity drives further connectivity.

Transcend’s approach suggests a world where collateral is abstracted from its location and treated as a fungible resource across networks using digital twins to mobilize assets quickly and easily. In future, we may see Transcend extend this connectivity to Ethereum-based DLT networks, HQLAX R3-based infrastructure, or Fnality’s payment rail. As adoption grows, DLT connectivity and venue or settlement types of optimization might become a differentiator in a highly competitive collateral technology vendor space. Market participants should take this paradigm into account as they consider their collateral technology strategy going forward.