The Polish Capital Market (r)evolution. “Our system was ahead of its time”

Shares or bonds whose ownership can be transferred 24 hours a day, 365 days a year, transactions settled instantly, and the infrastructure based on blockchain technology—this isn't fantasy, but a solution being developed by the National Depository for Securities. We spoke with Michał Krystkiewicz and Rafał Wawrzyniak from KDPW about the details of the CSDonDLT project.

The Polish Capital Market (r)evolution.

/ Shutterstock

The National Depository for Securities (KDPW) began experimenting with blockchain in 2017, when it was primarily associated with bitcoin, which the National Bank of Poland (NBP) and the Polish Financial Supervision Authority (KNF) had warned against. How did KDPW see this as an opportunity?

Michał Krystkiewicz, KDPW: 2017 truly marked the first global use of blockchain technology for purposes other than Bitcoin or cryptocurrencies. We were one of the pioneers among traditional financial market infrastructure institutions. Going back a step, to 2016, we began examining this technology and its potential uses beyond transactional and speculative purposes. We examined the very foundation of Bitcoin: a distributed and decentralized database.

What really caught our attention, as a contrast to the traditional structure of capital market infrastructure, was the sharing of a single, immutable general ledger. This represents a paradigm shift in the functioning of capital or financial markets – not within separate, centralized systems, but rather a system shared by all stakeholders that ensures security, immutability, and transparency.

Rafał Wawrzyniak, KDPW: It's also important to mention that this initial phase was our discussions with the Council of Custodian Banks, and we recognized the concern that this technology could, in a sense, eliminate intermediaries—institutions such as banks, brokerage houses, and even KDPW. It was determined that the most appropriate institution to offer something was one that builds market infrastructure, and that is precisely what KDPW is.

Hence, we took this challenge very seriously and decided to act in this area by conducting a dialogue with the market. It was still quite amusing at the time, because some people, hearing that we were beginning to experiment with blockchain technology, asked if the National Depository for Securities (KDPW) would now buy power plants, because, as we know, Bitcoin is based on an energy-intensive proof-of-work algorithm. Those were the early days, but we already knew this could be one of those technologies that would change things significantly.

The first blockchain project implemented by KDPW was eVoting. How does this solution work and who uses it?

Michał Krystkiewicz: Speaking of managing general meetings and the eVoting system, today every general meeting of a joint-stock company in Poland whose shares are deposited with the National Depository for Securities (KDPW) is registered on a blockchain. This is crucial not only for tracking changes to a specific meeting's documentation—such as the announcement, agenda, or draft resolutions—but also for ensuring transparency, data integrity, and auditability of the entire process.

When it comes to remote participation of shareholders or their proxies in general meetings, some companies have been using this option since 2019, although there aren't many of them yet. National regulations regarding general meetings aren't clear enough to ensure companies can hold a general meeting solely remotely using a system like eVoting. However, there are pioneers who are already adopting this approach. Others are taking a hybrid approach. However, most companies still only allow physical participation at the general meeting location. I believe our system was ahead of its time, and its popularity and widespread use are still ahead of us.

Rafał Wawrzyniak: There's been a recent discussion in Poland about recounting votes in general elections. There's no need for that here, because votes are cast and counted indisputably. That's one advantage of this solution. The second is that the act of voting itself can be shifted to the investor's contact with the entity managing their securities account. In the future, this could work in a way that allows for both share purchases and voting at the general meeting from a single interface. This hasn't been achieved yet, but blockchain technology makes it possible – the collaboration of multiple stakeholders within a single general ledger.

What is KDPW's latest blockchain initiative, CSDonDLT?

Rafał Wawrzyniak: What we plan to offer with this solution is the introduction of an additional distributed layer as an extension of the current capital market infrastructure. We assume that all market participants will participate in this distributed layer, and it will be a system serving the entire market. Its effect, for now limited to the OTC market, will be a service for atomic transaction execution and settlement 24/7/365, meaning instantaneous, even when market participants' traditional systems are unavailable.

We're talking about the possibility of settling transactions in securities currently deposited with the National Depository for Securities (KDPW). Transferring them to this layer wouldn't require any changes from the issuers who introduce them. This isn't about introducing securities in any special form, but about transferring them to the DLT layer, i.e., the blockchain, which would be decided by their holder, who could freely conclude transactions using this solution.

Michał Krystkiewicz: Perhaps a few words about why we even undertook this project. First of all, we've been observing investor capital flows for many years. A recent report shows that over 18% of adult Poles invest in cryptocurrencies, compared to approximately 7% who hold securities accounts. It's therefore quite obvious that capital that could flow into the traditional capital market is flowing into the crypto market.

The second trend we're observing is the convergence of these two worlds at the European and global levels. Investors should be able to freely decide where their capital flows. This should be as simple as possible. CSDonDLT is our response to these trends—an attempt to gain a national foothold in the context of building a bridge between the worlds of traditional finance and decentralized finance. This opens up a wide range of possibilities for the future and positions the domestic capital market in a strong position.

Rafał Wawrzyniak: What Michał said is the crux of the matter. The number of Poles investing in cryptocurrencies is constantly and dynamically growing, while the same trend isn't visible in the traditional market. This shows that these are two distinct groups of investors. People investing in cryptocurrencies speak of a lower barrier to entry. They understand the mechanism based on distributed ledgers and the importance of owning assets in their digital wallets. Such a settlement system layer, in quotation marks “speaking their language,” could allow them to build portfolios not only in cryptocurrencies but also in traditional financial assets.

So do I understand correctly that ordinary investors will be able to transfer their shares to the blockchain and, for example, freely exchange them?

Michał Krystkiewicz: Stocks, bonds, and any assets that will be admitted to this distributed layer with the ability to settle transactions at any time from anywhere in the world—regardless of the availability of the traditional layer, which, as we know, operates within specific timeframes. Investors will have full control over their assets and access to these assets, although we certainly don't rule out the custodial model of traditional investment firms or banks.

Rafał Wawrzyniak: To understand the underlying mechanism, let's use the analogy we used for a digital wallet on the blockchain and a traditional account. We're effectively linking these two entities, meaning an address on the DLT network is a separate functionality of a securities account. It's the same world, but represented in a different layer. As KDPW, we view records on the DLT layer as consistent with our deposit account register. Therefore, this isn't a mapping or secondary tokenization of assets. It's simply an extension of the traditional system to include a distributed space, which we treat consistently with the traditional layer.

The nodes of this infrastructure will be KDPW participants, for example brokerage houses, which will also be able to build their own services on it in the future?

Rafał Wawrzyniak: That's our assumption. The network will reach its full potential when it's distributed, because otherwise it wouldn't differ much from traditional systems. Therefore, our assumption is that brokerage houses, banks, and financial institutions that maintain investors' securities accounts will join it.

We also view this more broadly in the context of market interoperability, or the “Savings and Investment Union.” This could be a good mechanism for expanding the offering of securities available on the Polish market, but also for building connections between depositories across the European Union. Currently, we envision the network being created by domestic entities, i.e., KDPW participants, but we're not limiting ourselves to this area—we think more broadly that it could be a component of greater market integration.

Michał Krystkiewicz: Exactly. Our approach aligns perfectly with how the European Central Bank envisions the future capital market infrastructure in Europe, namely a shared, distributed ecosystem. Our idea is, of course, a contrast to what we saw just a few years ago, when blockchain was at the peak of its “hype.” Back then, each institution had its own blockchain, leading to a proliferation of centralized blockchains, which completely defeats the purpose or idea of this technology. We intend to disperse the network among our national participants, while interoperability in a European context is also one of our principles.

Has the KDPW initiative already been discussed at the EU level?

Michał Krystkiewicz: Today I learned that our initiative will appear in a document soon to be published by the European Association of Central Securities Depositories. The document will address central depositories as pillars of innovation in the capital market. One of the flagship projects mentioned there is CSDonDLT, implemented by the National Depository.

Rafał Wawrzyniak: As an infrastructure institution committed to reaching the market with concrete results, not empty slogans, we have been working internally for a long time, building a coherent concept we are confident in. The White Paper we published two weeks ago is a relatively recent document in this context. In it, we described how we want to implement it. It's not only a broad business vision, but also a detailed description of all processes, their implementation, and technical operation. We believe this is a significant contribution to the discussion. It will take some time to resonate widely, but it was quickly noticed by the relevant European Union bodies.

How long will it take to complete this project?

Rafał Wawrzyniak: At the National Depository, we currently have a PoC (Proof of Concept) solution built. We are in the internal testing and integration phase with our traditional system. The distributed layer must integrate seamlessly and stably with existing solutions, as we don't want to change them. Our goal is to maintain current functionalities for the entire market, enriching them only with a new layer, rather than reshaping the entire market. We have meetings with our participants coming up. These will be both bilateral and group discussions, aimed at encouraging collaboration and demonstrating what it could look like.

The success of this project will depend on critical mass, meaning at least a few entities participating in the production solution. We assume this will require building certain competencies on the part of our participants. Full production launch and enabling investors to actually use the solution in a production environment will take some time. However, we hope to create a production MVP (Minimum Viable Product) next year.

The second area we're exploring is access to digital money and the possibility of building not only transactions related to paper flows but also atomic settlement with a monetary layer. So, there are several threads, but I hope we'll be able to see this project and “touch” production, at least on a limited scale, by the end of next year. That's our goal.

What would this digital money be and how would it work?

Rafał Wawrzyniak: We assumed we were talking about blockchain money represented as a MiCA-compliant stablecoin. The idea that this money should be available to multiple services led us to think that it might not be possible to build this on a single distributed network. Perhaps there will be other networks dedicated to digital money, such as public networks.

We currently assume that such digital money will appear within private networks only for market participants. However, money, by its very nature, should be used for exchange for any goods. Therefore, the concept we have presented assumes interoperability. We have entered into an agreement with StaBillon, part of the Billon Group, and are currently detailing the implementation and integration of the solutions.

Michał Krystkiewicz: Again, a bit of history. Our initial assumptions for the CSDonDLT project included the presence of digital money within our solution. This would ensure full atomicity in the exchange of securities for payment, but from an investor and liquidity management perspective, the investor would have to dedicate a portion of their liquidity to the system offered by the Polish capital market. Where money is generally available within external systems, there's no need to fragment this liquidity. However, our solution and other services must be able to ensure that payments are only made if assets in the securities network also flow, and vice versa. This is about adhering to the DvP principle, i.e., delivery versus payment.

That's why we're collaborating with StaBillon. It's the first and only electronic money institution in Poland to receive a license from the Polish Financial Supervision Authority in 2019 and, since 2021, has been issuing electronic money denominated in several European currencies, including the Polish złoty. Since the MiCA regulations came into effect, electronic money can be treated as a token. This allows for the internationalization of this means of payment and its expansion to public networks, opening up many exciting prospects for our project.

This means that a real revolution may occur in the capital market.

Michał Krystkiewicz: We say it's more of an evolution than a revolution, and that's how we want to see it—innovation is a continuous process. As a capital market infrastructure, we want these innovations to be responsible. We see blockchain as a natural next step in the development of markets, both operationally and technologically.

Rafał Wawrzyniak: However, if we're talking about a revolution, one interesting thing could happen. If we finally manage to integrate with a network that will provide legal stablecoins (for example, for the Polish złoty), and this stablecoin functions in both the crypto world and the world of traditional finance, it's possible that an investor moving from cryptocurrencies to this digital currency could immediately exchange it for, for example, shares of a company. From this perspective, it's a form of revolution, but as Michał said, we view innovation as a continuous, evolutionary process.

Michał Krystkiewicz: Speaking of this revolution, we can indeed imagine scenarios in which a crypto investor, while also holding traditional assets within the KDPW system, uses them as collateral for transactions executed in decentralized ecosystems. This is already a truly revolutionary direction, but since we're letting our imaginations run wild, why not? It's possible.

Finally, it's worth mentioning that the solution we're building is based on the Hyperledger Besu environment, an Ethereum client, bringing us technologically closer to public cryptoasset networks. We utilize the Ethereum Virtual Machine (EVM) and smart contract standards known from the Ethereum network, based on the Proof of Authority (PoA) mechanism. This technology choice aims to lower the barrier to entry for market participants, minimizing the technological and skills gap, making it easier for them to join the network.

Rafał Wawrzyniak is CTO and Managing Director for IT at the National Depository for Securities. He is responsible for the technological strategy and development of IT solutions within the KDPW Capital Group. With over two decades of experience in the financial sector, he specializes in the design and implementation of advanced IT systems, both in infrastructure and software architecture.

He has extensive experience in developing solutions based on blockchain technology and decentralized DLT registries. He shares his knowledge as an expert in blockchain studies organized by the Warsaw School of Economics. He actively participates in the digitization and automation of business processes, with a particular focus on paperless strategies and innovative operating models for capital market infrastructure.

A graduate of the Lodz University of Technology with degrees in computer science and electronics and telecommunications, he also completed an Executive MBA at the Institute of Economics of the Polish Academy of Sciences.

Michał Krystkiewicz is Head of the Innovation and Business Development Team at the National Depository for Securities. He is an expert in new technologies, standardization, and process automation, with particular emphasis on their application in the transformation of capital markets infrastructure. He leads research and development projects involving the use of blockchain technology in modernizing operational processes and developing modern market models. For over a decade, he has been involved in initiatives implementing international operational and communication standards in the Polish market. He is a member of international working groups at the ECB, SMPG, ECSDA, SWIFT, and ISO. Before joining KDPW, he worked at Deloitte Advisory. He is a graduate of the Danish Ingeniørhøjskolen, the Lodz University of Technology, and the Leon Kozminski Academy.

Sourse

No votes yet.
Please wait...

Leave a Reply

Your email address will not be published. Required fields are marked *