With investment in the blockchain technology more than doubling in the recent years, interest in introducing blockchain in capital markets seems to be exploding.
The current methods and operations of capital markets are highly complex, suffer from a lack of common standards, and utilize fragmented IT and data architectures. Can blockchain in capital markets be the structural change the market needs?
What does a blockchain-based capital market look like?
A blockchain-based capital market system would be an ideal setup where a record of each security would be held with multiple levels of beneficial ownership in a single ledger, no need to operate data normalization, reconciliation of internal systems.
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Such a utopia would have standardized processes and service, shared reference data, and a near real-time and improved understanding of counterparty worthiness. Regulators would have transparent data on holdings, and many other improvements.
What are the benefits of blockchain in capital markets?
Introducing blockchain in capital markets is a massive change to the structure of these markets. The industry would want to go down this route only when it sees potential benefits of doing so. Listed below are few such benefits across pre-trade, trade, and post-trade and securities servicing.
- Transparency and verification of holdings.
- Reduced credit exposures
- Mutualization of static data
- Simpler KYC and KYCC via look through to holdings
- Secure real-time transaction matching, and immediate irrevocable settlement
- Automatic DVP on a cash ledger
- Automatic reporting and more transparent supervision for market authorities
- Higher AML standards
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- No central clearing for real-time cash transactions
- Reduced margin/collateral requirements
- Faster innovation and efficient post-trade processing
- Fungible use of assets on blockchains as collateral
- Auto-execution of smart contracts
Custody and securities servicing
- Primary issuance directly onto a blockchain
- Automation and de-duplication of servicing processes
- Richer central datasets with flat accounting hierarchies
- Common reference data
- Fund subscriptions/redemptions processed automatically on the blockchain
- Simplification of fund servicing, accounting, allocations, and administration
What are the implications of blockchain in real estate?
With such a fundamental change in the system, the role of market participants would change, profoundly impacting their business models. Here’s how.
Clients: Clients, especially on the buy side, can expect to accrue the most benefit owing to the reduction in costs of capital markets dealing and securities servicing.
Dealers: By being better at sourcing liquidity for assets or taking principal risk where liquidity is thin, dealers will still play a valuable role in the market. They will play a dominant role in price setting, advising on execution and transaction management, instead of focusing on providing market access.
Private trading companies: The near real-time settlement process introduced by blockchain in real estate will have major implications for private trading companies, especially market-makers and High Frequency Traders (HFT).
Blockchain technology will fundamentally re-architect the processes involved in capital markets, driving blockchain from experimentation to mainstream adoption. This technology would help overcome latency challenges, security concerns, and internal/external processes that are difficult to reconcile.
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About The Author:
Naveen is currently the CEO at Allerin Tech Pvt Ltd. He is a seasoned professional with more than 20 years of experience, with extensive experience in customizing open source products for cost optimizations of large scale IT deployment. Naveen is a keynote speaker and thought leader in the area of IoT solutions, Machine learning and Block Chain Technology.
Specialties: Solution Design and consultancy , Data Science, Machine Learning, Deep Learning Enterprise Application Planning, Cost Optimization and Block Chain