Are Capital Markets Ready To Embrace Blockchain?

capital market

Since Its inception in 2008 as a framework for bitcoin, Blockchain technology has seen tremendous growth in other lines of work. The technology’s ability to be decentralized, immutable, and a perfect ledger has made the diversification possible. The technology can be used to do simple things such as keeping records and complex ones such as controlling autonomous vehicles. Blockchain and other technologies are sure the future of many fields more than the capital market.

Meanwhile, capital markets are being forced to rethink their strategies in the face of these technological advancements. For the longest time, there has been a need for a technological renovation with a real-time solution to challenges sweeping across the financial market.  From risk management operations, better management of financial institutions to meeting the customer’s needs that have evolved with time. 

This is where blockchain comes in. The distributed ledger technology will enable immutable data storage and tracking records that will save on costs tremendously for banks while doing away with the traditional manual processes. By this, blockchain will boost value-added activities and better risk management operations.

Besides, blockchain does not only update passive data entries across digital records but also supports ‘smart contracts’. These are peer-to-peer computer protocols used to facilitate, verify, or enforce the performance of the contract. In simpler terms, smart contracts allow a group of independent parties to share data sources which are automatically and securely reconciled between participants; perfect for a complex system such as those in the capital markets. This kind of automation can come in handy in processes such as payment instructions and moving of collateral funds.

Looking at things on the ground, capital markets have a lot in their hands and with the rapidly changing financial landscape, there is a need for a technological revolution. Attempts by traditional players in the financial sector to digitalize operations have been made with the primary aim being reduced operational costs. During an event by the International Capital Markets Association, ICMA, stakeholders in the capital market discussed the topic of blockchain technology and other emerging technologies in capital markets. 

It is evident, in the following ways, that blockchain can and should be integrated into the Capital market.

1.    Digital banking and Fintechs

The introduction of digital banking has enhanced the user experience in sending and receiving payments compared to the traditional manual processes involved. One can attest to the revolutionary growth that came with the internet in the field of commerce in the 90’s, and more developments have been made since then. With more advanced technologies, much more can be achieved. Blockchain-based organizations are actually thriving in the digital banking sector. 

Fintechs have managed to come up with mobile banking Apps and peer-to-peer payment methods that have improved customers experience in a considerable way. Contrary to the standard banks, they come with lower transaction costs, advanced technology, and better public offerings. These provisions have seen fintechs such as Stripe make billions of dollars yearly in online transactions.

2.    Startups on blockchain

There have been a rapidly growing number of capital market startups based on blockchain technology in the recent past. These startups have contributed significantly to growth in the financial market, attracting the attention of the International Capital Markets Association, ICMA. In one of their events, some blockchain-based startups were invited to share on the role of blockchain and other modern technologies in the debt capital market.

Apparently, these startups have been scaling up the hierarchy in the financial world. For instance, research reported that several London-based startups  are using the blockchain technology to establish inroads into the capital market processes. Besides that, 13 blockchain companies obtained over $65 million in funding in 2019 alone.

These startups have managed to do away with the cumbersome manual legal system that most retail banks currently have. Adoption of these blockchain-based startups strategies by banks’ infrastructure will realize tremendous growth in the capital market.

The capital market has a handful of challenges that can be done away by employing blockchain technology. Blockchain will realize

High-speed transactions

With the changing time, one would expect to receive services in the quickest means possible. However, it is saddening how making transactions with retail banks can take days to clear and settle. This is a niche that blockchain, through the adoption of a cryptocurrency token, can fill. 

Transactions involving cryptocurrencies happens in a blink of an eye: the digital assets are transferred from one individual to another, transaction verified and recorded in the blockchain. 

Reduction in systemic risk

Lenders are always facing risks such as negative interest rates, volatility in equities and commodities, and weaknesses in collateralized loan obligations.

Blockchain-based apps can help lenders with managing these risks through a permissioned blockchain database. Such a database allows one to track the live flow of funds, thus doing away with manual processes to ensure profitability and risk management.

It is logical to think that because blockchain-based transactions require pre-funding of trade, credit and liquidity risk would be practically eliminated.

Secure Transactions

One unique feature about blockchain as a technology is its immutability. The network uses an advanced type of encryption known as cryptography. With the encryption in place, no one can tamper with a record of a transaction after it is registered in the network. Also, the fact that it’s a distributed ledger is security enough; all the participants in the network will be alerted in case a breach happens. 

One of the major challenges that face the capital market is corruption and fraud: integration of blockchain will help in reducing these case

Effective operations through streaming information

Institutions in capital markets can be categorically placed under firms that perform different functions for a single goal.  For instance, with banks having several complex operations to run, consolidation of data for effective operations such as auditing is necessary and currently hard.

With blockchain distributed ledger features, there will be no need for the current middle and back-office processes in the market. Blockchain will consolidate all the database, streamlining information flow. This will, in turn, eliminate tedious manual processes of legacy systems, thus increasing profitability.  Also, blockchain’s immutable feature will cushion risks and shocks posed by external shocks and pressures, eliminating loopholes that might bring down the profit.

Moreover, blockchain can significantly boost value-added activities by streamlining the information flow on capital market transactions to be accessed by relevant market participants.  However, precautions should be enforced for the blockchain projects applied in capital markets: security should be a top priority to prevent unauthorized access among market participants.

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