A look at the continued developments of blockchain and distributed ledger technology (DLT) being applied to the capital markets industry including the key partnerships and challenges happening.
Over the past few years, the adoption of blockchain has gained significant traction across multiple industries, including capital markets. In this article, we will discuss:
- How is blockchain transforming capital markets?
- Which are the main companies applying distributed ledger technology (DLT) in capital markets?
- Which recent partnerships/developments have contributed to the capabilities of the industry players?
- What are the key challenges faced by blockchain in capital markets?
How is blockchain transforming capital markets and what are its benefits?
In a broader perspective, blockchain technology aims to decrease the role of intermediaries, cut down on transaction settlement time and its costs, improve the transparency of cryptocurrency trade, decrease friction in transactions, and improve the speed of transactions. Blockchain can provide capital markets players with asset tokenization and securitization of assets and even decrease costs for tokenization by 35% – 65% compared to traditional securitization. Asset tokenization is the process of converting real assets such as real estate, commodities, private equity shares, and physical goods into digital assets on a blockchain.
We all know of the necessity for anti-money laundering (AML) and know-your-customer (KYC) checks. Blockchain can simplify this process by cutting short lengthy reconciliation and verification processes. The emergence of blockchain technology can open doors for increased resilience, speed, and transparency in capital markets. Let us dig deep into the use cases it offers
Settlement times: Assets are traded extremely fast in the modern world, but transactions take time to get cleared and settled. The usage of blockchain brings down the time required for clearance and settlement.
Streamlining processes: Blockchain streamlines the operations across the assets’ life cycle, including investor onboarding, event handing, trade execution, and post-settlement services.
Operational improvements: Standardization is required for making processes further streamlined and improving operations. Blockchain contributes to the standardization of instruments and data formats required in blockchain trading, which in turn reduces middle and back-office processes.
Sales and trading: Sales and trading are some of the major functions of investment banking, which include buying and selling securities and other instruments. Blockchain uses mechanisms such as bilateral negotiations, centralized exchanges, decentralized exchanges, matching algorithms, and auctions to seamlessly allow digital securities to go to market.
Collateral management: Blockchain can decrease the existing redundancies in collateral management processes which slow down the entire system. It helps to get rid of manual reconciliations and physical delivery of securities. Moreover, smart contracts can boost collateral management by issuing margin calls and invoking predetermined rules for each bilateral or intermediary relationship. The creation of collateral tokens or digitalization of assets can further enhance the collateral management processes by providing real-time settlements of collateral obligations.
Custody : Custody minimizes the risk of theft or loss of financial assets, and with the help of blockchain technology and its advanced security features, assets can be secured. Blockchain is also expected to decrease costs significantly in comparison to traditional methods.
Asset servicing: Asset management refers to the administration of money and securities by financial institutions. Blockchain technology is used to automate digital security lifecycle events such as the exercise of rights and management processes, among others.
From the above use-cases, we can see how blockchain’s distributed ledger characteristics useful in the capital market.
Below, we explore some of the key players who are doing this.
What type of companies are applying DLT in capital markets?
The DLT removes most of the inadequacies prevalent in the existing capital markets infrastructure, offering a secure, highly capable, and decentralized method of organizing and sharing data. A growing number of companies are deploying DLT to streamline the process of verification of transactions and eliminate internal reconciliations. These companies use DLT to develop services such as asset tokenization, custody services, settlement services, and compliance solutions.
There are more than 200 companies operating in this space. Using the CB insights platform, we have identified the most relevant companies that are applying DLT in capital markets.