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BLOCKCHAIN APPLICATIONS IN CAPITAL MARKETS AND TRADE: THE WAY TO SUCCESS

Arguably no technology has been such a disruptive innovation since the advent of the internet as blockchain technology. This concept that has flooded the world of capital markets and trade is most known for being the technology underpinning the infamous Bitcoin. And as such, it has generated a huge amount of interest.

Blockchain (or distributed ledgers, as it is alternatively called) revolutionizes the approach to data management and sharing and is offered as a solution to cover many of the inefficiencies afflicting the industry.

Bitcoin technology presents itself as the pledge for a new digital currency architecture, where all capital market participants can work from common datasets, close to real-time, with supporting operations being streamlined to their maximum value or cut down altogether.

According to the “Blockchain in Capital Markets” report from February 2016, the technology has brought together an impressive number of experts in Fintech start-ups, incumbent market infrastructure providers and banks to brainstorm and suggest innovative approaches to the potential use of the technology. And, even given that the transition from today’s system to a fully-fledged technological paradigm will be time consuming, with lots of obstacles to overcome on the way of adoption and implementation, the benefits may still be more impressive.

Two of the industries where blockchain technology is expected to cause the greatest positive change are capital markets and trade.

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(source: letstalkpayments.com)

What problems in these industries does blockchain technology handle?

One of the most important assets of blockchain technology that the capital market segment expects is creating a shared flat ledger that will enable the processing of transactions between multiple intermediaries. Basically this will cut down on the cost and time per transaction, as well as facilitate the real-time transfer of assets.

Another crucial segment of capital markets where blockchain technology is able to cause change is client onboarding & account maintenance. The cost of a central issue – knowing your customer or KYC – is very high. Therefore, a huge number of companies across the world are looking for ways to reduce KYC costs and eliminate the number of KYC checks. As blockchain technology is capable of storing and facilitating KYC data, it can find its successful implementation in cost reduction and reducing the number of KYC checks, both demanding a huge amount of resources otherwise.  

With a number of companies involved and the potential for enormous cost cuts and yearned-for compliance benefits, blockchain technology is sure to find plenty of devotees in capital markets and trade.

While the technology is still relatively raw, businesses need to keep an eye on it. Blockchain has all of the necessary potential to evolve into the revolutionizing power capable of transforming the banking system, by cutting out securities depositories and central clearing, as well as reducing settlements delays.

The process has been developing rather steadily since late 2015 when Goldman Sachs introduced a patent application for a cryptocurrency settlement system – SETLcoin which is expected to offer quick execution and settlement of trades including stocks and bonds.

As reported by the company, “This decentralized, cryptography-based solution cuts out the middleman. It has the potential to redefine transactions and the back office of a multitude of different industries.

Also, as reported by the Financial Times, the specified “cutting out the middleman” can save lots of financial resources, adding up to a predicted $20 billion annual value.

These benefits have been noted and widely followed by one of the industry giants, McKinsey & Company. One thing the company certainly agrees with is that blockchain technology could actually revolutionize the world’s economy, trade and capital markets. This viewpoint has been extensively weighed in on by Don Tapscott, the author of Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World, in the scope of a recent interview with Rik Kirkland, McKinsey Publishing’s senior managing editor.

Blockchain technology does no longer seem weird and untrustworthy, as huge corporations take the route to study its benefits and potential and implement it for a number of capital market segments.

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(source: thomsonreuters.com)

While McKinsey’s report “Capital markets and investment banking 2016: Time for tough choices and bold actions” still introduces that the technology needs to be refined, the idea is that capital markets and trade are likely to begin enjoying the whole set of benefits within a short period of time.

“In the coming years, blockchain technology could deliver a broad range of benefits — including faster clearing and settlement, ledger consolidation, consolidated audit trail, reduction in systemic risk and operational improvements — to firms across the capital markets industry, from clearinghouses and exchanges to prime brokers and banks.”

As reported by Nasdaq, the benefits of implementing blockchain technology for segments of capital market could lead to significant financial benefits:

  • In over-the-counter (OTC) derivatives, blockchain could save companies $4 billion to $7 billion by means of lowering counterparty risk and operational costs;
  • Blockchain’s potential for streamlined operations, instant settlement and better visibility could reduce counterparty risk capital costs in half, bringing them down from $4 billion to $2 billion;
  • The potential for better collateral management could save from $500 million to $1 billion;
  • Streamlined client onboarding, trade processing and settlement that Blockchain technology enables in the back and middle office could save $1 billion to $2 billion.

Even given all the change required for the smooth transition of blockchain technology, it clearly enables success and brings forward benefits across pre-trade, trade, post-trade and securities servicing.

  • Pre-trade

Blockchain technology ensures transparency and verification of holdings, reduction in credit exposures, simpler know-your-customer and mutual statistic data;

  • Trade

On this level, blockchain technology ensures more secure, real-time transaction matching with quick irrevocable settlement. It automates DVP on a cash ledger, reporting and enables more transparent supervision for market authorities;

  • Post-trade

In this respect it removes the need for central clearing for real-time cash transactions, reducing collateral requirements. Blockchain technology enables faster novation and efficient post-trade processing, as well as mutually interchangeable use of assets on blockchains as collateral and automatic execution of smart contracts;

  • Custody and securities servicing

The technology enables primary issuance directly onto a blockchain, common reference data, automated servicing processes and fund subscriptions/redemptions,  more abundant central datasets with flat accounting hierarchies, simplification of fund servicing, accounting, allocations and administration.

All of these benefits, matched with the predictions by industry giants put blockchain technology on the “watchlist” of businesses as a surefire way to future success. Today, this technology should be considered as part of the plan of improving businesses in the trade and capital markets segments, and the new path to success for the businesses that want to embrace change.

In conclusion, while blockchain is still a very recent technology, it holds tremendous promise for revolutionizing the trade and capital market industries, facilitating greater transparency, less transactional delays, and cost savings.



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