Blockchain meets the ups and downs of money

In the article “Welcome, Bitcoin” we tried to provide an insight into the birth of the Blockchain as the underpinning technology that allowed the cryptocurrency Bitcoin to become a reality. Today we move outside the Bitcoin sphere to examine the potential applications of Blockchain Capital Markets.

Financial companies are increasingly being presented with inefficiencies, which include slow responsiveness to competition from Fintech and InsureTech innovators, a centralized system that makes data management an overly-articulated task and exposes firms to cyber threats and system failures. The potential benefits that the Blockchain could bring in Capital Markets can be identified depending on the trading phase of the assets involved:

• Data Management: each firm operating in the Capital Markets has its own way of holding information in custody. Indeed, there is a lack of common architectures to gather information on financial accounts, which easily turns into setbacks when organising data across firms. The Blockchain could allow the sharing of account information on a common distributed ledger, standardising processes and removing costs and loss of time deriving from the need to synchronise internal systems. For instance, the issuance of new assets might be registered directly onto the blockchain, which would allow for more transparency and eliminate the need for multiple levels of custody (brokers, sell-side banks, custodians etc.). Even implying less privacy for individual companies, who seem to be hesitant about showing their client’s information, the sharing of data would increase transparency, allowing both companies in easing the retrieval of data needed and regulators in enforcing industry controls
• Real time transactions: by storing all information and recording transactions onto a distributed ledger, exchanges of value can be verified in nearly real time and it would be easier to ensure that both parties involved in the deal have the right means to complete the exchange.
• Automation: firms could take advantage of the Blockchain smart contracts to automate the process of settling trading positions. Information such as face value and maturity date could be embedded in coding-based contracts to automate the execution of transactions. For instance, a contract for a certain asset can be instructed so that it can automatically compute an asset’s price at maturity and proceed with its payment

In the end, the application of the Blockchain is going to lead to a significant rise in trade volume as investors become increasingly connected. With lower costs, lower times and lower risks, trading has never been easier .

“If you want to dig deeper into the topic and understand also the potential setbacks that the application of Blockchain might encounter in Capital Markets, read this report released by Euroclear in collaboration with Oliver Wyman": https://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2016/feb/BlockChain-In-Capital-Markets.pdf