Blockchain: Architecting Capital Market Arena

Capital Markets CIO Outlook | Friday, October 16, 2020

Capital markets are adopting blockchain technology to obtain smarter and more streamlined procedures to perform capital planning and risk management, which changes the way market participants purchase or sell equity and debt instruments.     

FREMONT, CA: Blockchain has become a much-talked subject, and the way in which financial institutions communicate with each other and how trades are processed and resolved is anticipated to have an enormous effect. The technology is expected to settle transactions more quickly and safely, with its peer-to-peer interaction in the blockchain network and cryptographic security. In the cryptocurrency room, the subject of Security Tokens is increasingly common. Security Tokens, hailed to be the future of the capital markets and vilified as a new wave of ICOs and pyramid schemes by others. With this, it can be difficult to discern whether safety tokens are the real thing. Here is an overview of the present landscape of capital markets, and the 'how' behind Security Tokens and blockchain technology as a whole can transform investment as we understand it.

Initial Offering

When firms want to issue an Initial Public Offering (IPO), they must first discover an investment bank to support their offer. This method could take weeks, months, or years in itself depending on how appealing the proposal to the underwriting Solution is. Several of these inefficiencies disappear with the use of Security Tokens, but the overall system remains the same. A Security Token would be the perfect way to improve the IPO process by making new offers in the form of a compatible digital token. The Security Tokens would enable for transparency and holding verification, which in turn would reduce loan risk associated with certain investments, simplify the Know Your Customer (KYC) process, and decrease the number of intermediaries engaged.

Secondary Trading

The same issues about property still stay in secondary trading. Participants in the secondary sector include brokers, exchanges, central safety depository, clearinghouses, and custodian banks. Security tokens and the introduction of blockchain into secondary markets would provide transparent real-time information that could reconcile conflicts between counterparties and permit selective disclosure of trusted data to pre-trade counterparties, enhancing general transparency in secondary market trading. Also, Security Tokens would reduce the amount of duplication, and hence the risks and costs associated with it, as each party can view the ledger and no longer has to keep their records.

Settlements and Clearing

Typically, custodian banks are outsourced to manage the real assets held and traded. Balances must be reconciled across a complicated global financial network at these custodian banks, each with its own ledger. Transactions take days to settle due to all the trades confirming back and forth and reconciling the ledgers of all. Security tokens and blockchain technology can eliminate intermediaries in these transactions. Trades performed using blockchain technology integrated with the property eliminate the need for post-trade confirmation with central clearing owing to enhanced transparency. There would be no need for a central clearing authority, and there would be near-real-time transactions. Also, smart contracts could pay dividends and purchase inventory through a code, lowering the operating burden associated with holding securities.

It should be noted that some of the advantages of blockchain technology can be achieved without effectively applying it, but blockchain makes it simpler to attain these advantages. Blockchain has the potential and serves universal recognition and implementation. Exciting times are ahead, demanding smart, sustainable, and result-driven strategies.

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