Major Benefits of Blockchain in Capital Markets

Major Benefits of Blockchain in Capital Markets

Capital Markets CIO Outlook | Monday, July 19, 2021

From transactions to trading and settlement, it appears that Blockchain will play a significant role in the future architecture of capital markets.

Fremont, CA: Blockchain, also referred to as Distributed Ledger Technology (DLT), is one of the most discussed technological innovations nowadays. It can also create the underlying mechanism for Bitcoin, but various industries are using it, including capital markets.

The key technologies of blockchain/DLT technology differ by industry. Still, they all share one thing in common: the promise of a decentralized, immutable, stable, and consistent method of data organization and sharing. On the other hand, Blockchain does not necessarily update passive data entries through digital documents that require correction. It also allows for the development of sophisticated smart contracts.

However, potential improvements of technology are apparent in a complex system like capital markets, where transactions include buyer, seller, broker, clearing, settlement, and sometimes external parties like liquidity providers and regulators. Let's see few notable benefits of Blockchain. 

Benefits of blockchain/DLT in capital markets

  • Settlement times 

Resources are being traded in the blink of an eye thanks to new digital trading architecture. However, clearing and settling these transactions can take days. The time it takes to do so is cut in half with a blockchain settlement solution. A cryptocurrency 'token' that serves as a proxy for the transaction will be transferred to the beneficiary's wallet almost instantly, verifying the ledger update and constituting it.

  • Streamlining processes

In streamlining processes, institutions and other distinct organizations perform various roles in a single process involving a single data set brought into practice through databases. The unified data model, which is also suitable for reporting, would aid in meeting regulatory requirements. 

  • Reduction in systemic risk

Credit and liquidity risk is dealt with; with blockchain-based transactions by reducing systemic risk, which entails pre-funding of a trade.

  • Operational improvements

Many of the existing middle and back-office processes in capital markets will become obsolete due to the standardization of instruments and data formats required by blockchain trading.

  • Reducing costs

All of the efficiencies mentioned above can result in cost savings.

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