Blockchain technology has been seen as one of the most disruptive innovations since the invention of the Internet. As a result, the financial industry has also started to leverage it to store and transfer its value to other financial instruments. Capital Markets is one such industry in the financial space where industry experts are optimistic about using blockchain technology.
But what is the burning problem that needs to be resolved using blockchain technology?
1. For the movement of assets from one institution to another, the ledger balances of these assets have to move. This is a cumbersome job. In addition, the involvement of more intermediaries in the transaction results in the exchange of more messages. This again results in the updation of more ledgers. Several intermediaries are involved in a trade, like exchanges, central counterparties (CCPs), central securities depositories (CSDs), brokers, custodians, and investment managers. For correct accounting and to complete the business transaction, intermediaries need to update their respective ledgers based on the messages exchanged between them. This essentially means that every time a transaction happens, additional messaging needs to be done. This creates a delay and also additional cost. Sometimes, to enable a particular transaction and the corresponding ledger updates, intermediaries may need to complete a few additional ledger transfers in the form of realignment, securities borrowing, or cash management. This introduces additional delays in the transaction lifecycle and is usually referred to as a settlement cycle in capital markets (represented as T+n days, where T represents the transaction date and n represents the number of days taken for the transaction to be settled).
The use of blockchain technology for creating a shared flat ledger to process transactions between multiple intermediaries is the most crucial thing the capital market segment expects. The technical solution will help in reducing the time and costs involved in a transaction. In addition, the solution will also be capable of facilitating the real-time transfer of assets.
Financial institutions can build a shared flat ledger using blockchain technology that trusted processing nodes can manage. Using digital signatures, financial intermediaries can update the ledger to complete a business transaction. The shared ledger needs to be encrypted to protect the confidentiality of the data. Key processes involved in executing a trade like security issuance, trading, clearing, and settlement can be redesigned and simplified using such a solution. LTP feels that this use case of blockchain technology will be the first thing that companies operating in the capital market segment would like to implement.
2. Client onboarding & account maintenance is the next segment in capital markets where we will witness the surge of blockchain technology. KYC costs are very high. Reducing the KYC cost and eliminating the number of KYC checks is what companies worldwide are looking for. A blockchain system that stores and facilitates KYC data can be implemented that will help reduce costs and eliminate the number of KYC checks. Blockchain startups that focus on improving identity management are already in the business.
Blockchain technology can be used as open-source software to customize and tailor business rules for transaction processing based on organizational requirements. Areas like over-the-counter (OTC) derivatives and bonds trading will immensely benefit through blockchain technology. Blockchain technology can provide a real-time, cost-effective, and secure settlement model that is global and decentralized. So it’s just a matter of time before we watch blockchain play an imperative role in capital markets.
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