The capital markets industry is going through profound changes in business dynamics due to regulation, technology-led market disruption, and transformed economics of core business areas. The era of digitalization has resulted in sweeping changes to the industry mindset – while many firms took nearly a decade to stabilize after the 2008 crisis, they were soon confronted with expectations of a new way of doing business as a result of the digital revolution. These new expectations meant changing norms in an industry with long-persisting issues like:
- Lengthy settlement cycles (US SEC finally enforced T+2 settlement mandate in Sept 2017 while instruments like leveraged loans still take weeks to settle trades)
- High costs of collateral after implementation of regulations like Dodd Frank, Basel III
- High transaction costs due to presence of intermediaries in payments, asset exchanges etc.
- Inefficiencies in processes like reconciliation
With the advent of Blockchain, capital markets firms already have the next level of disruption within their sights and many of the traditional challenges could well be addressed by the technology behind bitcoin. The basic functions of blockchain are:
a) Decentralized storage of the transaction/asset data across all participants
b) Immutability of data stored due to hashing principles
c) Smart contracts which can execute transactions / actions based on business rules
The benefits and impact of Blockchain could be far-reaching in capital markets across buy side, sell side, and market infrastructure with the promise of eliminating or reducing the role of intermediaries. There are several potential use-cases based on the challenges due to multiple data stores and stakeholders, intermediaries, and limitations of existing technology solutions (Figure 1).