Blockchain Use Cases in Capital Markets

Modern economies rely heavily on capital markets, which serve as a means to exchange financial assets between investors and companies. Despite their crucial role, capital markets can be complex and involve several intermediaries, which can lead to increased costs and risks. To overcome these challenges, many players in the capital markets industry are now exploring the potential of blockchain technology. This also offers a secure and transparent way to manage financial transactions and assets and has the potential to transform the way we invest, trade, and manage financial assets.

In this blog, you will delve into some of the most promising use cases in capital markets and examine the potential impact of this technology.”

Blockchain Effects on Capital Markets

The impact of blockchain technology on capital markets could be significant, with numerous potential applications in investment banking. Use cases being explored include data sharing for Know-Your-Customer and Anti-Money Laundering compliance, trade surveillance, regulatory reporting, collateral management, trading, settlement, and clearing.

Capital market operations rely heavily on data and transactions, which are currently managed using complex and fragmented IT and data architectures that lack standardization. This leads to high costs and prolonged execution times due to the constant need for data reconciliation and duplicated processes.

Market segmentation

This indicates that the blockchain market is projected to grow at a compound annual growth rate (CAGR) of 62.4% from 2023–2030. This growth will be driven primarily by the adoption of blockchain as a service (BaaS) by enterprises. BaaS allows companies to experiment with this technology without having to invest in costly in-house resources. By incorporating Distributed Ledger Technology (DLT) into their core technologies, companies can simplify its usage, making it an attractive choice for digital transformation initiatives.

Blockchain Use Cases

Blockchain technology has the potential to revolutionize capital markets by eliminating the need for intermediaries on the buy side, sell side, and market infrastructure. This opens up a variety of potential use cases due to the complexity of current systems and intermediaries.

• Real-time trade settlements.

The current lack of a monitoring mechanism creates inherent trade default risk for trading parties, which clearinghouses currently bear. However, intermediaries lengthen trade settlement cycles. With blockchain, a smart contract located on a permissioned network can synchronize with ledger positions and perform real-time verification of traded instruments.

• Tri-party collateral management

The current system only allows for a daily evaluation of collateral positions, leading to higher collateral deposits and increased funding expenses. A blockchain-based solution uses a smart contract to encode allocation logic, with private rules being handled off-chain by a rules engine.

• Automate asset Servicing processes

Finally, blockchain technology can be used to automate asset servicing processes, including the exercise of rights and management processes. This allows for more efficient management of money and securities by financial institutions.

Path to Adoption for Capital Markets Firms

The path to the adoption of this technology in capital markets requires a gradual and incremental approach due to the complexity of the industry. To start, institutions should clearly identify use cases and assess their feasibility and cost-benefit analysis. Given the limitations of blockchain technology regarding scalability and integration with existing systems, a proof-of-concept (PoC) approach is recommended to test use cases. Innovative capabilities such as lab as a service, blockchain as a service, and crowdsourcing can be utilized to implement PoCs.

It is important to have small-scale implementations of blockchain-based applications within the next 1–2 years to establish organizational comprehension and appetite for technology applications. Within the next 3–5 years, blockchain-based applications are expected to become mainstream, and organizations with mature capabilities employing in-house and partner resources will have a competitive advantage over those that neglect to do so.

What does the Future Hold?

Looking ahead, blockchain-based technologies are expected to evolve and expand, revamping the value chains of capital markets. To fully exploit the benefits of blockchain technology, brokers, dealers, asset managers, and other related service providers must be willing to transform. The focus of this technology in the coming years should be on reducing risk, lowering expenses, and capitalizing on revenue opportunities.

Market participants, authorities, and developers must collaborate to encourage and facilitate growth. Joint efforts and partnerships will significantly shape infrastructure investment trends, and the potential for blockchain technology in the capital markets is promising.

Contact Gyan Consulting for more information.