The capital markets industry significantly relies on the exchange of information among market intermediaries and their legacy and hierarchical systems, leading to increased cost and processing time. Therefore, industry players are always on the lookout for advanced technology solutions to achieve cost optimization as well as process automation and simplification.
Bitcoin and virtual currencies have come into prominence recently, as open source, real-time payment infrastructure without any centralized regulatory authority. These are based on complex mathematical formulas, shared public ledgers, and cryptography. Popular with technology enthusiasts and venture capitalists, this concept has not had much resonance with banks and capital market firms yet, due to regulatory uncertainty and risks involved. However, global financial services firms are evaluating the underlying technology of Bitcoin blockchain for potential deployment in mainstream banking and capital markets.
The unique characteristics of blockchain technology that make it a potential candidate for capital markets applications are:
Design paradigm: Traditionally, market participants have had isolated ledgers that use secure financial messaging for transaction processing. Blockchain technology enables the design of a shared distributed flat ledger that can process transactions between multiple intermediaries simultaneously.
Integration mechanism: Financial institutions can post transactions directly to the shared ledger using digital signatures, thereby replacing traditionally used secure financial messaging mechanism.
Data storage mechanism: In blockchain technology, blocks comprising several transactions get appended to an existing chain. An append-only data storage mechanism like this is ideal for a shared ledger since it allows market participants to synchronize their ledgers with internal books by requesting incremental updates.
Software: Many of the current implementations of virtual currency and blockchain are open source. These open source software pieces can be further customized as per business needs, instead of opting for a greenfield solution.
When combined, the strength of these features will provide immense benefits to the industry, particularly in areas like issuance, asset servicing, trading, and clearing and settlement. Initial adoption will likely be in asset classes with less sophisticated systems in place like OTC derivatives, bonds, and startups. Blockchain technology has the potential to provide a real-time, cost-effective, and secure settlement model that is global and decentralized. Leveraging this technology for transaction processing will enable organizations to focus on strategic revenue generating activities, while reducing transaction costs, processing timelines, and systemic risks by redefining the role of intermediaries.
An in-depth exploration of this subject, potential benefits and areas of application, and related intricacies, are presented in our white paper, Blockchain Technology: Transforming Transaction Processing in Capital Markets.