Blockchain technology has fundamentally changed the way financial institutions are exchanging value and building market infrastructure. Here’s a closer look at how this new technology is transforming capital markets and the specific benefits for a wide range of market participants
Blockchain provides significant benefits to issuers by enabling easier, cheaper, and faster access to capital through programmable digital assets and securities. New securities can be issued in minutes, with their corresponding rights and obligations encoded and automated.
The ability to program or encode terms and conditions into assets (in the case of securities issuance, for example) provides greater flexibility and customisation than ever before. Blockchain technology can streamline KYC/AML processes and provide real-time updates and analytics with a single interface for investors, increasing transparency and efficiency.
One of the key advantages of digital assets is the ability to fractionalise each asset. Digital assets can be broken into more affordable and transferable units that create an opportunity for greater liquidity and investor diversity in certain markets. Moreover, the barriers to issue an asset or security are significantly lowered, opening up greater opportunities for smaller issuers while existing issuers benefit from new markets or forms of securities. Lastly, the entire lifecycle of an asset has the potential to be automated from investor servicing to event handling in the case of dividends.
For fund managers
Fundamentally, blockchain enables the peer-to-peer trading of any asset on a verifiable ledger. Funds benefit from faster and more transparent settlement and clearing which reduces default risk or systemic risk in more opaque markets. Fees paid to third parties for services such as fund accounting and administration, transfer agency, and even custody can be reduced or eliminated through automated fund services.
Blockchain technology significantly reduces the barrier to issuing new assets or financial products. As the cost of issuance of new securities drops and the speed of issuance increases, issuers will be able to tailor new instruments to the bespoke needs of each investor. The enhanced ability to more exactly match investor desire for return, time horizon, and appetite for risk with custom digital instruments may profoundly impact the relationship between investor and issuer, creating a direct bond between capital seekers and investors. Additionally, the transparent and distributed blockchain ledger will enable more robust insights into asset quality with the potential to enhance the due diligence process.
Government agencies and regulatory organisations can benefit from a blockchain’s distributed ledger, which is transparent and verifiable at all moments of the day. The immutable nature of blockchain − meaning transaction data cannot be altered − enables regulators to automate functions such as auditing and compliance. As multiple institutions use the same blockchain network to track their holdings and asset lifecycle events, regulators will be able to devote more time to analysis and risk prediction.
Blockchain gives rise to various new digital instruments created to match investor demands. These new assets are made possible by the instantaneous and customisable nature of digital securities issuance which can be programmed to seamlessly perform different kinds of business functions.
Although there will be an explosion of financial products, most of these assets will share specific programmed standards, thereby simplifying the structuring of new financial products or instruments. The ability to issue digital assets and fractionalize existing assets will create a broader investor pool, especially as newer investors are more comfortable with the idea of owning a portfolio of digital assets.