Blockchain & Capital Markets
Do you want to know what the role of blockchain in the institutional capital market is? Or what that role could be? Blockchain
can be used almost anywhere. Due to DeFi (decentralized finance), more and more people are aware that the financial industry can look completely different when blockchain is applied. This also applies to the institutional capital market.
What are the benefits of blockchain in the capital market?
There are four different parties in the capital market that could benefit from the benefits of the blockchain. These are fund managers, investors, regulators and the issuer of securities. Let's take a look at what those benefits look like for them.
Fund managers benefit from blockchain because it provides a more transparent market, which significantly reduces the risk of default. In addition, transactions can also be validated much faster. Fund managers thus have a lot less tied-up capital and can use their existing capital more efficiently.
Many processes can be automated, such as maintenance, accounting or allocation. This ensures that the transaction costs are also a lot lower or even could be eliminated.
For investors, the threshold of investing is much lower. This is because the costs to start investing are lower when the capital market takes place on the blockchain. Investors can also register themselves much more effortless. Transactions of investors make take place a lot faster than they do now. All events can be seen by everyone, allowing investors to react to these events much quicker.
Many people are not happy with regulators as they would interfere too much with the market or, on the contrary, not respond quickly enough to a crisis, for example. Because blockchain is transparent, regulators can see events much faster and therefore anticipate to them more quickly.
Since transactions that have been validated are unchangeable, regulators are able to automate functions to recognize and comply with activities. So, it saves regulators a lot of time and effort.
Blockchain also offers many opportunities and possibilities for issuers of shares and other financial products. This is because they can issue new shares faster, easier and cheaper. As investors can get in more easily, publishers can also sell their shares more easily. Thus, a whole new market will become available to issuers of shares.
By means of smart contracts, publishers can also program conditions in their shares, making shares more flexible and adapting to certain situations. This allows processes to take place more streamlined.
How can blockchain be used in the capital market?
So, there are many different parties that benefit from blockchain in the capital market. But how could blockchain play a role? If we don't know how it could, the question is whether the above parties will ever really benefit from the stated advantages.
More financial products
Blockchain offers the possibility to publish more products. There will be more products available on the market to invest in. Consider, for example, tokens. These are valuable digital products that could be traded.
It is also possible to set up digital crowdfunding so that one can raise capital more efficiently. In that case, the capital raised can be distributed more fairly among the entitled parties by means of a smart contract. When you donate, you can be sure that your money will reach the right destination.
Current collateral management processes are not exactly efficient. As a result, it is not possible to react quickly enough to market conditions, which can cause problems. Blockchain offers transparency and speed so that collateral management can be arranged much more efficiently. Smart contracts ensure that participants always adhere to the rules, which means there is less risk.
No more intermediaries needed
You usually always have to deal with an intermediary. This can be the broker, but also a notary. In the case of blockchain, no intermediary is needed anymore. Smart contracts ensure that agreements are carried out. This creates more trust between stakeholders and reduces costs.
Digital products that always have the same value are called stablecoins. For example, they are always worth 1 Euro. JP Morgan and Facebook are currently developing their own stablecoin.
These stablecoins can be used internally by companies for reconciliation and asset management across multiple LEIs within a parent company. Using your own stablecoins can benefit companies.
No more post-trade service costs
After a transaction has taken place, it is checked by institutions. This entails a lot of costs (between $ 17 billion and $ 24 billion per year). Blockchain can ensure that these processes are all automated. It increases the safety and efficiency of these processes, and also reduces costs considerably.
Now you see that blockchain can play a massive role in the institutional capital market. Many parties benefit from the advantages that blockchain brings because it can be used in many different situations. It's an evolution that coincides with the development of DeFi. Both developments are extremely important for the financial world of the future.