Securities such as shares and bonds have been long established centre-pieces of global economies for many years. The markets operate on multiple levels, with primary markets available for the initial issuing of securities and release to purchasers, and secondary markets enabling those securities to be subsequently traded between investors.
The application of blockchain and distributed ledger technology to capital market transactions has become a hot topic, given the numerous ways in which blockchain technology could prove beneficial to such transactions. Particular areas of note include:
- Data management: the ability to store and update data is central to capital markets transactions. Financial institutions typically have their own reference data systems which must be kept up to date and are not always consistent amongst institutions. Major banks have already begun considering ways in which distributed ledger technology can simply reference data processes and increase data consistency across the industry.
- Smart contracts and asset issuance: the extent to which smart contracts may replace existing market infrastructure (e.g., clearinghouses) remains to be seen. What is clear is that smart contract technology can assist with the process of enabling transactions, cutting down on inefficiencies in back-office systems and registries.
- Transaction verification and clearing: combined with data management and smart contract initiatives, distributed ledger technology can enable the simultaneous execution and settlement of trades. Ownership of the traded asset could be verified instantly, and legal title could be transferred immediately upon execution of the trade.
There is significant scope for change in capital markets with the introduction of distributed ledger technology. It remains to be seen which initiatives will be accepted and developed by stakeholders in the existing market infrastructure. For now, research is still being carried out to assess the benefits and risks associated with distributed ledger technology and how this aligns with capital markets around the world.