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Blockchain Technology in Capital Markets

Blockchain Technology in Capital Markets
November 28, 2017

Technology has been growing exponentially ever since the advent of the internet and Financial Services industry has been the stalwart in the so called tech-novation. It is the first of all industries to fully adopt process automation and reap biblical benefits with it. For instance, through migrating from UNIX to Linux platform, Chicago Mercantile Exchange doubled its daily trades in no time from 1 million to 2.2 million (2004). Various other stock exchanges like NYSE, NASDAQ others followed suit.

Even the much acclaimed digital journey converges to leveraging modern technologies like blockchain that would completely transform the way we do businesses. Blockchain, a Distributed Ledger Technology (DLT) underpins bitcoin technology and has enormous power to not only expand existing markets by reducing cost but also to create entirely new markets.

What is the need of blockchain in capital markets?

Much of the tech-novation in Capital markets is aligned to the front office. Introduction of relational database system may have eliminated the paper work to perform a security trade in the blink of an eye, but it still takes days to settle a transaction leading to the time consuming middle and back office trade. This settlement is currently managed by stock exchanges through the Central settlement authority, which is known as CCP (Central Counterparty Clearing house) in many European countries.

The DLT eliminates the need of such a central repository by settling an asset trade between the counterparties in no time. It has potential of settling millions of such transactions per second saving considerable amount of operational cost to the enterprise.

Any hack like Wannacry which attempts to update a transaction at a single node in the network has to update the same transaction in every other node in the chain to be successful. This is impossible as any such attempt will alarm all the nodes making the network foolproof for any such fraudulent transaction and exhibits enhanced security.

“Banks can save up to $20 billion per annum with adoption of DLT by 2022”Santander Innoventure

Banks can save up to $20 billion per annum with adoption of DLT by 2022”

The various other applications of blockchain in capital markets include

  • Post-trade processing – data reconciliation by creating a virtual database at every node in the value chain thus decentralizing and closing an asset transaction in real time reducing counterparty exposures
  • Payments and remittance – Peer to peer (P2P) trade with frictionless processing of transactions for both domestic payments and cross-border transactions
  • Issuance, ownership and transfer of financial instruments in real time during security trading without the need of a third party entity
  • Regulatory reporting –  blockchain repository held virtually at every node provides easy-to-assess information for regulatory purposes
  • Smart contracts – enable automatic triggering of derivatives and future contracts to be sold or bought instantaneously.

In bringing the blockchain technology live on ground rests on various factors -

 Application Program Interface (API)s

Developing open/private APIs would allow third party developers to create customized products for t FS companies, reducing time to market and the user to have easy access to the currency data from the bitcoin exchanges.

Blockchain as a service (BaaS)

Technology mammoths like IBM and Microsoft are exploring BaaS solutions through considerable investments. Ethereum BaaS by Microsoft Azure developed by Microsoft provides a pluggable cloud based architecture to corporate clients to experiment and pilot real-time blockchain use cases at lesser cost and in an easy to access development/test/production environment.

Application development

Startups like Prolitus and Oodles are leveraging the cloud BaaS platforms and open source software like Hyperledger to help businesses create PoCs and pilot specific use cases. Infosys Ltd has recently trained more than 500 of its resources in blockchain technology and has already piloted various use cases with its several customers in FS

Identity management

Major portion of the cost involved in servicing an end customer lies in the KYC which necessitates easy-to-access identity information from the application built on blockchain. This eliminates back office transaction costs like underwriting and helps companies to process transactions with very less time and the minimal cost required.

Digital content, storage and delivery

Transparent and immutable blockchain network needs a database which is decentralized and is virtually available to every partner in the network to verify and validate a business transaction.

Legacy modernization

As promising as it could be, blockchain technology adoption in the market will lead to umpteen number of business entities looking to transform their existing business landscapes thus creating a major requirement for legacy modernization. Also, integration with non-block chain systems will be the major business requirement in the near future.

The way forward…

Though the applications of blockchain technology are still in the earlier stages and will still take some time to be widely adopted in the business enterprises, the best foot forward for the service providers like HCL technologies is to collaborate with the other players in the industry, form a consortium, develop Proof of Concepts and pilot use cases in the real time environment there by leading to new business opportunities. The potential benefits of DLT are remarkable in the systems which are highly integrated and companies should tap into such business segments as soon as possible.

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