A growing number of investment banks and exchanges are experimenting with usage of the blockchain solutions and distributed ledger technology (DLT), according to GreySpark Partners.
The global capital markets consulting firm says that more than 30 banks are experimenting with blockchain for a variety of purposes
The report, entitled The Blockchain: Capital Markets Use Cases, highlights how these experiments are supported by software applications being developed by a raft of US and European financial technology start-up companies and how usage of the blockchain by banks is poised to increase in the future as applications for DLT become more widespread.
The report explores seven capital markets use cases for the blockchain, specifically: payments and remittance uses; know-your-client or anti-money laundering (AML) uses; digitised financial instruments; regulatory reporting; clearing and settlement uses; reconciliation uses; and smart contracts.
While the applications for DLT within each use case are equally valid, the research suggests some of the use cases have proven stronger than others as offerings capable of either disrupting or replacing the use of existing trade lifecycle technology systems and processes within banks and financial markets infrastructure providers like clearinghouses and exchanges.
However, despite the transformative potential of these blockchain applications, the report finds banks and buyside firms approaching their adoption slowly because of the cultural shifts that their usage within the trading lifecycle would entail.
The report’s authors believe that success for fintech companies in developing capital markets uses for the blockchain will depend on the willingness of banks and financial institutions (FIs) to adapt their markets infrastructure-facing software so that it can operate on a distributed, shared basis, spanning a potentially limitless number of approved counterparties and settlement agents.
“Blockchain and distributed ledger technology, while representing a promising alternative to existing financial markets infrastructure, presents two challenges that banks and other financial institutions must consider before deciding whether its use is applicable within their businesses.,” said Camron Miraftab, GreySpark analyst consultant and report co-author.
“First, scalability issues must be resolved. These scalability issues are related to the trade-off that exists between the current level of transaction throughput-capacity offered by blockchain protocols, and the size of real-world transaction values and volumes. This trade-off is specifically pertinent in the use of smart contracts, wherein large-size transactions are not yet possible.
“Second, despite the recent creation of industry consortiums such as the R3 initiative that are designed to develop blockchain applications for real-world use, there will inevitably be winners and losers among the fintech companies competing with each other to develop an optimal capital markets DLT infrastructure or protocol.”
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