Study pinpoints blockchain success in capital markets

A study into blockchain technologies for international capital markets participants outlines how they can best be harnessed for success over the next few years.

The discussion paper, entitled ‘Four scenarios for Blockchain in Capital Markets’, is issued by Australia’s GBST, the securities transaction and online trading technology provider and was developed with Australia’s digital innovator Data61.

The paper tracks the ongoing benefits of ‘digital disruption’, identifies the importance of distributed ledger technology and smart contracts to potentially reduce inefficiencies and costs, while creating new market infrastructure capable of challenging traditional capital markets operators.

GBST adds that publication follows a recent push by global consortiums to establish common standards for blockchain technology and further encourage its use across the wider financial services industry.

“At one end of the spectrum, blockchain technologies are being proposed to completely rebuild capital markets infrastructure and at the other end, blockchain will simply replace legacy technology in use by clearing houses and central securities depositories (CSDs),” said Nick Clarke, executive manager – institutional product management, GBST.

“We place these opportunities into context and analyse what these outcomes could mean for current market participants.”

“In each case, features such as agreed consensus, redundancy and smart contracts will have varying benefits for our industry and need to be weighed against the cost of implementing each model. Collaboration with regulators and industry agreement on operational models will be key.”

Four scenarios

GBST adds that it has discussed use case scenarios for blockchain with its global clients. Its research has shortlisted four varied scenarios including technology replacement; the extensible ledger; a new global clearing and settlement infrastructure and peer-to-peer (P2P) finance – or what it terms ‘uber finance’.

Each scenario outlines the potential advantages and limitations of the introduction of distributed ledger technology, highlighting potential benefits and limitations.

Clarke continued: “We believe that these varying scenarios for the introduction of distributed ledger technology into capital markets will provide participants with an insight into both the benefits and limitations that particular approaches will offer,” said Clarke.

“It should certainly have market participants thinking about the potential impact of distributed ledger technology on their firm’s operations.”

The discussion paper acknowledged that participants will need internal accounting and client servicing systems into the medium term, possibly acting as a firm’s “digital wallet” but it is longer term that the study acknowledges more focus on the P2P transacting model will have the potential to reshape participant’s operations.

The four scenarios discussed in the paper are:

Technology replacement – represents a limited disruption introduction of the technology by incumbent market operators.
The extensible ledger – an extension of technology replacement, this scenario could see the formation of a ‘smart ledger’.
A new global clearing and settlement infrastructure – a global consortium designed to solve clearing and settlement issues in domains currently poorly served by existing infrastructure or facing poor value for money.
Global P2P network – the distributed ledger technology creates a network capable of replacing the traditional capital markets systems in the longer term.


Related reading