The recent five years have witnessed tremendous changes in the realm of blockchain. The most well-known form of cryptocurrency, bitcoin, had attained great heights in 2017 before it suffered a brief fall and rose to the top in the past months. Research studies conducted on Central Bank Digital Currencies (CBDC) by the world’s major central banks have exhibited an essential piece of information. It has shown that the foundation of blockchain, i.e., DLT or distributed ledger technology, has shifted from the side-lines to be adopted at the mainstream and conventional level. DLT, in the world of capital markets, has been considered both as an interruptive danger to the current players and a potential solution in the quest of a problem. It all depends on the person’s perspective whom the question has been asked. Here’s a detailed study of the experiment results undertaken by various financial firms of the world.
Effect of Blockchain on Industries
The World Economic Forum has conducted numerous workshops and conferences inviting financial organizations and technology suppliers to understand the impact of DLT in the realm of capital markets. As it can be expected, many industries are thrilled by the technology’s potential to establish trust and faith in the shared/familiar data sources, begin the automation of processes, and enable more straightforward methods of the transfer of assets.
According to a report by BCG, the capital markets have not yet thought of a complete shift to DLT-supported change. Anyways, it is pretty clear that the industry has been dramatically affected by the advent of this new technology.
Various firms and service providers have agreed that these technologies have underlying faults, risks, and inefficiencies that may pose a challenge to the capital markets. While these markets are sufficiently sturdy and irrepressible, the recent incident of GameStop’s trading failure in January 2021 had shown how slow and complicated the functioning of the capital markets could become. No wonder the repercussions will be far more felt as these will be highly pronounced outside the realm of the stock market. Now, the focus is on the suitability of the DLT as to whether it will able to find a resolution to the problems. To comprehend this, two factors have to be taken into consideration.
- If DLT can offer distinct benefits to align with the use case requirements that the technology providers cannot provide.
- What factors will DLT use to simplify this complex ecosystem without inviting any risks or dangers?
Many institutions have gone on to determine the effectiveness of DLT by constructing concept proofs. However, it has been observed that a lot of these projects have been impeded. The reasons may be the lack of clarity in the value or because the successful implementation may be unimaginably complicated.
Anyways, there is an increasing necessity for cross-institution collaboration to realize the benefits of DLT. Indeed, many firms are now collaborating at an increased rate. However, certain players in the capital market industry are making the unification behind common future goals a bit difficult. This can be because of the tough competition of the incentives among various companies. In addition, the factor of varied ways of functioning among the multiple institutions may have made the achievement of advantages of DLT a bit difficult.
Things to be done by the leaders of capital market
Having discussed the DLT and varied other issues persisting in the capital market, it is essential to know what are the things that are needed to be done by the capital market leaders.
- The marketing executives need to have a more precise and more profound understanding of DLT and its benefits in the industry. This will give them a clear idea of the DLT’s significance in varied areas. They will also be able to point out the areas where it cannot have any impact. Thus, they will be able to reflect on the role of the institution in the upcoming ecosystem.
- A disintegrated picture of the silos by the institutions will offer a complete picture of the way the capital markets operate. DLT impacts the varied departments/sections of the firms, including the treasury, back office, and front office. Owing to the chance of the redefinition of markets, the divisions between the asset cases may get wiped away.
- The industries must continue to unite behind the common interests and standards for contracts and processes. For the shift to DLT, these standards are the essential prerequisites, though the chances of risks and dangers cannot be ruled out completely. The Common Domain Model of ISDA is exemplary in this case. Tremendous efforts have to be put in for the proper implementation of common standards into practice.
- Continuation of the active engagement of the regulators on DLT and a clear vision for the changing markets are the things to be done by the industry. Decision-making in the vacuum is something that the regulators cannot do. The challenge of uncertainty about regulation has been brought to light by the market participants. The institutions of the capital market need to be quite dynamic with regulator involvement to introduce new solutions.
The DLT has been at the decisive point in capital markets. Ranging from conduction of experiments, concept proof, product launches to a renewed imaging of the value chain, no matter what the asset class is, DLT is the meeting point for all the participants in the capital market. DLT will be instrumental in bringing about a radical transformation of various global institutions’ values, roles, and propositions. This can be converted into reality only if the participants in the capital market align unitedly behind the visions and strategic goals.