Blockchain technology fundamentally changes the way financial institutions exchange value and build market infrastructure. Broadly speaking, there are four categories of market participants in capital markets for whom blockchain-based solutions offer clear benefits: issuers, fund managers, investors, and regulators.
The following Maoqiu Technology will analyze the benefits of blockchain in the capital market for four types of participants:
Issuer
Blockchain offers significant benefits to issuers by enabling easier, cheaper, and faster access to capital through programmable digital assets and securities. New securities can be issued in minutes, and the corresponding rights and obligations are coded and automated, which can increase the speed of financing for issuers.
The ability to program or encode terms and conditions into assets (for example, in the case of securities offerings) provides greater flexibility and customization than ever before. Blockchain technology can simplify the KYC/AML process and provide investors with real-time updates and analytics through a single interface, increasing transparency and efficiency.
One of the main advantages of digital assets is the ability to segment each asset. Digital assets can be broken down into more affordable and transferable units, creating opportunities for greater liquidity and investor diversity in certain markets.
In addition, the barriers to issuing assets or securities are significantly lowered, providing greater opportunities for smaller issuers while existing issuers benefit from new markets or forms of securities. Finally, the entire lifecycle of an asset has the potential to be automated, simplifying the speed of event processing from investor servicing to dividend situations.
fund manager
Fundamentally, blockchain enables peer-to-peer transactions of any asset on a verifiable ledger. Funds benefit from faster, more transparent settlement and clearing, which reduces the risk of default or systemic risk in more opaque markets.
Faster processing means funds and managers have a smaller capital footprint and are able to use and allocate their existing capital more efficiently. Funds will reduce costs by improving operational efficiencies, such as streamlining fund servicing, accounting, distribution and administration. Fees paid to third parties for services such as fund accounting and administration, transfer agency, and even escrow can be reduced or eliminated through automated fund servicing.
There will undoubtedly be many new types of financial products and instruments created using blockchain technology, which will create new asset classes for capital allocation. While there will be an explosion in financial products, most of these assets will share specific procedural standards, simplifying the structuring of new financial products or instruments.
investor
investor
Blockchain technology greatly lowers the barriers to issuing new assets or financial products. As the cost of issuing new securities falls and the speed of issuance increases, issuers will be able to tailor new vehicles to each investor's needs.
The enhanced ability to more accurately match investors' returns, time horizons, and risk appetites through custom digital tools could profoundly impact the relationship between investors and issuers, creating a direct connection between capital seekers and investors.
Investors want to reduce risk while increasing potential returns. One of the main drivers of risk is lack of liquidity. This is addressed by the programmable nature of digital assets and financial instruments, which allow for reduced transaction costs, increased potential liquidity of assets and more comprehensive risk management.
Combined with increased connectivity and efficiency in capital markets, investors will see greater liquidity and lower cost of capital. Additionally, a transparent and distributed blockchain ledger will enable greater insight into asset quality and potentially enhance the due diligence process.
Regulators
Regulators have often been criticized for being overly involved in capital markets or not quickly enough, as in the 2008 financial crisis.
Government agencies and regulators can benefit from blockchain's distributed ledger, which is transparent and verifiable at all times of the day. Blockchain's immutability - meaning transaction data cannot be altered - enables regulators to automate functions such as auditing and compliance.
As multiple institutions use the same blockchain network to track their holdings and asset lifecycle events, regulators will be able to devote more time to analysis and risk prediction, rather than learning the idiosyncrasies of each firm’s system environment and customizing transactions express.
first level title
issued
issued
Issuance refers to the process of issuing securities or other investment assets to investors to raise funds. Blockchain enables the creation of digital representations of existing traditional securities and entirely new digital assets that are marketed as tokens.
Securitization of financial instruments and securities will become more customized and streamlined through the use of blockchain issuance platforms. Issuance can be improved throughout the asset's lifecycle, including at the time of company incorporation or the digitization of equity for the various assets under management.
Traditional security-backed assets can be digitized to create tokens representing individual securities by improving additional programmable features.
Blockchain enables new business models, such as decentralized crowdfunding, that can raise funds more efficiently and create a better distribution of equity and governance rights. Another benefit of blockchain throughout the securitization lifecycle is increased transparency and manageable cap tables that can be conveniently recorded on a single distributed ledger.
sales and trade
Sales and trading is one of the main functions of an investment bank. It refers to the buying and selling of securities and other financial instruments. Blockchain enables digital securities to be listed seamlessly through a variety of mechanisms such as bilateral negotiations, centralized exchanges, decentralized exchanges, matching algorithms, and auctions.
Blockchain opens up a variety of new possibilities, including new and customized digital tools created to meet investor needs. These new assets are enabled by the instant and customizable nature of digital securities issuance, which can be programmed to seamlessly perform different types of business functions. For example, digital and automated invoices or other short-term obligations could be enabled through the use of blockchain networks and digital tokens or assets.
Collateral Management
The current collateral management process is slow and inefficient due to the limited ability of manual reconciliation and physically delivered securities to react to market conditions. Information is also very siled, making it difficult to get a unified picture of collateral holdings across warehouses and entities. This siled structure further limits an entity's ability to optimize collateralized deposits or net balances across entities and geographies.
Blockchain enables more efficient collateral management by digitizing collateral into a single, optimized registry. Additionally, smart contracts can enable precision in collateral management by automatically issuing margin calls and invoking predetermined rules for each bilateral or intermediary relationship.
comminicate
comminicate
Exchanges are often responsible for a myriad of tasks, including market services (trading and management of equities, fixed income, derivatives, etc.), corporate services (IPOs, OTC upgrades, investor relations), and licensing (data or index licensing).
Blockchain has the potential to improve the business operations of exchanges in many of its functions. Lower transaction fees coupled with faster settlement and clearing have the potential to reduce overhead costs and improve existing processes. A shared distributed ledger backed by a blockchain network can enhance KYC and AML compliance and provide transaction matching or confirmation.
The transparent ledger of the blockchain can assist transactions with data verification, access rights, and in the best case, provide a stronger warning system for transaction activity.
Digitization of assets allows for new financial products and derivatives with enhanced asset servicing capabilities (geofencing, whitelisting, time locking, etc.). Furthermore, the combination of blockchain with new digital assets and securities opens up the potential for new primary or secondary markets to improve the liquidity of certain assets.
Clearing and Settlement
Clearing is the process of updating accounts and organizing the transfer of funds and securities. Settlement is the actual exchange of assets and financial instruments. Smart contracts can be programmed to match payments with transfers via off-chain cash payments, cryptocurrencies or stablecoins.
For settlement, they can match a variety of models, taking into account the risk tolerance and liquidity needs of the market, including atomic settlement, deferred settlement and deferred netting.
Post-trade services and infrastructure
After the transaction is completed, post-trade services come into play. However, today's post-trade settlement process is at risk due to the instant nature of transactions and volatile prices and markets.
Global post-trade processing generates costs ranging from $17B to $24B per year, including reference data, reconciliations, transaction fee management, customer lifecycle management, corporate actions, tax and regulatory reporting. Blockchain automates and simplifies these processes, increasing security and efficiency, and reducing costs and settlement times.
asset service
Asset servicing refers to the need for a unique set of services, while asset management is the management of currencies and securities by investment banks and other financial institutions.
Blockchain enables the automation of digital security lifecycle events including coupons, dividends, rights exercises, expiration dates and pricing, streamlining service and management processes.
mutual fund management
Mutual fund administration includes various processes such as fund administration, entity registration, transaction management and reporting.
Fund administration currently relies on manual processing of fund data and other error-prone administrative tasks. Blockchain enhances fund management processes by automating and securing fund reference data among key stakeholders in near real-time. This greatly increases the transparency and security of fund data and any other information.
Entity registration is costly and requires intensive KYC/AML compliance procedures. Essentially, blockchain provides entities with a unified public ledger that automatically stores, verifies, maintains, and distributes records. In addition, more processes of fund operations can be simplified, such as fund unit ownership registration, investor and fund cash balances, cash distribution, etc.
New markets backed by digital assets and securities present opportunities for funds to differentiate their offerings by creating new products and digital financial instruments.
hosting
hosting
Escrow refers to the custody or holding of securities for safekeeping to minimize the risk of theft or loss. The advanced security attributes of blockchain technology, including its decentralized architecture and cryptographically secure code, ensure assets are extremely secure.
transfer
The transfer agent is responsible for maintaining ownership records of the issuer's registered shareholders, including contact information. The transfer agent manages the transfer, issuance, and cancellation of the issuer's shares and regularly assists registered shareholders.
Backed by smart contracts and digitization, blockchain networks can act as digital transfer agents by maintaining asset provenance chains and encoding asset lifecycle payment instructions. This would allow investors to get paid, require investor signatures and review materials without additional agency tasks.
Larger logic can be implemented in the digital transfer agent, such as recording investor-initiated net subscriptions and liquidations/redemptions.
Additionally, digital agents utilize smart contracts to identify stock classes and automatically distribute benefits, such as dividends. A host of other tasks can be encoded into digital transfer agents powered by blockchain technology to enhance asset servicing to funds, investors and other key stakeholders.
