Blockchain and Capital Market

Cyber Crime,Cyber Security,Cyber Law

What is blockchain technology?

‘Blockchain’ is the algorithm behind bitcoin that allows it to be traded without a centralised ledger. In basic terms, it is an electronic ledger of digital events – one that’s ‘distributed’ or shared between many different parties. And it maintains a continuously
growing list of data records.

It has three key features:

First, it is a vehicle for transferring value and holding records – each transaction or record is evidenced by a unique data set or ‘block’ that attaches to the continuously growing blockchain.

Second, it does not involve a central authority or third-party intermediary overseeing it or deciding what goes into it. The computers that store the blockchain are decentralised and are not controlled or owned by any single entity.

Third, every block in the ledger is connected to the prior one in a digital chain algorithm. So the record of every transaction lives on the computers of anyone who has interacted with it, and is updated with each entry. The continual replication and decentralised nature makes it secure.

How can blockchain transform capital markets?

So why does blockchain have the potential to transform capital markets?

I see four reasons.

First, efficiency and speed. At present, when investors buy and sell debt and equity securities or transact derivatives, they generally rely on settlement and registration systems that take sometimes several days to settle trades. It can take even longer, sometimes, where the trade involves cross-border parties. Blockchain holds potential to automate this whole process.

Second, disintermediation. Blockchain automates trust; it eliminates the need for ‘trusted’ third-party intermediaries. In the traditional market, buyers and sellers can’t automatically trust each other, so they use intermediaries to help give them the comfort they need. With blockchain, the decentralised ledger offers this trust. Investors can deal with each other and with issuers in private markets directly.

Third, reduced transaction costs. By eliminating the need to use settlement and registration systems and other intermediaries, there is significant potential to reduce transaction costs for investors and issuers. A June report backed by Santander InnoVentures, the Spanish bank’s fintech investment fund, estimated that blockchain could save lenders up to $20 billion annually in settlement, regulatory, and crossborder payment costs.

Fourth, improved market access. Because of the global nature of blockchain, global markets have the potential to become even more easily accessible to investors and issuers; therefore making it easier for investors and for issuers to invest in and issue debt and equity securities.

Naturally, harnessing this potential will depend on the integrity, capacity and stability of
blockchain technology and processes. It will also depend on industry’s willingness to invest in, and make use of, new ways of settling and registering transactions. The potential is, nonetheless, enormous. Industry is seeing that potential and is looking to see
how it and the markets might benefit.

Blockchain developments

Let me touch on four areas where the benefits of blockchain are being explored:

The first is in share, loan and derivative trades. A series of start-ups are looking to use blockchain to execute and settle securities and derivative trades.

 The second is in private equity transactions. The US stock exchange, NASDAQ, is experimenting with using blockchain technology as a way of recording private equity transactions. In doing so, it hopes to provide ‘extensive integrity, audit ability, governance and transfer of ownership capabilities’.

The third is in government bond trades. A US firm is developing a way to use blockchain
to record and settle short-term government bond trades on a distributed ledger.

 The fourth is in money transfer. In Mexico City a firm has developed an app that lets
migrants send money via the blockchain to Mexico and withdraw cash from ATMs.
How regulators are responding

Right now, we don’t know exactly how blockchain or other disruptive technologies will
evolve. But, for now, it is fair to say that they will. Blockchain potentially has profound
implications for our markets and for how we regulate.

As regulators and policymakers, we need to ensure what we do is about harnessing the opportunities and the broader economic benefits – not standing in the way of innovation
and development. At the same time, we need to mitigate the risks these developments pose to our objectives. We also need to ensure those who benefit from the technology trust it. And, at the end of the day, we are working to ensure that investors and issuers can continue to have trust and confidence in the market.

Modified and Adopted from “The future of capital markets in a digital economy” A speech by Greg Medcraft, Chairman, Australian Securities, and Investments Commission.