05 February 2016
Reporter: Stephanie Palmer
Blockchain a blessing for capital markets
Although there are still barriers to the widespread adoption of blockchain in capital markets, a ‘wait-and-see’ approach could be damaging, according to a whitepaper by Euroclear and Oliver Wyman.

The paper suggested that banks’ IT and operations expense in capital markets reaches $100 billion to $150 billion per year, while post-trade and securities servicing fees were estimated at about $100 billion per year. Capital and liquidity costs are also increased because of delays and inefficiencies within market operations.

New architecture, based on blockchain, could allow all capital market participants to work from common datasets, meaning operations could be streamlined, or removed altogether.

This would remove some of the current complexities around fragmented IT and data architecture and a lack of common standards, which lead to constant reconciliation and duplicated processes.

The technology could also increase visibility for fund managers, and allow multiple layers of custody functions to be viewed in one single function.

The paper said: “The obstacles to be overcome are significant, and it is far from clear what will ultimately emerge.”

These obstacles include the limited scalability of the technology, the need for a robust cash ledger, operational risks, issues around managing anonymity, and creating common standards and governance. Regulating capital markets on blockchain was also highlighted as an issue, specifically around making sure any regulation is fit for purpose.

While disruptors in other sectors may have taken an ‘act-first’ approach to regulation, in financial markets, innovators have to secure regulatory approval ahead of time, taking in to account geographical legislation and rules around change-in-ownership. On top of this, currently, once mechanisms are entered in to blockchain they cannot be retrieved. Although this is a security feature, it could also prevent legal intervention, the paper warned.

According to the paper, blockchain provides a new approach to data management and sharing that is being proposed as a solution to inefficiency within the industry. Firms could also reduce financial resource requirements, for example, by reducing counterparty credit risk, which could help to reduce the economic cost of business.

The report concludes that established players in the market should be working with innovators in order to develop standards while preserving the strengths of the ecosystem, including addressing the complexities around legal oversight.

It said the industry should take “a collective view” of the potential of blockchain, and “must embrace this potential, show patience with its development and invest in various innovative solutions to bring it to bear”.

Adoption of the technology could come about through one of three routes, the paper said. Challenger disruptors will be developed outside of core capital markets; regulatory mandates will drive introduction of a new market infrastructure; or collaborative efforts will shift the value chain towards blockchain – although this transition could take as long as 10 years.

The paper concluded: “In the face of uncertainty about the technology, vaguely developed use cases and only conceptual promises of enormous cost saving, industry participants would be forgiven for taking a wait-and-see approach. This may be unwise.”

“If adopted in a widespread fashion, the new technology will bring fundamental changes to the role of different market participants and could shake up each part of the value chain.”

Angus Scott, head of product strategy and innovation at Euroclear, said: “In order to work together to shape a new future, the industry needs to take a collective view on the potential of the technology, which was the intention of this study. The market must embrace this potential, show patience with this development and invest in various innovative solutions to bring it to reality.”

More news
The latest news from Asset Servicing Times
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
Funds need to keep an eye on BEPS negotiations
24 May 2017 | London | Reporter: Becky Butcher
Fund participants were encouraged at Guernsey’s Fund Forum to pay close attention to negotiations over base erosion and profit sharing (BEPS) rules
Northern Trust expands UAE operations
24 May 2017 | Abu Dhabi | Reporter: Stephanie Palmer
Northern Trust has opened a new branch office in Abu Dhabi, as part of a continuing focus on business in the UAE
R3 raises record funds for DLT development
24 May 2017 | London | Reporter: Stephanie Palmer
The R3 group has raised $107 million in two tranches of fundraising, securing the largest ever investment in distributed ledger technology to date
Promotions abound at Interstrust in Jersey
24 May 2017 | Jersey | Reporter: Stephanie Palmer
Intertrust in Jersey has made a spate of promotions, including elevating Sherin Sugeeswaran to the role of associate director in the fund services team
RSRCHXchange boosts research offering with data consumption partnership
23 May 2017 | London | Reporter: Stephanie Palmer
Institutional research marketplace RSRCHXchange has partnered with corporate access management solution provider CorpAxe in order to make research consumption data available to the buy side
MainstreamBPO to expand in Europe and Cayman through Trinity acquisition
23 May 2017 | Sydney | Reporter: Stephanie Palmer
MainstreamBPO has entered into an agreement to acquire Trinity Fund Administration in Dublin and the Cayman Islands
Julius Baer builds on UK and Ireland compliance team
22 May 2017 | London | Reporter: Stephanie Palmer
Julius Baer International has appointed John Dodds as head of compliance for the UK and Ireland
More news