Is Blockchain Creating A Revolution In The Capital Markets?

Is Blockchain Creating A Revolution In The Capital Markets?

Blockchain News
October 13, 2022 by Diana Ambolis
1411
A bumblebee should not be able to fly in theory, but it does. Although more pilots are on the ground than at Heathrow, the change is currently stalling. Many areas of capital markets, particularly primary bond markets, should, in view, be screaming for a blockchain-enabled transformation, yet the digital revolution fails to ignite. Is blockchain
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A bumblebee should not be able to fly in theory, but it does. Although more pilots are on the ground than at Heathrow, the change is currently stalling. Many areas of capital markets, particularly primary bond markets, should, in view, be screaming for a blockchain-enabled transformation, yet the digital revolution fails to ignite. Is blockchain a game-changing technology for financial markets, or is it akin to the eight-track cassette, an intriguing but ultimately unappealing technology? This problem was the subject of lively discussion at a recent OMFIF Digital Monetary Institute session commemorating the publication of the ‘Future of Capital Markets’ report.

On the surface, the case for blockchain as a bond market enabler appears to be compelling, making its adoption both a no-brainer and a top priority. The possibility of same-day, even atomic, settlement, which would operate continuously via automatic smart contracts, would eliminate the effect of time zones, open the market to new players, eject unnecessary and expensive intermediaries, and usher in greater efficiency with lower cost and risk. This enhanced value would be felt in the front, middle, and back offices throughout, from issuance to settlement. The introduction of digital native instruments for trading and settlement would present substantial prospects. What’s not to appreciate about that?

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On the other hand, primary capital markets have been established for at least three centuries and work well, as several participants pointed out. They’ve evolved to adapt to new methods and technology with ease and minimal disturbance. True, present technology and procedures may need an update and development to fulfill the requirement for increased speed and efficiency and to combat the growing complexity of risk, particularly in the realm of cybersecurity.

A settlement was made in digital central bank money (through reserves kept at the central bank) for all intents and purposes, obviating the requirement to establish a wholesale central bank digital currency for use by capital markets participants. In terms of the parasitically expensive intermediaries, it was pointed out that the capital markets are a complex ecology requiring many specialized functions to function correctly. Although no group of costly players who would be usefully eliminated by wholesale adoption of blockchain technology was officially recognized, all attendees at the seminar favored removing needless cost categories.

Representatives from the public sector, particularly those from central banks and frontline regulators, emphasized striking a balance between innovation and stability. When in question, they favored tried-and-true technology over potentially game-changing innovation. There is concern that blockchain, in its broadest sense, may become unscalable, resulting in unforeseen and highly destabilizing repercussions. As a result, stringent pilots will continue to be required.

Any modifications to trade and settlement should be anchored on central bank money, and new digital instruments should be explicitly and legally connected to and supported by fiat money. This should be governed by a broad, complex, and comprehensive set of laws, regulations, and oversight imposed by the government. It was also believed to be non-negotiable.

In terms of financial markets and distributed ledger technology, the digital revolution has been on hold for a while, pending more research and better-argued business reasons. For apparent reasons, the government is not yet ready to relinquish control to decentralized finance and blockchain.