In any competitive marketplace, organizations seek out transformative technology that will help set them apart. For capital markets firms, that's where blockchain enters the picture.
Developed as the transactions database for digital currency Bitcoin, blockchain today serves as a public ledger of every confirmed bitcoin exchange. Through a transparent system of chronological ordering, blockchain provides a freely accessible and comprehensive history of the cryptocurrency's transactions -- one that can only be appended, not reordered or deleted. Though it's the tool that powers Bitcoin, blockchain technology can be applied to other sectors, including the capital markets.
There's huge potential there, but we won't see it realized this year. Here's why.
Blockchain's Capital Markets Potential
Blockchain is already making waves throughout the fintech world. Back in September, for instance, a group of industry players including Citi, Visa and Nasdaq invested $30 million in San Francisco-based blockchain start-up Chain.com. At the beginning of January, Chain.com made headlines for its involvement in Nasdaq's first private security transaction using its dedicated blockchain ledger, Nasdaq Linq.
There's little question that blockchain will eventually have a significant impact on the capital markets, and financial institutions are already looking into how it can help evolve longstanding industry processes. One thing it promises to overhaul is the traditional trade lifecycle; transactions that take place on a transparent and collectively agreed-upon platform can be settled immediately, eliminating the need for a three-day settlement period.
Beyond making transactions more efficient -- not to mention driving down the back-office costs associated with the traditional settlement process -- distributed ledger technology has the potential to reduce transactional risks. Because blockchain offers an unforgeable, irreversible and collectively authenticated database (one that was designed to facilitate trust between anonymous parties) it could mitigate pervasive industry security issues like fraud. With blockchain, there's always a digital trail.