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Blockchain-enabled distributed ledgers on the rise in capital markets

As blockchain investment grows, investment banks want to know what this emerging tech can do.

Between 2014 and 2015, investment in blockchain technology as it relates to capital markets more than doubled, from $30 million to an estimated $75 million. By 2019, that figure is expected to reach $400 million. Everyone wants to see what this emerging financial technology can do.

What are blockchains?
Blockchains are a way to verify and order transactions in a distributed ledger, a record of consensus that is validated and held within a network of separate nodes. Blockchain-enabled distributed ledgers offer capital markets the opportunity to fundamentally change how data is managed, moving from a scenario where each organization maintains its own copy of a data set to one where everyone has controlled access to a shared copy.

The use of “smart contracts” takes the technology one step further, embedding the business logic for processing contracts into individual transactions and effectively eliminating the need for a centralized logic engine.

What blockchains can (and can’t) do
Despite significant technological advancements in capital markets over the past two decades, middle-and back-office functions remain antiquated and slow. A recent Santander report estimates that blockchain technology could save the industry between $15 billion and $20 billion annually by 2022.

Blockchain-enabled distributed ledgers have the potential to help investment banks improve efficiency, client service and regulatory reporting by:

  • Shrinking settlement times.
  • Facilitating new products.
  • Lowering capital requirements.
  • Reducing counterparty risk.
  • Improving contractual term performance.
  • Improving transparency.

However, certain aspects of the technology still require further thought and development. Specifically, investment banks and regulators must find ways to balance privacy and traceability, prevent network overpowering by a group of participants, establish standard tools and interfaces, and ensure scalability.

What’s next for blockchain?
Integrating distributed ledger and blockchain solutions into legacy bank infrastructure will not be simple, but an internal proof of concept (PoC) can be a good way to get started. In the next few years, increased regulatory certainty is expected to widen the pool of adopters and uses for this emerging technology. By 2025, Accenture predicts that blockchain-enabled distributed ledgers will be an integral part of the capital markets ecosystem.