From automation of KYC and AML to elimination of archaic and onerous processes, we are presented with the opportunity to reshape and redesign the entire market infrastructure. 

Today’s capital markets infrastructure is considered by most to be sub-optimal; some would go as far as to call it simply no longer fit for purpose. Regulatory pressures continue to push markets towards higher standards of transaction reporting and transparency. Processing costs are under constant review. The possibility of cost savings estimated to be as much as €30 - €50 billion annually cannot be ignored. Meanwhile, blockchain technology is starting to come of age in the capital markets. It will soon be ready to play an important part in realising these vast savings and delivering significant opportunities to the industry as a whole. 

Cycle of history

The history of capital markets infrastructure development is one of decentralisation and disintermediation amid responses to market crises. Regulation has challenged monopolies and mandated competition. Technology has responded with increased speed and efficiency leading to lower costs. Yet again, regulation is seeking greater consistency and transparency. Throughout these upheavals, technology has proved itself to be an enabler; for instance delivering seven-fold reductions in transaction costs in markets reorganised by logical sectors rather than legal jurisdictions.  And since the last major global financial crisis, blockchain based technology has progressively taken its place as a viable decentralised ledger approach. 

Advance of blockchain architecture

It is now becoming clear that blockchain architectural advances are providing a robust rebuttal of long cited industry concerns. Crucially, blockchain does scale; proven capability to handle over a billion transactions daily vividly underlines the point. Security considerations are being addressed effectively, while breaches of ‘conventional’ systems continue to vastly outweigh any blockchain related losses. Just as with preceding technologies, capital markets infrastructure is well capable of shaping blockchain’s potential to a variety of specific use cases, without any single, dogmatic approach. 

Proofs of concept

While Bitcoin by no means eclipses all other delivered proofs of concept, it continues to provide the single highest profile instance of blockchain enabling a secure, decentralised ledger currency. Bitcoin bestows confidence in blockchain. This confidence is clearly apparent in such initiatives as Bank of Ireland’s information ‘golden source’ across an entire trade lifecycle, or Icap’s smart contract representation of spot/forward FX block trades. Market leaders and innovators are successfully engaging with blockchain. 

What next?

From automation of KYC and AML to elimination of archaic and onerous processes, we are presented with the opportunity to reshape and redesign the entire market infrastructure landscape. This in turn will create the possibility of a significantly reduced systemic, counterparty, market and liquidity risk.  Blockchain has a real role to play. The challenge now, today, for practitioners, is to determine how they can practically engage with the technology in order to deal with existing market complexity and ultimately simplify the way markets operate in the future.