Blockchain Applications in Capital Markets & Global Trade Finance

Uncategorized Aug 23, 2017

Blockchain is indeed rising as one of the biggest revolutionary technologies for a number of industries, as discussed in last few posts of TheBlockchainAcademy.com[1]. We have been in the process of highlighting the potential of blockchain to the best we can, since it is expected to transform the way various industries work, to an incredible extent. This time the industry we have selected to discuss in regard to expected blockchain impacts upon it, is capital market and global trade finance. This industry is of prime importance since majority of the digital transactions around the world are carried out here, both with higher returns and risks involved. Let’s see how blockchain applications are on the way to place themselves within their scope.

Blockchains are developed on the stream of innovations in organizing and distributing data. The aim is to develop a single truth version, used by all the parties or participants, containing a much enhanced dataset than exist in any of the system today. This is then going to enable novel industry processes to be created, based on the use of transparent immediate and real time data settlement of transactions and the extension of auto-implementing smart contracts having encoded business logic in the ledger[2]. Saving and agreeing the datasets of financial ownership and obligations makes the fundamental basis of capital market operations. The existing method are very complex, use fragmented data and IT architectures and become the victim of absence of common standards. This leads to the need of data reconciliation with massive systems and the process duplication, causing high protracted time to carry out tasks and costs. Is blockchain the structural change that market is looking for?

The vision of blockchain is clearly a huge change to the capital market structure. In order to understand why the markets will go with it, it is necessary to consider the benefits blockchain brings for pre-trade, trade, post-trade and the securities servicing[3]. 

Benefits for Pre-trade:

·        Transparency of holdings

·        Verification of holdings

·        Less credit exposures

·        Mutualiazation of the static data

·        Simpler KYC & KYCC via look through to holdings

Benefits for trade:

·        Real time and safe transaction matching

·        Instant irrevocable settlement

·        Automatic DVP in the cash ledger

·        Automatic reporting

·        Transparent management for market authorities

·        Higher AML standards

Benefits for post-trade:

·        There is no central clearing needed for real time cash transactions

·        Less collateral or margin requirements

·        Efficient post trade processing

·        Faster innovation

·        Fungible use of the assets on the blockchains being collateral

·        Auto-implementation of the smart contracts

Benefits for custody and security servicing:

·        Initial issuance direct on the blockchain

·        Automation of servicing processes

·        Deduplication of servicing processes

·        Enhanced centralized datasets having flat accounting hierarchies

·        Common reference data

·        Automatic processing of fund subscription/redemptions on the blockchain

·        Simpler fund servicing, accounting, allotments and supervision

Blockchain pledges to streamline the process of trade finance. A blockchain is the data structure than enables the formation of digital ledger of the transactions, which can be distributed in the digital network via cryptography[4]. Hence, through this approach, every participant who is on the network can safely change that ledge with no need of central authority. Since the blockchain is updated in real time by every participant on the network to show the latest transaction, it eliminates the need of various copies of the same information document saved across databases under various entities. For instance, with a conventional trade finance system, the exporter, importer, bank, shipper etc must all have their own databases for all the documents related to the transaction. Each of the databases need to be reconciled on constant basis against each other, and if there is some error in a document, measures must be taken to identify which copy of the document (if any) is correct[5].

A single blockchain may symbolize all of the essential information in single digital document, which is then updated almost instantly and can be seen by all members present on the network at the same time. Among the best blockchain’s benefits are least transaction settlement time (which at present takes days), increasing precision between all parties, and unlocking assets that would otherwise be tied up to be transferred between parties involved in the transaction.

[1] www.TheBlockchainAcademy.com

[2] https://www.wto.org/english/thewto_e/coher_e/tr_finance_e.htm

[3] http://bravenewcoin.com/news/swift-explores-solving-the-correspondent-banking-problem-with-the-blockchain/

[4] http://www.oliverwyman.com/content/dam/oliver-wyman/global/en/2016/feb/BlockChain-In-Capital-Markets.pdf

[5] http://blogs.wsj.com/cio/2016/02/02/cio-explainer-what-is-blockchain/


Copyright 2017 Bryant Nielson. All Rights Reserved.

Bryant Nielson – Managing Director of CapitalWave Inc.– Being a big believer in Technology Enabled Learning, Bryant seeks to create awareness, motivate adoption and engage organizations and people in the changing business of education.

Learn more about Bryant at LinkedIn: www.linkedin.com/in/bryantnielson

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