The use of alternative finance instruments and channels has increased since the last financial crisis. One of the reasons for this is that credit institutions have become more vigilant in granting facilities and in turn, it has become harder for companies to raise finance. Companies have consequently, been forced to seek alternative means of financing, specifically by tapping into the capital markets and raising capital through the offering of equity and the issuing of debt instruments on these markets. However, over the years this industry has shown signs of inefficiencies. Blockchain technology, with its innovative and seemingly more effective data storage solutions, could become a viable way forward if introduced into the capital markets on a large scale. Blockchain has the potential to dramatically reshape the capital markets industry, with significant impact on business models, reductions in risk and savings of cost and capital.
The underlying distributed ledger technology is likely to deliver a wave of benefits to the major players in the capital markets value chain; such as clearing houses, exchanges, investment firms and credit institutions. One major benefit that Blockchain could introduce is a more efficient and faster clearing and settlement practice – whereby once a transaction is finalised and inputted to the digital log of transactions (which would make up the digital ledger), the underlying security would be automatically settled in the investor’s virtual wallet, with minimal middle and back-office support. This would lead to the mitigation of counterparty settlement risk and fraud since major players involved in the issue of securities would have access to the same data through their connection with the ledger and any updates thereof would be instantaneous.
In this respect, in the area of post-trade and custody of securities servicing in the capital markets, Blockchain technology has the potential to create a ledger whereby the securities (either equity or debt) offered by the issuing company would be directly issued to the investors, as opposed to having a central securities depository. Access to the ledger and the distribution of the securities in issue found therein, could be managed by virtue of smart contracts, self - executed between the issuing company and the investors, once certain conditions are fulfilled. This would efficiently allow the investor to have direct access to his/her portfolio of securities, doing away with the need of investors holding custody accounts with financial intermediaries.
The above begs the question, amongst others, as to whether Blockchain has the capacity to alter the role of, or even substitute, certain key players in the capital markets, and if so how can the market participants embrace the benefits of Blockchain technology whilst preserving their role in the capital markets industry?