Blockchain Applications in Capital Markets
In late 2013, bitcoin exploded onto the world stage as a digital currency. A blockchain is a public digital ledger that records bitcoin transactions. It is essentially a digital transaction database that is decentralized, transparent, and encrypted. As such, it has massive potential to revolutionize business and daily life in general.
The word ‘blockchain’ derives from the old English word ‘block-chaining.’ This term refers to the process of establishing blocks through which all data on a network gets stored. Each block contains data about recent transactions and is connected to its previous one via chains. Therefore, the data in each block is synchronized across all nodes in the system.
The core function of blockchain technology is to create a decentralized digital ledger where transactions can be recorded without any error or delay. It works as a system for recording transactions, configuring data, and holding backups. Transactions are recorded on the blockchain through cryptographic algorithms and are viewable by everyone on the network. The system is highly secure and can be used for banking, the stock market, digital money, and commodity trading and management.
Blockchain has many uses in the capital markets sector such as trade finance, Cleared Transaction Market (CTM) standards, equity trading, fund transfers, and private equity. Some prominent applications of blockchain in capital markets include digital identity management, audit trails, and securities settlement systems. Banks can use blockchain to transfer money from one country to another without any cost or delay. Companies can reduce transaction costs and increase capital availability by transferring funds between banks via blockchain.
Several regulators have tried to understand how blockchain will impact their operations, which has led them to create task forces to examine the technology’s implications for their agencies. In February 2016, the US government held a two-day Workshop on Digital Finance Innovation hosted by the Office of the Deputy Comptroller General (ODCG). The workshop featured panels of experts that provided technical updates on the latest developments in blockchain technology and gave attendees an opportunity to ask questions about applicable regulations of distributed ledger technology (DLT).
Blockchain has immense potential to revolutionize capital markets with its transparent and secure nature that eradicates fraud and errors commonly found in current market systems.
