Blockchain Applications in Capital Markets

Some of the biggest use cases of the blockchain technology have been in the financial services industry. From the obvious use in payments (e.g., Ripple) to the more complicated use in trade settlement (e.g., Digital Assets partnership with ASX) financial industry has been testing the technology since it’s very early days. While some banks have gone ahead with developing the technology in-house (e.g., JPM’s Quorum), some have made strategic investments (Goldman’s investment in Circle), while many have joined industry consortium (R3 CEV) to engage with the technology and create common standards.

At Wharton, students and faculty are already engaged in deep discussions around blockchain’s implication in the financial services industry. Over the spring semester, Wharton MBA students from the Penn Blockchain Club worked on an independent study project analyzing Blockchain Applications in Capital Market. Under the supervision of Wharton Faculty and guidance from R3 CEV, we were able to leverage our work experience across a range of capital market functions to dig deeper into the impact of blockchain across Capital Markets. We are delighted to share our work here for the benefit of the financial services and blockchain community.

In part 1 and 2 of the paper, we have covered basics of the blockchain technology and our motivation behind the project. If you are new to blockchain and would like to learn more please refer to the previous post which compiles a living list of blockchain learning resources.

In part 3, we have examined existing literature and research projects conducted by the financial industry and academia and distilled the agreements and disagreements across a range of proposed blockchain use cases and key capital market function. We hope this section would be a useful resource for anyone looking for big-picture analysis and diverse perspective on blockchain use cases in financial services. As we dug deeper into different literature and spoke with industry experts, we documented a range of issues, across use cases, that have been either untouched or ambiguous and needs further analysis.

In part 4, we developed a methodology to rank the potential of blockchain in asset classes such as syndicated loans, private placements, asset-backed securities, OTC derivatives, commodities futures, etc. We looked at various criteria like liquidity, contract specifications, market size as well as the ease of adaptation by evaluating various stakeholders and market structures and speaking to industry experts. We also wanted to create a thorough quantitative framework for ranking the use case, but lack of coherent data broken down by asset class or vertical functions held us back. Nevertheless, we hope the paper could be a guiding light for deeper quantitative research into the potential of blockchain so that innovation leaders across the industry can better channel their resources.

We conclude in Part 5 by distilling big-picture takeaway from our analysis. We hope this paper is a step towards going down the rabbit hole of enterprise applications of blockchain in capital markets. Please feel free to reach out to the author’s if you have any questions or comments. We are actively seeking feedback and opportunities for further collaboration in building blockchain solutions for financial markets.

Authors: Vivek Chauhan, John Pennington, Huiqing Han