Blockchain and Digital Assets are Revolutionizing Capital Markets
4 min read
Retail investors have flooded the market in the U.S., their number more than doubling from 2010 through 2021 — a trend that is only expected to increase. With this new demographic of entrepreneurs comes new expectations, such as the ability to invest at lower entry points and to trade at any time. Blockchain and digital assets allow financial institutions to innovate and meet such expectations while avoiding the risk of losing market share to banks and FinTechs that are quicker to adopt the disruptive tech. In addition to satisfying a new and growing investor base, blockchain solutions and digital assets upgrade capital markets by eliminating outdated practices and offering operational efficiency to financial services providers. Failure to implement such improvements impedes growth and gives the impression that an institution is archaic.
Blockchain solutions to capital market concerns
Modernizing capital market services with blockchain opens the market to a broader base of investors and mitigates the problems concerning both financial institutions and investors including:
Issuance
Tokenization on blockchain allows institutions to create digital representations of assets and securities and bring them to market quickly. Such assets range from intellectual property and real estate to precious metals, bonds, and equities. Additionally, the digital assets that are created can be fractionalized into smaller, more affordable pieces which increases the investor base.
Settlement
Smart contracts on blockchain allow issuers to program specific terms and conditions into digital assets. When trading a digital asset, two parties agree to the terms of sale, which are included in the smart contract. The contract is automatically executed once the conditions are met. There is no need for clearinghouses or other intermediaries to cover the risk of default.
Efficiency
Because smart contracts automate the execution of a trade, it is possible for near real-time settlements of transactions. Smart contract automation reduces trade costs by removing third parties and can be used to issue margin calls and trigger trades at specified price levels.
Liquidity
The ability to convert assets to cash is an essential part of the market. However, in traditional markets, such liquidity is only achievable during business hours. Digital assets can be traded at any time, allowing for the exchange of capital outside of traditional market hours. The quicker settlement and lower transaction cost of digital assets further improves liquidity by reducing lock-up periods.
Asymmetric information
As an immutable, distributed ledger, blockchain provides accurate information to all parties. Such transparency attracts new investors who now feel comfortable there is no knowledge gap between them and more experienced participants. Furthermore, real-time updates to the blockchain without the need to cross-check other ledgers provide everyone with access to the most current information to use when making financial decisions.
Implementing blockchain solutions
To develop digital assets and modernize capital markets, financial institutions must have the proper blockchain infrastructure. Cloud service providers such as AWS, which hosts Hyperledger Fabric and Ethereum frameworks, enable institutions to implement and scale blockchain solutions that cut costs, streamline operations, and help reach a new demographic of investors.
As a Premier Tier Services Partner of AWS, SoftServe is the next-gen digital partner for banks and FinTechs looking to implement blockchain technology. We design, roadmap, and create the architecture necessary to adopt digital assets and secure transactions. Our work has included building a metal trading platform for a bank that had existing blockchain infrastructure and was looking to expand its offerings.
Look at our white paper, Blockchain’s Applications Beyond Bitcoin, to discover other ways blockchain can help financial services providers unlock new revenue streams.