Are Banks and the Capital Markets Ready to Embrace Blockchain?
Very few banks, or even countries, emerged unscathed from the rubble of the 2008 global financial crisis. The aftermath of the worldwide recession coincided with profound technological innovation and breakthroughs that have forced banks and other financial service providers to reconsider their approach to doing business. New regulation and investor demands have forced banks to move toward a more efficient, transparent and compliant operating model. Although Wall Street has cottoned on to these developments, the big question still remains: Are banks ready to leave old business processes behind to embrace new blockchain-based technological breakthroughs?
Now, more than ever, distributed ledger technology offers real-time solutions for banks to overcome the challenges sweeping across the financial world. Immutable data storage and tracking records can offer cost-savings on an enormous scale for banks while removing cumbersome manual processes. All of this will serve to boost value-added activities and better manage banks’ compliance and risk management operations. As the coronavirus pandemic sends markets into a tailspin, banks are once again facing the same crossroads, which lay before them between 2008–2012.
It is fair to say that something of a fintech revolution has already swept across the payments landscape. Digital banking mobile apps and business-to-business payments technology have been enhancing the user experience in sending and receiving payments. Companies such as Stripe are processing billions of dollars in online business transactions per year, while crypto exchange Coinbase has branched out to offer broader services. The lower transaction costs, improved technology and multi-service offerings of these fintech companies have greatly enhanced payment services for millions across the world, which has, in turn, disrupted and challenged the status quo of traditional retail banks.
The technological breakthroughs in retail banking haven’t been mirrored in the capital markets yet, but developments are underway. Consolidation of the investment bank sector, combined with the challenging market conditions for institutional investors amid historically low-interest rates, has forced Wall Street to re-think its product offerings. These market dynamics have forced investment banks and broker-dealers to explore more sophisticated technologies to meet clients’ demands and expectations.
Artificial intelligence, blockchain technology and machine learning have been among the most obvious technologies to address the inefficiencies and opaque structures of investment banking services. To keep up with market competition, banks need to respond to new trends by simplifying and modernizing their product offerings. The investment community also faces the added pressure of staying on the side of regulators and compliance departments. Blockchain technology could be Wall Street’s answer to staying above ground.
The steady rise in blockchain-based capital markets startups led by senior investment banking executives could be the clearest sign yet that a technological breakthrough is on the horizon in the industry. In December of last year, some of these startups were invited to an industry event sponsored by the International Capital Markets Association, or ICMA, that explored the topic of blockchain technology and other emerging technologies in the debt capital markets.
Speakers hailed from organizations such as Nivaura — a digital platform that streamlines and automates the entire end-to-end process of issuing financial instruments and their ongoing administration and lifecycle management. The company was also the pioneer behind the world’s first automated cryptocurrency-denominated bond issuance. Another speaker at the event was Globacap — a blockchain-based platform that aims to make capital fundraising faster and more cost-effective.
