Investment Banking and Blockchain
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Start for FreeInvestment banks typically have the following core business lines:
Capital Markets – issuing stocks and bonds to raise capital for their corporate clients on the primary market, selling them to investors and trading them on the secondary market for clients or for the bank’s own account.
Advisory Services – consulting companies during specialized processes such as mergers and acquisitions, as well as corporate restructurings.
Asset Management – managing clients’ funds professionally in an investment portfolio.
Capital markets are all about raising capital for companies in the form of equity or debt. It’s not hard to imagine that equity and debt securities can be represented by tokens on the blockchain and issued and traded there. In fact, this could be a much more efficient way to do that. Clearing and settlement can be done directly and almost instantaneously rather than waiting several days and paying fees to intermediaries.
Here’s a real example: a pilot project for a bond trading platform, developed by Hyperledger Sawtooth, which we introduced previously. They identified the following issues with legacy systems:
- Record keeping practices differ between institutions and reconciling ledgers is often difficult, expensive and time consuming;
- Historical bond ownership data can be fractured and incomplete;
- Centralized data management solutions have monopolized their offerings;
- Data can be altered retroactively, leading to financial fraud; and
- Centralized systems risk single points of failure.
To streamline the process of transferring bonds, Hyperledger Sawtooth created a user interface and smart contract platform that allow investors to track and transfer bonds in real time. Here, users can create, buy, sell, and settle their portfolio of bonds. While the smart contracts were customized specifically for bonds and their unique identifiers, they can be tailored accordingly to a wide range of financial instruments.
There are many advantages to migrate financial markets to the blockchain.
It promotes data consistency across different market participants. It helps maintain comprehensive, ordered, accurate, and immutable record of historical ownership. In addition, decentralization, transparency and trust are inherent in the system.
Naturally, this can be extended to any type of financial instrument used for capital raising or risk hedging. Smart contracts can be very useful to structure any kind of derivatives or other exotic financial products that are traded on global capital markets.
In the future, all established financial markets platforms could be migrated on blockchains as they provide a more efficient financial infrastructure. Actually, this future may come sooner than most people expect…
In July 2017, London Stock Exchange Group in a partnership with IBM announced that it will create a Blockchain platform designed for digitally issuing shares of Italian companies. Hyperledger Fabric will form the basis of the platform.
Nasdaq has also been very active in developing blockchain trading platforms.
The Australian Securities Exchange (ASX) has announced that it will replace its current clearing system with blockchain technology.
And the list goes on…
Global capital markets are moving to the blockchain.
Besides, efficiencies to established financial markets, blockchain also provides access to the new emerging crypto-asset class.
Interestingly, some major investment banks like Goldman Sachs and Barclays, among others, have been exploring opening cryptocurrency trading desks. It seems that this new asset class soon may find its place next to traditional asset classes on banks’ trading floors.
In advisory services, the blockchain impact is a little bit more far-fetched, as the space is so new, companies are very early-stage and mostly fall below the radar of established investment banks.
What about blockchain and asset management? This area is moving ahead quite dynamically too. The new crypto-asset class, led by Bitcoin, is emerging and gaining recognition among asset managers worldwide. The interest among institutional and retail investors alike is growing strong, and the offering of related investment products is following closely the market demand. Bitcoin futures were launched on two of the largest global commodity exchanges in Chicago – CME and CBOE, at the end of 2017. Nasdaq is planning to launch a similar product too. Bitcoin and Ethereum Exchange Traded Notes are listed in Sweden. A Bitcoin Investment Trust, sponsored by Grayscale, is also available to qualified investors. And Bitcoin Exchange Traded Funds (or ETFs) on the New York Stock Exchange have been in the pipeline, but it seems more time is needed for such a product to come to fruition. This is just the beginning and the way ahead is long and uncertain, but also exciting. Crypto-assets are extremely hard to value, so we’ll see how the space evolves; but one thing is clear – the asset management industry is moving in a direction where crypto-assets will play an increasingly important role. So, we can expect that new exciting developments are in the making!