EC The Role Of Blockchain In Capital Markets

blockchain capital markets

A variety of capital markets play a vital role in the modern economy. Some examples include pensions, life insurance, and stock exchanges. Undoubtedly, various capital markets will continue to evolve over time along with technical innovation. Here’s how blockchain is beginning to improve the way that capital markets operate.

Settling International Trades Between Banks

Handling trade settlements has been one of the biggest technical challenges for traditional, online banks in the past two decades. The process is far from streamlined. For example, US banks often need to transact swap contracts with European banks (and vice versa). This process doesn’t seem like a major task in the fiat economy. However, it is actually quite difficult to accomplish with traditional technologies. This is mostly due to regulatory risks.

For instance, mirror trading presents a tremendous regulatory challenge. One real-world example took place between 2012 and 2015 when Deutsche Bank accidentally allowed Russian mirror trades, allowing customers to launder money and evade Russian capital controls. As a result, the UK’s Financial Conduct Authority fined Deutsche Bank £163 million ($204 million) for not having an adequate AML control framework.

Blockchain technology could have prevented this altogether. In this scenario, the two banks could have utilized technologies such as digital ledgers and smart contracts to identify issues more easily via cash flow tracking. Moreover, blockchain in this capital market adds transparency and can even be combined with AML detection and prevention technologies to serve as a complete end-to-end solution. Ultimately, this would save financial institutions from unknowingly participating in financial crimes. 

Fewer Trade Limit Violations

Big banks also have to be aware of other potential regulatory violations like trade limits. Even with transactions that are above-board, various governments have legal requirements on specific trading categories (i.e. position-size limits). The London Whale Trade of 2012 is an excellent example of a scenario in which blockchain could have prevented a trade limit violation.

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