Blockchain technology is more than just cryptocurrencies; it has many applications in the real world. This type of technology is transforming not only the crypto space but also other fields such as health care, voting, governance, supply chain, and so on.
Integrating blockchain technology into the capital markets might help to increase efficiency. Traditional financial markets typically operate only during the week and do not trade on weekends.
Blockchain technology is a perfect solution to this problem as users would be able to trade bonds at any time of any day. The success of blockchain technology is largely due to the fact that there is little friction involved in the process. This solves the market liquidity problem because there is nothing that stands in the way of markets being able to trade every day. In contrast to the traditional bond market, transactions on the blockchain are settled almost instantly and irreversibly.
What is the Capital Market?
The capital market involves individuals, firms, and digital spaces involved in trading different types of financial instruments. Bonds, equities, derivatives, and currencies are standard financial instruments in the capital market.
Most countries have unique capital markets in prominent locations in the country.
Capital markets can be classified as primary markets or secondary markets. Capital markets often consist of entities that supply funds and those that utilize the funds.
Primary markets are those that sell new financial instruments such as bond issues and equity stock, while secondary markets are those markets that focus on selling existing financial instruments.
What are the types of capital markets?
There are two categories of capital markets, which are primary and secondary.
When a company wants to sell new debt financing or equity, it goes to the primary market. Assuming a company wants to sell new shares, it must do so through an Initial Public Offering (IPO).
Specific regulations must be followed before new shares can be issued.
Financial instruments sold in secondary markets are not issued directly by the company. Buyers of financial instruments can obtain securities in the secondary market if the company has not newly issued them. Popular secondary markets include Nasdaq, the Nigerian Exchange Group, and the New York Stock Exchange (NYSE).
Although innovative technologies exist in capital markets, traders, firms, and other participants still face specific challenges when utilizing the system. Some of which include:
• Longer processing time
People have to be verified before they are allowed to access financial instruments in the capital market. Verification usually takes a lot of time, primarily because of the users’ paper storage system. Transactions on the crypto market are executed quickly, whereas transactions in the capital market can take several days.
• Lack of standardization
Different capital markets have varying requirements for users. The lack of uniform guidelines has negatively affected public access to the capital market. The lack of uniform international standards is a major issue that needs to be rectified.
• Lack of communication
Before allowing potential customers to utilize an institution’s services, it is customarily required that they verify their identities. They must undergo an AML/KYC (Anti Money-Laundering/Know Your Customer) verification. When this is done in an institution in a capital market, it must be done in another one if the person wants to use the other firm. Capital market institutions do not share information, making the onboarding process cumbersome for individuals.
• Unequal access to data
Participants in the capital market do not have equal access to the data they need to make rational decisions. People may hide data to have a competitive advantage over others. There is a scarcity of a data reservoir that users can access when making decisions. Blockchain enables the seamless sharing of data in a secure environment.
What are the benefits of blockchain/DLT in capital markets?
Blockchain technology will not replace the current capital market architecture; instead, it will redefine how things are done.
Wherever they have been implemented, blockchain solutions tend to improve how things are done.
The following are some advantages of blockchain technology in capital markets:
• Faster settlement time
A typical capital market transaction may take longer to settle. This could be due to the numerous intermediaries involved in the process. The blockchain settlement service shortens the time to clear and settle transactions. This is because it reduces the number of middlemen required for each transaction.
Cryptocurrencies have a fast transaction time because they can seamlessly be transferred from one wallet to another, and transactions are immutable.
• Affordability
Blockchain technology reduces the cost of operating the capital market. Usually, before a company issues new shares, they have to spend a lot on paying fees. Some of these fees may be linked to the numerous intermediaries that the company has to deal with before a new set of shares can be issued.
Reduced costs can be highly beneficial to the capital market.
• Efficiency
Capital markets are not always as standardized as one would like, which leads to inefficient operations. Blockchain technology has the potential to improve capital market processes. It eliminates the need for multiple intermediaries and excessive transaction fees while maintaining financial instrument standardization.
• Improved market transparency
Capital markets are not as transparent as one would like, even though the financial instruments exchanged there are critical to the economy’s health. Blockchains are recognized for transparency, as transaction logs are permanently preserved on the network. Blockchain transactions are immutable; it is nearly impossible to alter them. For a short time, everyone can view the history of what has happened in the ecosystem. Consider how beneficial obtaining information related to a stock market transaction can be.
• Round-the-clock Trading
The capital market is designed to be closed on weekends and at night. This means that if a trader wishes to make a deal during the period when it is not operational, they must wait until the start of the day.
This is in contrast to the crypto market, which is open 24 hours a day. Traders can conduct transactions on weekends.
The market for a financial instrument is influenced by news. Positive news may motivate users to buy assets, whereas negative news often causes traders to flood the market with their assets for sale. If bad news is made public over the weekend, traders will be unable to make reasonable decisions or alter their positions until the stock market opens.
Incorporating blockchain technology into the capital market eliminates this limitation, allowing users to conduct any transaction they want.
• Elimination of sole reliance on existing architecture
Incorporating blockchain technology will eliminate the need for individuals to rely on only one method of enjoying the benefits of the capital market. Traders can access better facilities when they have an array of options to choose from.
Traders can access better facilities when they have an array of options to choose from.
What are the challenges of blockchain technology in the capital market?
Blockchain technology may be effective if integrated into the financial market, but it may face significant obstacles.
The capital market is highly regulated, and institutions must seek regulatory approval before using nascent technology such as blockchain.
The use of blockchain technology in a highly regulated market has regulators on the fence. Some governments are hesitant to change the status quo and incorporate this technology into their capital market operations, especially since there has been little research in the sector.
Regulators who do not comprehend the concept may legislate against it, increasing regulation risk.
In Conclusion,
- Individuals, organizations, and firms trade financial instruments in the capital market.
- Capital markets can be classified as either primary or secondary markets.
- The primary market is utilized when a company wants to sell its new debt financing or equity.
- Companies do not directly issue financial instruments sold in secondary markets.
- Blockchain technology shortens settlement time in the capital market.
- Blockchain technology brings more efficiency to the operations of the capital market.
- Popular secondary markets are Nasdaq, the Nigerian Exchange Group, and the New York Stock Exchange (NYSE).
If you would like to read more articles like this, visit DeFi Planet and follow us on Twitter, LinkedIn, Facebook, and Instagram.
“Take control of your crypto portfolio with MARKETS PRO, DeFi Planet’s suite of analytics tools”