A report by Grand View Research Inc. predicts that the global blockchain technology market will reach $7.74 billion by 2024. The distinguishing feature of blockchain technology that has contributed to its growing popularity is the ability to keep all electronic transactions in a public ledger allowing all participants connected in the network to track information through a secure network, thereby eliminating the need for third-party verification. While the technology was first applied to Bitcoin and later other cryptocurrencies like Ethereum, its uses continue to increase by the day. Blockchain technology is also used in:
- Smart contracts
- Physical asset registration
- Trade execution and settlement
- Asset exchange
- Cash reserve management
- Supply chain management
The Place of Blockchain technology in Markets
The last 20 years have been characterized by significant advancements in technology in the capital markets. However, much of it has been concentrated in the front office functions while middle and back office remained slow and inefficient. Today, it is possible to trade an asset electronically in the blink of an eye but take days to settle. Consequently, both investment banks and their customers are demanding more–and the market is responding. There has been a number of initiatives such as the Linux Hyperledger Project to develop open source distributed ledger frameworks so that developers can focus on building industry applications.
The Future of Current Capital Markets Ecosystem
The question for industry experts has been whether blockchain technology will eventually replace the current capital markets ecosystem. David Treat, the managing director of Accenture Capital Markets, says that the likely outcome is for blockchain technology to work within the existing infrastructure to help simplify and restructure existing processes, therefore, reducing inefficiencies associated with reconciliation. On the one hand, banks with be looking for ways of improving efficiency and client service and on the other, regulators will be seeking to increase transparency and optimize execution and settlement.
The Place of smart Contracts
Smart contracts are powered by computer protocols that can verify and execute the terms of a contract automatically without relying on a central business logic engine. The proponents of smart contract solutions envision the removal of intermediaries through their solutions to achieve greater efficiency but still maintain auditability of the transactions. Although it is possible for individual transactions to be enabled by blockchain technology, there are technical challenges that need to be addressed, for example, data feed issues, execution timeframes and upstream security issues.
The overall implication of the system raises even more concerns. An intermediary such as a clearing house usually ensures that where one counterparty is unable to fulfill their part of the transaction, other transactions can be kept whole, reducing systemic risk. Smart contracts may not be able to provide the same degree of risk mitigation. The result is that regulators would not be comfortable with them.
Future of Blockchain Technology Markets
The market is expected to continue growing due to the many benefits it provides such as:
- eradication of the requirement of a financial institution to validate transactions,
- reducing duplicative record keeping
- eliminating reconciliation
- minimizing error rates and
- facilitating faster settlement