Financial Services

Beyond transactions: Blockchain integration in capital market BPM services

Blockchain, the technology that underpins tamper-proof distributed ledgers, cryptocurrencies, and tokenisation, is rapidly revolutionising the financial sector. For capital markets, blockchain adoption promises to be a game-changer that will inherently transform the way capital firms operate, network, and engage with stakeholders.

This article delves into the benefits of blockchain in capital markets, its potential use cases, and the challenges in implementation.

Blockchain in capital markets: Key benefits

Capital markets are at the heart of investment banking. They include a range of financial instruments such as stocks, bonds, equities, commodities, and structured derivatives. The involvement of diverse capital assets and participants, including individuals, businesses, and governments, makes for a highly complex ecosystem.

Currently, capital markets rely on siloed systems and disjointed architectures, leading to inefficiencies in data reconciliation, higher operational costs, longer settlement times, and the need for intermediaries. Embracing blockchain technology will enable firms to improve their infrastructure and reap several benefits across the buy side and sell side.

The key advantages of blockchain in capital markets include:

Increased transparency and trust

Blockchain technology offers an immutable and transparent ledger of transactions, reducing the risk of fraud and fostering trust among stakeholders.

Enhanced efficiency

The availability of a shared ledger helps to streamline operations. The facility for creating smart contracts significantly reduces settlement times, mitigates counterplay risk, and frees up capital locked in for longer periods.

Lowered costs

Leveraging blockchain for capital market operations can help mitigate manual processes, paperwork, and intermediaries. This results in lower operational and transaction costs, benefitting both sellers and investors.

Higher security

Blockchain functions on the principles of decentralisation, cryptography, and consensus, which makes it highly resistant to unauthorised access, hacking, and fraud.

Increased liquidity

Blockchain can tokenise a wide range of assets, including bonds, equity, art, and real estate. This creates new possibilities for liquidity in otherwise illiquid markets. It also allows for fractional ownership of assets, significantly improving market participation and capital allocation.

Opportunities for globalisation

By enabling tokenisation, digital assets, and digital currencies, blockchain facilitates trading on a global scale.

Use cases of blockchain for capital markets

While blockchain technology can revolutionise several aspects of capital market operations, a few use cases have drawn significant attention in recent years. Below are the key use cases of blockchain in capital markets:

Real-time settlement

A shared ledger, accessible to both parties involved in a transaction, mitigates the need for intermediaries such as brokers, dealers, and clearinghouses. This streamlines the clearing process and enables near-instantaneous trade settlement.

Smart contracts

Smart contracts are among the prime use cases of blockchain in capital markets. By automating agreements, asset management, and settlements, capital firms can eliminate intermediaries, ensure real-time visibility into collateral positions, and enable on-time peer-to-peer payments.  

Digital securities

Blockchain technology can tokenise traditional financial assets and convert them into digital securities for ease of online trading. Additionally, it offers a tamper-proof ledger to maintain a record of ownership, significantly reducing the risks of error and fraud in the trading process.

Know Your Customer (KYC) and Anti-Money Laundering (AML) processes

Blockchain enables the creation and management of digital identities for individuals and businesses. Additionally, it provides a secure platform for storing and sharing customer information. These capabilities are invaluable in streamlining Know Your Customer (KYC) and Anti-Money Laundering (AML) processes.

Regulatory compliance

Besides simplifying KYC and AML verification, blockchain technology allows capital firms to maintain an immutable record of transaction histories and automate compliance monitoring, auditing, and reporting.

Optimal collateral usage

Traditional systems can only provide an end-of-day view of collateral, resulting in suboptimal collateral usage. Leveraging blockchain for capital markets can offer real-time visibility into collateral inventories and positions, allowing for greater liquidity and optimised collateral usage.

Challenges in blockchain integration

The potential rewards of blockchain integration are too sizeable for capital markets to ignore. However, institutions planning to embrace blockchain-based technologies must consider the following challenges in implementation:

Regulatory considerations

The regulatory guidelines for digital currencies and securities are evolving and often unclear. Since blockchain-based applications will soon be mainstream, regulators must work to develop compliance and legal frameworks that can ensure market integrity and investor protection without limiting innovation.

Interoperability and compatibility issues

Currently, blockchain platforms face interoperability issues due to a lack of standardisation. Moreover, companies face unique challenges in integrating them with their existing enterprise systems.
Organisations must invest in extensive integration testing to ensure that the blockchain network integrates seamlessly with various systems, applications, and APIs.

Security considerations

While blockchain platforms are more secure than traditional systems, they are not immune to cybercrimes. Companies must establish a comprehensive test strategy that includes testing foAIr functionality, consensus, and integrity to ensure that the blockchain network is reliable, tamper-proof, and resilient.

Addressing skill gaps

Leveraging blockchain in capital markets is not a system upgrade but an intentional shift towards a futuristic technology. Capital firms and financial institutions must anticipate resistance, identify knowledge gaps, and invest in continuous training and education to ensure a smoother transition.

How can Infosys BPM help you leverage blockchain for capital markets?

Infosys BPM’s capital market solutions are designed to assist private equity firms, investment banks, asset managers, and broker-dealers in driving digitisation across financial operations and preparing for the future. We provide tailor-made solutions to clients through strategic partnerships with fintech and regtech providers in the capital market space.

Know more about Infosys BPM’s Capital Market Financial Services.