Blockchain in capital markets: revolution in waiting?

IN THEORY, a bumblebee should be unable to fly, but perversely it does. In theory, many aspects of capital markets, including primary bond markets, ought to be crying out for a blockchain technology enabled transformation, but perversely the digital revolution fails to ignite. Despite more pilots in operation than there are at Heathrow Airport, the breakthrough transformation currently refuses to occur. Does blockchain offer significant, step-change advantages to capital markets or is it the 8-track cassette, an interesting technology but ultimately of limited interest? This conundrum lay at the heart of fascinating debate at a recent OMFIF Digital Monetary Institute seminar held to mark the launch of the Future of capital markets report.

On the face of it, the bill of fare for blockchain as an enabling technology for bond markets ought to make its implementation both a no-brainer and a pressing priority. The potential for same day, even atomic, settlement, operating via automatic smart contracts on a continuous basis, would eliminate the effect of time zones, open the market to new players, eject unnecessary and expensive intermediaries, and herald greater efficiency coupled with lower cost and risk. This added value would be felt throughout the entire process from issuance to settlement, in front, middle and back offices. There would be significant opportunities to introduce digital native instruments for both trading and settlement. What's not to like?

Yet, as several participants observed, primary capital markets have been around for at least 3 centuries and work well. They have evolved to adapt to new practices and technologies smoothly and without great disruption. True, existing technology and practices could do with an overhaul and development to address the need for greater speed and efficiency, and to combat growing complex risk particularly in the field of cybersecurity.