Singapore, as a top financial hub, should ride blockchain wave

IN the late 90s, the Stock Exchange of Singapore introduced its electronic trading system, following in the footsteps of other leading international exchanges. This adoption of new technology fuelled its growth and strengthened Singapore's status as a leading capital markets centre.

Fast forward to 2020, blockchain technology promises to deliver innovation across the financial services industry and transform the way we do business. Given its efficiency, security and transparency, the application of blockchain technology in capital markets will see the evolution of traditional exchanges and the rise of new exchanges to open a new chapter of growth.

Foreseeing disruption ahead, many exchanges around the world are already exploring the use of blockchain technology. As capital market value chains begin to shift, Singapore must move quickly to realise the benefits of blockchain technology or risk losing its status as the region's leading financial centre.

Traditional trade transactions involve two legacy IT systems going through an intermediary to match, validate and finalise the transaction between the buyer and seller - a process which typically takes two to three days. This has been a necessity to address counter-party risks.

In an exchange trading platform built on blockchain technology, smart contracts will automatically manage transactions between buyers and sellers. Smart contracts represent rules for transactions which are programmed within a blockchain network. A transaction will occur only if the necessary requirements are met, ensuring that contractual obligations are honoured.

Transactions are recorded permanently across a decentralised network of computers instead of on a single server. Transactions are also encrypted after they are validated and then linked to the previous transaction to form an immutable chain. These steps prevent unauthorised changes to the transaction data.

Blockchain technology also enables participants with permissioned access to view historical transaction data for greater transparency. With a trusted ledger of information, there is no longer a need for numerous intermediaries to process, validate or authenticate transactions.

These attributes of blockchain technology enable greater cost-savings in secondary trading and the ability to offer participants T+0 settlement within seconds. It also automates the post-exchange process, including the legitimate ownership transfer of the security.

More broadly, blockchain technology opens a new horizon in digital trust across networks, enabling new ways of doing business in the financial-services industry.

Many of the fintech innovations developed around the world with blockchain technology are built on the Ethereum network, a global, open-source platform for decentralised applications. Unlike traditional exchanges which have limited interoperability, global investors will be able to easily access secondary markets for digital assets through the common Ethereum network. This means that Singapore is not only competing with the region, but with the world for a slice of the digital-assets trading market.

Raising funds from the capital markets requires regulators, the stock exchange, issuers, broker-dealers and professionals to undertake rigorous due diligence and reviews before the stock can be listed and traded, a process which can take up to a year to complete.

Given the efficiencies of blockchain technology and smart contracts, digital-asset exchanges provide a competitive alternative listing venue for the issuance and trading of asset-backed security tokens. Without the need for numerous intermediaries and the automation delivered by smart contracts, issuers will benefit from significant cost and time savings.

By lowering the barriers for asset owners to raise funds, digital-asset exchanges will also open up exciting new investment opportunities for investors who would otherwise not list on traditional exchanges and remain illiquid within opaque private markets.

Fractional ownership of assets enabled by blockchain technology will also lower the barrier of entry for investors to participate in various asset classes such as private equity, real estate, hospitality investment opportunities, fine art, jewellery and gold. These asset classes would otherwise require large minimum investment amounts in legacy markets.

NEW WAVE OF LIQUIDITY

With daily trading volumes of the world's top crypto currency exchanges running in the billions of dollars, crypto investors could deliver a new wave of liquidity through digital-asset exchanges as they swap volatile and risky crypto currencies for more stable asset-backed yield products.

The programmable nature of asset-backed security tokens and smart contracts offer unique opportunities unrivalled by traditional securities. During issuance, tokens can be designed to provide a variety of economic and non-economic returns to investors.

For example, debt securities can be designed to provide a percentage of the net profit if the asset is sold during the tenure of the bond on top the regular coupon payments.

Non-monetary utility benefits such as time-share or usage of property at discounted rates can also be programmed for token holders to enjoy. This unique feature enables issuers to go beyond just coupon yield to compete with traditional securities and attract investors seeking unique investment opportunities.

In addition to the many advantages of blockchain technology in capital markets, Singapore incumbents and non-traditional players are also supported by the pro-blockchain stance of the Monetary Authority of Singapore (MAS).

The MAS continues to uphold Singapore's reputation as a trusted financial centre with the introduction of a strong regulatory framework and licensing regime to govern the operation of digital-asset exchanges. This gives global players the added confidence to list and trade digital assets on exchanges operated by Singapore entities.

The MAS has also been collaborating with industry players to explore the use of blockchain technology through Project Ubin, leading the way to create new opportunities and an inclusive regulatory environment.

The days of speculative and unregulated initial coin offerings are behind us, as institutional players begin to see the potential of blockchain technology to deliver alternative fund-raising options.

Businesses across the financial-services industry recognise that blockchain technology cannot be ignored and are actively exploring commercial opportunities. Those with traditional capital-markets expertise are in a strong position to capture opportunities offered by blockchain technology.

Just as the Internet, digital cameras and smartphones were once emerging technologies, industry players who do not prepare for disruption risk being blocked out of new markets and shifting value chains. Singapore must innovate to maintain its competitiveness as a financial hub amid the rise of blockchain technology and digital assets.