Blockchain Technology and the Financial Market

Cite as: Evans, O. (2019). Blockchain Technology and the Financial Market: An Empirical Analysis, Actual Problems of the Economy, 211, 82-101.

Blockchain technology has positive and significant effects on the financial market. For example, by eliminating intermediaries in the banking industry, blockchain reduces transaction costs, saves time and removes conflict. It is therefore crucial for stakeholders in the banking industry to replace large chunks of current business in the industry with blockchain. Blockchain can be used to transform a number of complex intermediary functions in the industry such as identity and reputation, payments and remittances, savings, lending and borrowing, trading, insurance, risk management, audit and tax functions. It may be worthwhile for global giants such as JPMorgan Chase and Citigroup, currently investing in the technology, to embrace blockchain in order to streamline their businesses, reduce risk and transaction costs.

The case of Bitcoin illustrates the principle that blockchain can change the practice of money transactions. Using cryptography, different kinds of assets can be transferred all over the world peer-to-peer over the internet. The absence of intermediaries also upholds data security; the current practice where third parties collect personal data can imply risk of security breaches. In such cases, blockchain can be used to render third parties obsolete, thus increasing user’s security. By establishing contracts using cryptography and replacing third parties, blockchain can be used to disrupt the entire transaction processes in the banking industry as well as to automatically execute contracts in a secure, transparent and cost-effective manner. In other words, blockchain can be used to decentralize most of existing forms of intermediary services. For example, interbank payments rely on complicated intermediary processes including bookkeeping, payment initiation, balance reconciliation, transaction reconciliation, etc. As well, cross-border payments require complicated clearing procedures for every country. A remittance may require nearly 3 days to arrive. These processes are lengthy and costly, demonstrating low efficiency. Blockchain technology can be used to eliminate intermediary financial institutions, which will promote service efficiency and reduce transaction costs.

Capital Markets

The workings of capital markets involve time-consuming processes, complicated procedures, high costs, and risks which could be lowered by the application of blockchain. Through blockchain, smart contracts, for example, can replace lawyers and banks involved in contracts for asset deals. Smart contracts can also be used to control the ownership of shares. Blockchain can be used to raise funds in a peer-to-peer way, through distributed share offerings. For example, in 2016, blockchain companies raised $400 million from investors and $200 million through initial coin offerings (ICO). These ICOs, rather than IPOs, are content and digital rights management platforms which make investing in ICOs and managing digital assets easy (e.g., SingularDTV, the DAO, ICONOMI, Cosmos). According to Tapscott and Tapscott (2017, p. 5): “Done right, ICOs can not only improve the efficiency of raising money, lowering the cost of capital for entrepreneurs and investors, but also democratize participation in global capital markets.”

Emerging markets

If emerging markets such as China strives to develop their financial markets, it is advisable to take the lead and use blockchain to fundamentally transform the existing models of finance. For example, the banking industry in China is currently facing multiple pressures and changes, including declined profits and increased risks. Some of the pressures result from the sudden Internet finance boom which has affected traditional banking business. At this point, it will be necessary for the banking industry to tap into blockchain to accelerate service innovations, thereby adapting to changing customer demands and the competitive environments. Since blockchain is capable of transfer and asset digitization, it can be used to reconstruct the whole banking industry to increase the efficiency of clearing and settlement of financial assets transactions, while also reducing costs.

The Future of Intermediation

In financial markets in the US and China, intermediation is still the dominating solution for verifying ownership of assets and transaction processing. Intermediaries/middlemen provide information services or product brokerage. In most cases, a chain of intermediaries performs the careful checking of each involved party in a transaction. There are various intermediaries in the market, such as exchange operators, investment bankers, lawyers, auditors and crowd-funding platforms (such as Indiegogo). With the adoption of blockchain in financial markets, the role of intermediaries is at stake. Changing times have traditionally closed old doors and opened new windows, as the adage goes. In many cases, demand for intermediary services will decline. However, if it’s assumed that blockchain will result in some form of decline in intermediary services, many of the intermediary services that will ultimately be displaced will be services that “no one really wants,” or at the very least, services that consumers have difficulty using. For many of the current intermediaries, blockchain innovations are likely to move them to a different spot that creates more value to businesses and consumers.

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