Blockchain technology has the potential to disrupt an $867 trillion market, a report by the World Economic Forum (WEF) has revealed. The report looked at the integration of blockchain in derivatives, debt markets, asset management, securitized products and more.
Titled “Digital Assets, Distributed Ledger Technology and the Future of Capital Markets,” the 100-page report sought to provide policy makers, regulators and executives with insights on the emerging use cases of distributed ledger technology (DLT) in capital markets.
“DLT is beginning to reshape capital markets, but the future is uncertain,” the report stated, adding, “Market forces, supported by regulatory and technical developments, are pushing participants in capital markets to digitize and consider the use of distributed ledger technology (DLT).”
The integration of DLT in capital markets has received a boost in recent times from some tailwinds that include a growing interest in digital assets among retail and institutional investors. There’s also a growing regulatory comfort with DLT across several jurisdictions. Additionally, there have been a number of technical developments that have led to platform consolidation and a growing maturity that have attracted investors.
One of the areas DLT will transform radically is the equities market, according to the WEF report. Globally, traded equities account for over $95 trillion in market cap. Some of the emerging DLT use cases in this sector include re-platforming existing post-trade infrastructure, the implementation of digital platforms that cover full securities life cycle and the issuance of equity tokens on the blockchain.
In debt markets, blockchain has the potential to disrupt the bonds outstanding sector which the WEF estimates at $106 trillion. Market participants can use blockchain technology to develop platforms for digital bond issuance, have distributed order books for bond trading and create ‘stand-alone’ blockchain bond issuance platforms.
The biggest capital market blockchain technology can disrupt is the derivatives market, WEF believes. It estimates this sector to be worth $560 trillion. DLT can be used to develop platforms for OTC derivatives as well as platforms for managing collateral for cleared derivatives and exchange-traded derivatives.
The report also looked at the challenges hindering blockchain adoption. They include a lack of business cases and leadership buy-in, regulatory uncertainty and a limited risk appetite among many corporates.
WEF conducted the study in partnership with the Boston Consulting Group. Commenting on the report, BCG’s managing director Kaj Burchardi stated, “Distributed ledger technology has come of age as it begins to enhance efficiencies, reduce operating costs and create new business models in capital markets, but the use cases and solutions are respective to each asset class. For capital markets to unilaterally adopt DLT, they will require cross-institutional alignment to realise the game-changing market opportunities it can offer.”
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