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HOW DIGITAL ASSETS CAN RESHAPE THE POST-TRADE LANDSCAPE IN CAPITAL MARKETS

George Holt
08 July 2024

The continued advancement of digital assets, including cryptocurrencies, security tokens, and other blockchain derivatives, is building a new era in the capital markets. This shift extends beyond trading, by revolutionizing the logging, clearing, and settling of transactions within the post-trade sphere. As digital assets establish their presence, they reveal significant challenges and unique opportunities. These developments have the potential to reshape the financial services industry.

Streamlining operations and mitigating risks

Digital assets expedite and streamline transaction processes far beyond the capabilities of traditional financial tools. Underpinned by blockchain technology, they facilitate transactions that are not only faster but also settle in real time, paving the way for atomic settlement. This eliminates the need for the protracted settlement periods typical of legacy systems, thereby reducing counterparty risks and boosting market liquidity.

The revolutionary role of smart contracts

Smart contracts are a pivotal innovation in utilizing digital assets post-trade. Embedded directly into blockchain code, these contracts execute automatically, upheld by a decentralized network of computers via network-wide consensus. For example, in a bilateral trade, both parties must agree on the trade economics before the contract is considered upheld and the trade is written to the ledger. Smart contracts can automate the complex and labor-intensive tasks of post-trade operations, from compliance verification to dividend issuance and managing corporate actions. This automation potential may significantly reduce operational costs and curtail human error, streamlining the entire post-trade process.

Navigating the integration minefield

Yet, for all their advantages, digital assets present formidable integration challenges within the traditional capital markets framework. Regulatory clarity is still, at best, a work in progress globally, as authorities grapple with appropriate frameworks to govern these digital assets. Moreover, the existing technological infrastructures of conventional financial institutions often require extensive overhauls to accommodate blockchain transactions, necessitating significant investments in new technology and workforce retraining.

Evolving regulations

As the impact of digital assets becomes more apparent within financial markets, regulators are under pressure to evolve existing legislation to include these innovations. The trajectory of these evolving regulations will critically shape the digital asset landscape within capital markets. Clear, consistent regulatory directives are vital to balancing fostering innovation, ensuring market stability, and safeguarding investor interests.

The path ahead

The impact of digital assets on the post-trade sector signals a pivotal transformation in capital market operations. Though the journey ahead is fraught with regulatory, technological, and operational complexities, the promise of enhanced efficiency, reduced costs, and bolstered security presents a compelling case for broader adoption of digital assets. As the market landscape adapts, stakeholders must remain flexible, leveraging new technologies and adapting to emerging paradigms to stay competitive in this evolving arena.

Meet our expert

George Holt

Senior Consultant, Capgemini