A Change Is Coming
Capital markets are in the midst of a technological sea change. However, it is not all smooth sailing. Because the markets must operate within a restrictive regulatory environment, they are relatively resistant when it comes to adapting to innovations. Even when innovations are embraced, they must coexist with antiquated systems and protocols that come from a time when people had to move physical paper to complete transactions. We see the consequences of this patchwork every day. Stock trades may take only a fraction of a second, but clearing and settling activities can take days, and banks trading whole loans take weeks.
However, blockchain technologies promise to revolutionize the bureaucratic processes that are the principal cause of inefficiencies experienced in today’s capital markets—particularly in fixed income markets. As a type of distributed ledger technology (DLT), blockchain allows a large number of computers to keep and update identical records of information without referencing or relying upon a master copy of the data. With blockchain technology, these records are stored in a cryptographically secure, immutable manner.
Blockchain-based financial platforms can verify events, authenticate identities, and transfer funds simultaneously, dramatically decreasing the opportunity for fraud or modification of records after the fact. Thanks to the tamper-proof, decentralized public ledger, parties involved in a transaction do not need to rely on a centralized third-party to maintain the integrity of that transaction. As a result, incumbent financial powers are disintermediated in a way that was not possible before secure decentralization became technologically feasible.
Rising to the Challenge of Complex Transactions
Many of the current efforts to use blockchain technology to make capital markets more accessible focus on simple transactions that can be managed with smart contracts. However, with more complex instruments, such as debt securities, there are complicated issues surrounding structuring, risk, and performance monitoring. Larger, bespoke transactions can involve multiple sellers, bidders, buyers, and professional services providers such as attorneys and accountants. All of these parties are an integral part of a complex transaction and cannot be written out of the process by smart contracts alone.
For this reason, Inveniam proposes a mix of on-chain and off-chain elements that all refer to the underlying instrument. This hybrid process carefully preserves the complexity that is essential to these transactions—from managing large data sets to meeting more stringent regulatory requirements around identity, anti-money laundering protocols, and exempt transaction compliance. At the same time, it reduces the complexity that is unnecessary by using distributed ledger technology (DLT) to disintermediate where appropriate.
The Next Generation of Capital Markets Infrastructure
By streamlining complex transactions in a way that maintains yet improves current protocols and practices, Inveniam ensures that its technology can be seamlessly adopted by today’s market participants. New business practices can emerge if the technological developments foster the participation of bankers, lawyers, and middle market company executives—who are not computer scientists or coders.
As a second-generation blockchain company, Inveniam recognizes that, if DLT is to have meaningful impact on the industry, it will be necessary to build a broader use case that includes the complex reality of financial services. Just as the true power of the internet was unleashed only after the advent of distributed web services and architecture (Web 2.0), the next phase of the internet will be driven by an architecture of decentralized solutions, with blockchain currently at the forefront those innovations.
Inveniam is the first of its kind, a company that integrates blockchain technology with professional service firms, banks, traders, issuers and investors in a radically transparent, compliant way. The future of financial markets belongs to a remarkable cohort of ambitious, technologically sophisticated people who have disrupted and transformed one industry after another. It’s fair to say that they have arrived and Inveniam is among them.
You can read more about our groundbreaking innovations in our first white paper: Introducing the Tokenization of the Global Debt Markets.