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Do traditional exchanges see Blockchain as an opportunity?

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Distributed ledgers technology also known as Blockchain, offers a new way to data management and sharing that is being used to propose solving many inefficiencies affecting the financial industry. Technology experts, Fintech start-ups, banks and market infrastructure providers are working on underlying technologies and its potential use in the industry. However the journey of such transformation may take long. In this post we will focus on the benefits and architectural changes Blockchain could bring to capital market, and some example from such appliances across exchanges around the world.

The potential benefits of Blockchain technologies could cover different process within different stages in capital markets. In order to expose why capital markets would pursue to Blockchain technologies its worth taking a look at the benefits across pre-trade, trade, post-trade and security servicing.

Pre-trade:

Blockchain technology will establish more transparency on verification of holdings. Additionally it reduces the credit exposure and making Know-your-customer way simpler.

Trade:

For this stage, Blockchain technologies provide a more secure, real-time transaction matching and a prompt irrevocable settlement. Blockchain could also help automating the reporting and more transparent supervision for market authorities, we could add higher standards for anti-money laundering.

Post-trade:

In this regard it eliminates the demand for central clearing for real time cash transactions, reducing collateral requirements. Blockchain technology enables quicker novation and effective post-trade processing.

Securities and custody servicing:

Distributed asset ledgers with flat accounting structures could remove some of the role which custodians and sub-custodians play today. Custodians’ function might change to that of a ‘keeper of the keys’, managing holdings data and ensuring automatic securities servicing operations are done correctly. To that end we could also add advantages such as common reference data, simplification of fun servicing, accounting, allocation and administration.

Nasdaq has become the forefront of blockchain revolution, they have and are currently involved with many blockchain jobs. To name these endeavors, it started with Nasdaq Linq blockchain ledger technology. Linq is the primary platform in a recognized financial services firm to show how asset trading could be managed digitally through the usage of blockchain-based platforms. Nasdaq has continued more to blockchain, showing that, it is working to develop a trial utilizing the Nasdaq OMX Tallinn Stock Exchange in Estonia which will discover blockchain technology being used as a way to reduce obstacles preventing investors by engaging in shareholder voting. The intention is to boost efficiency in the processing of purchases and sales of fund units and also to make a device ledger — a place which currently is primarily characterized by manual patterns, longterm cycles and newspaper driven processes.

Read more about Nasdaq activities in Blockchain here.

London Stock Exchange developed to simplify the tracking and management of shareholding information, the new system plans to make a distributed shared registry comprising a list of all shareholder trades, helping to open up new opportunities for investing and trading.

Read more about LSE and IBM activities in Blockchain here.

Australian Securities Exchange (ASX), is all about the replacement of this system that underpins post-trade procedures of Australia’s money equity marketplace, known as CHESS (the Clearing House Electronic Subregister System). ASX is working on a prototype of a post-trade platform for the cash equity market using Blockchain. This initial phase of work was completed in mid-2016. In December 2017 ASX completed its own analysis and assessment of the technology which included:

  • Comprehensive functional testing of the critical clearing and settlement functions currently performed by CHESS
  • Comprehensive non-functional testing (scalability, security and performance requirements) for a replacement system when deployed in a permissioned private network
  • A broad industry engagement process to capture users input on the desired features and functions of a replacement solution
  • Third party security reviews of the Digital Asset DLT based system.

Read more about ASX procedure here.

The Korea Exchange (KRX), South Korea’s sole securities market operator, has established a new service where equity shares of startup businesses may be traded on the open marketplace. The Coinstack platform will offer record and authentication options for your KSM by checking against client references which have already been provided to the platform by Korean banks such as JB Bank, KISA, Lottecard, Paygate in addition to others.

Deutsche Börse Group has developed a theory for riskless transfer of commercial bank funding through an infrastructure based on distributed ledger technology. By combining blockchain technology using its proven post-trade infrastructure, Deutsche Börse aims to achieve efficiencies while at exactly the same time investigating possible new business opportunities enabled by this technology.

Read more about Deutsche Börse Group activities in Blockchain here.

Japan Exchange Group: IBM had teamed up with Japan Exchange Group, which works the Tokyo market, to begin experimenting with blockchain technology for clearing and other operations. IBM says it expect the technology will reduce the cost, complexity and speed of settlement and trading procedures.

 

A Blockchain based capital market systems

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A broad range of innovators are creating solutions using blockchain technology. The most common are active from the ecosystem of cryptocurrencies (and related tools such as wallets). These basically provide a form of retail payments. A variety of blockchain applications across fiscal services are being contemplated, particularly about wholesale payments/correspondent banking, trade finance and other forms of trade banking. In this post, we focus on programs from capital markets and associated activities like post-trade and securities servicing.

A Blockchain based capital markets system:

Agreeing and preventing datasets of financial obligations and ownership forms the simple core of capital markets operations. This generates the continual need to reconcile data with massive systems and procedure copying, leading to high prices and protracted time to perform tasks. Could blockchain be the structural change the marketplace requires?

If we started from a blank sheet of paper now, with accessibility to efficient, well-architecture blockchain technology, we would anticipate the industry structure and processes to seem very different. The listing of each security would be held onto a flat accounting basis – that is, with multiple levels of beneficial ownership in a single ledger. There would be no requirement to run data normalization, reconcile internal systems, or consent exposures and obligations. We would have standardized procedures and solutions, shared benchmark information, standardized processing capabilities (for instance, reconciliations), close real-time data and enhanced understanding of counter party worthiness. For privileged participants such as labs, we’d have transparent data on holdings, among many other improvements. To bring this ideal scenario to life, we put out under a stylized ‘capital markets utopia’ based on blockchains and smart contracts.

 Securities transaction

Automatically verifying that another has the means to finish the transaction. (by way of example, Client A demonstrably owns the safety on the asset ledger, and Client B demonstrably owns cash on the cash ledger). Client A and Client B collectively ‘sign’ the trade by applying their private keys to unlock their advantage or money, and then by transferring ownership to the recipient via their public key. The signed transaction is broadcast into the dispersed blockchain ledger to be validated and recorded in the next update, along with a simultaneous update to some money ledger used in blockchain.

Asset servicing

Actually, securities themselves could be unbundled so that the individual cash flows, and also the rights they encapsulate, might be moved individually. Mandatory occasions and distributions could be handled via smart contracts using blockchain technology, embedded inside the securities. Complex events can be structured as easy Delivery Versus Payment (DVP) trades between investors and issuers.

With horizontal accounting, the numerous custody layers are shrunk to a single function. Presently, a single security may be held in as many as five or six layers of custody (stockbroker, sell-side lender, local custodian, global custodian, CSD, etc.) each with their own accounting viewpoints. Here the advantage is held by means of a type of wallet supplier recording the last beneficial owner.

Derivative trade

The utopian set up for derivatives represents the largest change. In the first case, unbundled securities could enable new approaches to financial technology, allowing specialists to construct bespoke instruments consisting of individual cash flows which meet precise needs in terms of timing and credit risk. These tools could be financed by issuers promoting their own instruments that fit the cash flows they expect to achieve, in essence producing swaps without the need for balance sheet intermediation.

Additionally, derivatives with blockchain will be created as preprogrammed smart contracts, catching the duties of both counter parties (for instance, margin agreements or swap requirements).

(CCP) would continue to permit traders to net their exposures. Adding collateral into the CCP in the shape of initial and variation margin could be achieved either by escrowing cash on a money ledger, or by simply devoting funds held on other asset ledgers to some security ledger. Later on, if a central bank problems publicly available digital money on demand, it might allow traders to pledge that the eligible part of their inventory to the central bank and utilize central bank money security when trading.
The smart contract may automatically recompute exposures by referencing agreed external information sources that recalculate version margin. Inter operable derivative and collateral ledgers would automatically allow the contract to call extra collateral units on asset ledgers to encourage these needs. At maturity, a closing net obligation is computed by the smart contract, Along with a payment instruction automatically generated in the cash ledger, closing Out the deal.

Are ICOs the new future of start-ups?

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An ICO is a form of financing commonly known as ‘token sales’ That is particularly favourable for early-stage companies. These forthcoming business concepts are valued via artificially created currencies that, theoretically, can be quantified in terms of riches in the long run — when the thought starts making money. There’s not anything more than a guarantee that the business in question has a renewable future beforehand — no feasibility studies are undertaken. Nevertheless, investors are jumping on this bandwagon in great amounts, providing this tendency increasing momentum.

Gnosis, the decentralized prediction marketplace platform, increased Over $12.5 million at a Dutch token offering in just 15 minutes. Investors rushed to obtain Gnosis tokens (worth 250,000 Ether), which subsequently had the project valued at a whopping $300 million almost immediately. Money has been set down, not for the final product, but for a forecast, which was sufficient to kick-start the plan.

It has amassed over $1.3 billion to date this season for tech start-ups. In fact, in a number of the offerings, demand surpassed the amount of tokens available.

ICOs Happen in an intangible network, where cash is created, exchanged, and disposed of in the cloud. Cryptocurrencies are not anything more than a fixed variety of entries in a database which exist on a peer-to-peer digital money system, which is decentralized. These transactional entries are made and saved in blockchain engineering, with encryption methods being used to restrict the production of financial transfers and units. They are transactions that are initiated, accepted, confirmed, and shared by a community of peers at the ‘crypto-world.’

Start-ups interested in an ICO may create their own Cryptocurrency utilizing protocols such as Ethereum, Counterparty, or Openledger, and establish a value dependent on the amount of money a job is required to deliver to achieve the roadmap outlined in its whitepaper. This post is like a mini pattern that summarizes the project (what it’s about, what its objectives are, its conclusion milestones, the amount of funds required, the duration of the campaign, and the kind of money okay), providing a prospectus into the market to create interest. The secret is getting the people to like and believe in the thought, even though nothing yet exists in real form to show its feasibility or potential prospects. People worldwide are then able to buy the newly made tokens in exchange for established cryptocurrencies, such as Ether (ETH) or Bitcoins (BTC).

Interested investors may open their accounts on electronic currency exchange platforms and begin trading BTC and ETH for a variety of tokens for new projects. ICOs normally persist for a week or so, during which the price of the token fluctuates according to the arrangement set up from the issuers. For instance, the price can remain static to achieve a specific goal or financing goal for your undertaking. However, issuers might want to match the static provide with dynamic pricing, where the price of tokens increases in tandem with the amount of financing received. A third model might have a static cost set with a dynamic supply — for instance, where the worth of ETH 1 is set upon the inception of a token. This will continue until the startup reaches its funding target.

Read more about Blockchain and how can it change our lives.

ICOs can involve multiple rounds of fundraising, together with the this incentives investors to place their money in as early as possible to reap the maximum benefit.

Tokens do not give investors any ownership rights or asset claims. Rather, they behave as bearer instruments, providing users rights about the particular project itself, not to the company that’s launching the project. While owning the tokens doesn’t entitle their holders to vote on the direction of this job, these rights are embedded within the ICO itself, in which engaging investors give input throughout the project’s lifespan. Users may be paid for a right prediction or to receive the content they contribute through a proposal. Investors get involved in these types of actions in anticipation that the value of tokens belonging to successful projects will grow drastically, generating a greater yield on their investments.

There’s no doubt that ICOs have become highly popular, not Just with fintech start-ups, but with individuals from all walks of life. They look ideal for anybody who would like to raise capital quickly for an idea. There are a variety of motives for this. Mainly, it is the speed at which money could be raised to get a project that exists solely as a vision — that in contrast to VC financing, where shareholders will run greater examination on the direction dynamics, market size, potential dangers etc.. The simple fact that this is largely an unregulated field also make ICOs attractive in terms of there being few or no duties and costs for compliance. For example, ICOs provide their issuers with numerous rounds of fundraising, with few (if any) intermediaries. These token earnings are likewise not subject to direct taxation, with shareholders being liable to cover only capital gains taxation, depending upon the jurisdiction. What makes this process much more appealing is the ease with which cryptocurrency tokens can be made, used in trades, and traded thanks to technological growth. Issuers might no longer need to mine with complicated codes to use this kind of funding.

But entrepreneurs are not the only winners. Investors also Enjoy taking part in ICOs for a variety of factors. This includes the opportunity to create enormous profits, which may be seen by the huge yields in 2016 from Monero and NEM start-ups. ICOs also offer greater liquidity, which isn’t readily accessible VC funding where exit options may be minimal. Here, profits could be pulled out easily by converting cryptocurrencies into Bitcoins or Ether, and then into fiat money. Platforms such as Coinbase, Kraken, Poloniex, and Yunbi allow investors to market their electronic riches and obtain quick returns on investments as costs vary drastically through the day.

$25 million using its ICO. While the company had already raised $20 million from traditional VCs, additionally, it raised capital through tokens for its product Omise Go — a decentralized payment system that allows users to share money without having to deal with maintaining a bank account and incurring support or cross-border charges. Omise Go’s initial services will go live from Q4 of 2017, where nominal holders can earn money by being a part of the network.

The ICO marketplace has grown at an exponential rate over the Past couple of months. The risk that this might be another bubble, like the dotcom Crash in 2000, has generated unease. Regulators particularly believe that such a highly open market is more likely to extreme volatility. It’s a dynamic place, where numerous tokens could be made and filtered out every day. Too much need by investors (due to speculation) can lead to tragedy. The rapid development Of ICOs as a source of financing is exciting but the sustainability of ICOs and Cryptocurrencies as a whole has yet to be proven.

Three use cases of Smart Contracts in Financial services

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Savings and upsides from decreasing syndicated loans settlement time

While the High-Yield Bond transactions are settled in more than three days, the settlement interval for leveraged loans frequently extends to almost 20 days. This creates increased danger and a liquidity challenge from the leveraged loan market, hampering its growth and attractiveness.
Since 2008, the global loan market has witnessed negative gain, whereas the High-Yield Bond market grew by 11 percent. We assume that smart contracts can reduce the delay in procedures such as documentation, buyer and vendor affirmation and assignment arrangement, and KYC, AML and FATCA checks, with the assistance of a permissioned ledger. With estimation that with the decrease in settlement times, if the rise of loans may be at least half that of their High-Yield Bond market growth (i.e. between 5 percent and 6%), it would amount to an additional $149 billion of loan demand on the industry. Such loans generally carry 1% to  5% of fees, translating into extra income of $1.5 billion to $7.4 billion to investment banks. In addition, operational expenses, regulatory capital requirements and costs related to delayed compensation payments throughout the settlement of leveraged loans will probably be decreased together with the shortening of the settlement cycle.

Read more about basic idea behind Ethereum and Smart Contracts here.

Mortgage business to benefit from adoption of smart contracts

The mortgage loan process is dependent upon a intricate ecosystem for the origination, financing, and servicing of the mortgages, including costs and delays. Smart contracts could reduce the price and time involved in this process through automation, process redesign, shared access to electronic versions of bodily legal documents between trusted parties, and access to external sources of information such as land records.

Our earlier study on banks back-office automation suggests that mortgage lenders may expect savings between 6 percent and 15% from business $149 billion added leveraged loan volume increase with a reduction in settlement times 11 client fills mortgage application with earnings, taxation and property details Are property documents valid and lien status in order? Reject loan application and inform the client credit mortgage accounts article verification of earlier measures calculation of the cost savings possible from the usage of smart contracts in the US mortgage sector register bank’s lien on land signatures confirmed and mortgage accounts generated customer signs the mortgage document in addition to the witness mortgage record created approved rejected credit history id check KYC & AML check check income and land LTV reject program and notify the customer mortgage adviser creates loan workflow and updates credit, id, KYC, AML information in bank’s loan workflow for mortgage origination predicated on sale of 6.1 million houses of which 64% are being marketed on mortgage mortgage loan origination cost for an average loan of $200,000 in the US (2015), minimum savings US$ 4,349.5 17 billion 396.3 (9.1%) 1.5 billion 1,528.4 (35.1%) 6 billion. These numbers, coupled with our experience and discussions with industry experts, helped us estimate anticipated savings for each of the processes involved in loan origination. For example, in the US housing market, almost 6.1 million homes were sold in 2015. Based on historical averages, 64 percent of them were bought by home owners with a mortgage. We estimate that minimal savings of $1.5 billion could be achieved by loan providers through the automation of tasks in their organizations. Further, economies of $6 billion could be achieved once external partners such as credit scoring companies, land registry offices, and tax authorities become accessible over a blockchain to facilitate faster processing and reducing costs.

We also estimate that loan clients could expect a 11% To 22% drop in the entire price of mortgage processing fees billed to them if smart contracts are adopted. The total of outstanding mortgage loans across the united states and European Union countries in 2014 was valued at $20.98 trillion. Based on the US mortgage market case, smart contracts may possibly save between $3 billion and $11 billion in the new mortgage origination process across the US and EU.

Claims processing cost savings at the motor insurance industry

We consider that, in the motor vehicle insurance industry, smart Contracts that bring insurers, clients and third parties to a single platform Also, third-parties like chargers, transport providers and hospitals — once They are part of the dispersed ledger — will be able to supply faster Support against promises to clients and can anticipate quicker settlement of claims. The united kingdom motor insurance industry dropped 3.7 million claims and spent $13.3 Billion in claim expenses and costs. We calculate that roughly $1.67 Billion, or 12.5 percent of their overall costs, might be saved by adopting smart contracts. Dependent on the United Kingdom motor insurance market, we estimate that each year $21 billion could be spared from the global motor insurance industry via the Usage of smart contracts. A portion of savings can be passed on to the Clients via reduced premiums on motor insurance policies. We estimate that the Cost savings amounts to a reduction of $90 on average on each premium payment In the event the insurers pass on each of the savings generated from smart contracts Adoption to customers, and $45 per premium in the event the insurers decide to pass On only 50 percent of economies.