Blockchain technology has been making waves in the world of capital markets, offering not only enhanced liquidity but also substantial efficiency gains. Sam Chadwick delves into the prospects for blockchain in capital markets, along with the potential impact of cryptocurrency regulation.
Our recent investment banking digitalization webinar, in collaboration with our partners at OddUp, focused on cryptocurrencies and the growing prominence of blockchain. Capital issuance through digital ledgers, such as blockchain, has the potential to drastically reduce costs and can shrink the time-to-market from three months to as little as a single day.
While Bitcoin and other cryptocurrencies have been widely discussed due to their value fluctuations since 2018, the ongoing exploration and development of blockchain receive less attention. It is essential to understand that building and innovating are just as critical as holding assets for their long-term growth. Much of this development has been happening quietly outside the media spotlight.
Refinitiv’s Involvement in Blockchain
Refinitiv has been actively involved in developing blockchain-based services since early 2016. Initially, our cryptocurrency services, including Bitcoin pricing, received limited customer interest. However, this changed dramatically in October 2017 when the pricing of cryptocurrencies, especially Bitcoin, soared.
We now offer price discovery through our flagship Eikon and Elektron data platforms, with features like sentiment analytics gaining popularity due to the opaqueness of cryptocurrency markets and the absence of traditional content, such as financials and estimates.
Our oracle framework, BlockOne IQ, facilitates off-chain market data like foreign exchange data and interest rates, as exemplified in JP Morgan Chase & Co’s floating rate debt issuance for the National Bank of Canada.
Blockchain’s Impact on Capital Issuance
The adoption of a digital ledger, such as blockchain, not only enhances liquidity but also brings substantial cost savings. For instance, the cost of issuing a £20 million bond drops from approximately £400,000 to just £100,000. The time-to-market is reduced from three months to a single day, and settlement time shrinks from weeks to seconds.
Funding for Start-up Companies
The blockchain experiment extends to early-stage and start-up company funding, where issuers have utilized initial coin offerings (ICOs) and, more recently, security token offerings (STOs) to crowdsource capital. Although many of these ventures may face medium-term challenges, wealth managers view the tokenization of assets as a positive development. It provides intermediaries with opportunities to gain insights and price discovery in otherwise opaque and illiquid assets.
However, tokenization poses a challenge for investment banks, as ICOs and STOs serve as liquidity events that can preclude future initial public offerings (IPOs). As a result, investment banks are compelled to get involved in earlier capital-raising stages.
The Regulatory Landscape
The primary concerns surrounding blockchain in capital markets pertain not to the process, technology, or investor interest but rather to regulatory treatment. Regulators face difficulties in classifying crypto assets, which can exhibit a range of characteristics. Our approach involves evaluating whether an asset is backed and whether it is fungible.
Regulatory Uncertainty and Global Competition
Regulatory uncertainty has led to global competition in capturing the blockchain industry. The focus has been shifting toward Asia, with China, Singapore, and Hong Kong showing receptivity to blockchain opportunities. Additionally, Switzerland, Malta, and Liechtenstein are garnering interest in Europe.
The aim is to establish regulatory certainty to prevent retrospective criminalization. Sound regulation is likely to foster adoption rather than hinder it.
Medium-Term Outlook
Four plausible scenarios lie ahead:
- Little Change: In this low-probability scenario, new technology companies may emerge to take advantage of innovative mechanisms.
- Banks Adapt: Banks may adopt blockchain technology to shift their value creation away from transactional services and toward other value-added services. They may pass efficiency gains on to clients, possibly without using a public blockchain.
- Government Digital Currencies: Governments could develop digital currencies, potentially absorbing some optimization of crypto assets. Some Scandinavian countries are actively investigating this avenue.
- Acceleration of Crypto Assets: Individuals, communities, and corporations may increasingly recognize the value of a digital, immutable store of value and means of exchange, potentially leading to a more comprehensive shift away from traditional currency structures.
The last scenario aligns closely with the optimistic vision of Bitcoin evangelists and could usher in substantial changes and opportunities in the financial landscape.