A Blog Series on Blockchain in Capital Markets, Part 1: Private Markets

R3 Aug 29 2022 By: Divya Taori
Comments

0 Comments

Views

1,079 Views

A Blog Series on Blockchain in Capital Markets, Part 1: Private Markets
Divya Taori
Divya Taori Blockchain Development (Corda Open Source)
Share this post:
Copied

The capital market industry is now witnessing strong adoption of Distributed Ledger Technology (DLT) and Blockchain technology. DLTs ability to guarantee “ what I see is what you see” allows it to operate across corporate boundaries and siloed infrastructures. 

DLT, for the uninitiated, is a secured, digital, immutable, and transparent record-keeping system where many parties collectively update the shared records. Often, people from the non-capital market industry are unaware of how this industry works and what values DLT technology brings to this industry. 

This blog series will encapsulate a variety of use cases from the capital markets industry. By using versatile examples, the blogs will portray scenarios where blockchain solutions could add value. Evidently,  an in-depth analysis will require a more detailed consideration of the specifics, stakeholders’ requirements, and challenges. 

Please note: This blog will have little to no connection with cryptocurrencies and will focus only on applications of the underlying technology of Bitcoin, aka. DLT. 

The first use-case in this series would be about the use of DLT to automate the private market asset lifecycle. Back in 2017, France allowed the use of DLT to trade unlisted securities. And post this, many countries and companies have been experimenting with the use of DLT for private markets.

What are Private Markets?

All of us have at least at some point in our lives traded in or are familiar with equities, bonds, portfolios, etc., or have heard about these assets on the news, internet, or from family or friends. We often transact with publicly listed digital assets – assets that are listed on the public market. Market – which is a liquid and public one where the companies are well-researched, prices get quickly reflected, and almost everyone sees the same information and news spread in seconds. But we often don’t think about the companies that haven’t gone public. Private markets operate in this category of companies. It involves investments and trade of assets owned by private companies – private equity, private debt, real estate, etc. Investors trade in such assets in the hope that by investing in private companies they would increase the value of these companies and later sell their stake through a trade sale, buyout, or by listing the company on public markets through an initial public offering. In fact, the public market that we usually notice is actually just the tip of the iceberg, if the iceberg were to represent all the assets that are out there. As per information from last year, the U.S. private market was larger than the public market, with statistics showing that public markets had raised $1.4 trillion in capital for issuers, as opposed to the nearly double $2.9 trillion in capital raised in the private markets.

Private Markets

What are the current challenges?

In contrast to public markets, private markets lack the same level of trade and settlement infrastructure. Investment, trading, and management of unlisted assets such as real estate, infrastructure, private companies, and funds have remained predominantly a manual process. These processes involve countless file exchanges via email, document storage on local servers, and manual operations at every stage in its lifecycle, creating an additional workload for investors.

These challenges end up taking time and resources that were meant to be allocated to process a higher number of transactions. In turn, all this results in increased risks and costs for asset owners. 

Solution:

Digitizing this private market asset life cycle infrastructure could potentially streamline the current operations, reduce associated costs, and cut down the end-to-end processing time. The technology could replace slow manual processes in private markets with an end-to-end digital transaction and tokenization platform. A DLT-enabled platform could support private market assets throughout their lifecycle: issuance, distribution, and secondary transfer.

Firstly, KYC/AML ( Know Your Customer and Anti-money Laundering) procedures could be easily automated through the use of multi-party approvals and verification enabled by DLT. This would result in faster onboarding processes for clients, fund managers, and investors. 

Secondly, the improved transparency of information and distribution could ultimately result in better liquidity

Additionally, transaction signing and verification done through the use of private-key cryptography and smart contract technology could result in faster investments. A DLT platform especially built for private markets would also result in easy secondary market trading of these unlisted assets.

Whilst this may all seem very theoretical, a solution is already being developed on Corda by VALK – a company that is building an end-to-end digital transaction solution. This solution makes the investment, trading, and management of unlisted assets seamless, delivering transparency and liquidity. To get more information about such similar success stories, check out our customer page.

I hope you enjoyed reading this blog. If you have any comments about this article, please leave them below. I would be glad to know your views.

Stay tuned for my next blog on DLT for Syndicate Lending. Until then…. Happy learning!

Divya Taori
Divya Taori Divya Taori is a Developer Evangelist at R3, an enterprise blockchain software firm working with a global ecosystem of more than 350 participants across multiple industries from both the private and public sectors to develop on Corda, its open-source blockchain platform, and Corda Enterprise, a commercial version of Corda for enterprise usage.

Leave a Reply

Subscribe to our newsletter to stay up to date on the latest developer news, tools, and articles.