There has been discussion about the potential of blockchain in the financial services sector, with various forms of this technology having the potential to transform the way the industry operates.
Blockchain (also known as Distributed Ledger Technology — DLT) is a digital system that allows for the continuous updating and sharing of groups of data (blocks) linked by computers and secured by cryptography (writing using codes).
The activity on the original ledger serves as the foundation for the generation of transactions and reports, which are then shared across the network of participating computers.
DLT is used to create cryptocurrencies, which are digital currencies that use encryption techniques to guide the generation of units of currency and to verify the transfer of the created virtual currencies.
Although some central banks have begun to consider issuing their own cryptocurrencies, all digital currencies, such as bitcoin, litecoin, ethereum, and zcash, operate independently of a central bank. Satoshi Nakamoto created Bitcoin in 2008.
While blockchain and digital currencies have some similarities, cryptocurrencies have received equal amounts of praise and criticism, depending on one’s point of view.
However, the debate over blockchain and its alternative applications has been less contentious, with most jurisdictions welcoming the potential benefits of the innovation.
The decentralized nature of blockchain provides several advantages, including improved document security because the (unalterable and encrypted) ledger is shared by multiple computers, transparency because all transactions are publicly recorded, and a lower risk of data loss and manipulation because there is no single point of failure or central party with unilateral control of the data.
Post-trade processing, payment and settlement of transactions, issuance, ownership, and transfer of financial instruments in real-time through securities trading, easing access and assessment of information for regulatory purposes through blockchain-enabled regulatory reporting, and smart contracts are all examples blockchain applications in capital markets.
