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New trends in the financial sector - Prospects of growing electronification in the capital markets (fintech, blockchain, electronic platforms…)

Capital Markets and Fintech/Blockchain – The matching game

By Casteleyn Tom - Head of Product Management for Custody, Cash and Foreign Exchange, BNY Mellon SA/NV

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The potential is easy to understand.

Many issuers and investors find accessing capital markets to be difficult and expensive.

Fintech, and distributed ledger technologies such as blockchain, hold out the prospect of a capital markets environment in which new, cheap, easy and secure processes replace old, expensive and burdensome processes.

But potential is not sufficient; we also need the practical implementation of new solutions. And this is the difficult part.

There is the business challenge of matching a business need with a technological solution.

There are also major regulatory and legal challenges.

Regulators need to ensure that existing regulation does not impede innovation. But regulators also need to ensure that they do not throw out the baby with the bathwater.

Existing regulation with its many prudential safeguards ensures a high degree of safety and of investor protection. The regulatory structure for fintech and blockchain should aspire to achieve the same regulatory outcomes, and should ensure that fintech activities can be carried out by regulated entities, and do not migrate into the unregulated “shadows”.

The legal challenges may be even more formidable. If a security is issued in a blockchain environment, it is not at all clear – from a legal perspective – what that security is.

There is the business challenge of matching a business need with a technological solution.

There is also the problem of the transition. Markets and market infrastructure are networks; the power of the network effect is strong; there is no incentive for a market participant to be the first to move from an existing network, to a new network with no counterparties.

Given the size of the challenges, it is legitimate to be slightly sceptical as to the chances for a wholesale re-ordering of capital markets in the near future.

Yet the degree of technological innovation and the multiplicity of initiatives in the area of fintech are breathtaking. It would take a brave person to bet that no progress will be made.

A reasonable judgement is that progress in the application of fintech/blockchain solutions will initially be small and incremental, and more radical innovation will be heavily dependent on the industry agreeing common standards allowing for the creation of new networks.