Financial Services - Capital Markets - A Basic Guide on how Blockchain/DLT fits

Capital markets in the financial services industry, per Congressional Research Services, is an place where businesses that need money (aka capital) for a long term can find sources of money from investors. The agreement between those who provide the money and the business that needs to money is called a security. Typically the security is either a debt (loan that is repaid at the end, with interest), bond (loan with periodic payments), or equity (stock). 

 

To see the connection between those with money, businesses that need money (capital), and the medium that allows this to happen, here is a simple chicken scratch.

 

People with Money : in the upper left corner, individuals earn money, have extra money that they can save or invest.

Companies that need Capital : in the upper right corner, businesses have several ways to acquire capital (money), via bond, equity, loans.

Capital market : in the middle where those with money (investors) can provide money to companies that need money (capital)

Capital markets infrastructure has played a critical role in global finance. For the past decades, it has silently been providing the transaction backbone for both capital and financial markets. But it is also antiquated – where a single transaction must traverse siloed system via messaging passing that is currently subject to errors, delays, and cost. Distributed ledger technology (DLT) can help to fix that, by providing a significant paradigm shift in the conception of financial market infrastructure as it can enable instant, authorized access to capital market actors “on a need-to-know basis” regarding several types of data, including asset reference data, asset ownership data and owner identity data. Current financial market infrastructure use cases that can benefit from DLT include: corporate actions, clearing and settlement, collateral management, and bond issuance. The DLT solution must also be enterprise grade to meet the rigors of regulators and compliance – including security, privacy, resilience.