Greenwich Associates: The Blockchain is Coming to Institutional Capital Markets

Jul 22 2015 | 4:13pm ET

Greenwich Associates has released a new research report exploring the potential applications and advantages of adopting the technology behind bitcoin for use in institutional finance.

The new report, entitled Bitcoin, the Blockchain and Their Impact on Institutional Capital Markets, studies the online, massively distributed ledger called the blockchain, which records transaction information in a cryptographically secure manner and simultaneously ensures that bitcoin cannot be spent twice or counterfeited.

The study found that risk reduction is among the top benefits of the new technology. Asset categories such as OTC derivatives, private stock, repurchase agreements, and loan markets are likely be areas that immediately benefit from the adoption of blockchain-like technology. Although more established markets like equities will also benefit, Greenwich points out that asset classes where automation is still limited is where the blockchain will make the most impact, and thus likely to be adopted early. 

The company interviewed 102 institutional financial professionals for the report, asking questions aimed at determining awareness levels and understanding of distributed digital ledger technologies among financial services firms.  

Actual adoption in capital markets is still limited, the study found, although a whopping 94% of the financial professionals interviewed in the study believe distributed ledger technology could be applied in institutional markets. Nearly half are actively reviewing the technology within their firms.

While motivations for this interest varied, settlement, counterparty and custodial risk reduction were the key drivers.  From a product perspective, OTC derivatives, private stock, repo, and loan markets were viewed as the most likely asset categories to benefit from distributed ledger technology in the medium term.

“Given the growth in trading volume but still limited infrastructure, the markets for leveraged/syndicated loans and private stock are strong candidates for early adoption of distributed ledger technology,” noted Kevin McPartland, head of Greenwich’s market structure and technology research, and co-author of the report.

“In both par loans and CLOs, a month-long settlement cycle is common and often includes the use of a fax machine,” added Dan Connell, head of Greenwich’s market structure and technology practice, and also co-author of the report.  “For a market so obviously in need of technology, it makes sense to implement improvements with the latest tools and approaches available, like blockchain.”

As with most research on digital currencies, the report uncovers a number of hotly debated questions regarding exactly how capital markets participants will go about adopting distributed ledger technology.

For instance, many in the financial community want to separate bitcoin, which has suffered from fraud, theft and a lot of bad press, from the blockchain, which brings modern technology to old, outdated asset-transfer procedures. Yet the two are completely intertwined, leading to questions whether “private” blockchains (also known as sidechains) can operate without losing the benefit of the public one.

Greenwich plans additional research to address these complex topics. Founded in 1972, the company is a leading provider of global market intelligence and advisory services to the financial services industry. It specializes in providing fact based insights and practical recommendations to improve business results.

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