In almost every country, the financial sector is in the midst of a profound transformation. The worst thing is the clear evidence (at the political and financial level) of no unity in the face of this important challenge, a challenge that tries to solve the big problem that is coming their way. There is no clear leadership in this process, which will have a negative impact on the form and timing of this transformation. Due to the financial crisis of 2008, the financial market players began to apply strict control and management rules. This imposition does not leave them much room to be able to react quickly and be agile in the face of changes that may arise, whether in structure, access or culture in relation to money.
The collateral damage for any financial institution that does not speak a language common to all, that does not establish international doors of communication and apply technical-financial solutions (where having, moving and managing money does not cost money) will be irreparable, becoming invisible and obsolete. Blockchain provides a new structure or financial architecture to the entire sector, opening up a multitude of business opportunities for the entire financial services industry, as well as allowing new forms of digital transactions. It undoubtedly offers great potential, not only in the drastic reduction of structural costs, but also in accessing more favorable jurisdictional environments.
In this article, since it applies and is directly oriented to the financial sector, I will talk more specifically about distributed ledger technologies (DLT). In capital markets, the two main areas of use for DLT are:
Process improvements, leveraging DLT-based solutions to more effectively share information between different stakeholders (such as in financing areas), and in the processing of corporate actions or customer knowledge (KYC).
The universe around the storage and transfer of value, i.e. the tokenization of assets and financial instruments through DLT
The intended purpose of this advanced financial digitization is:
– Introduce and categorize the concept of crypto-assets.
– To capture an estimate of the size and potential of the market.
– To be able to present and make known some business opportunities.
– To summarize the expected regulatory landscape and developments.
– To put crypto-assets in perspective.
– To articulate and address the main challenges ahead, discussing the improvement of competitiveness.
It is true that tax implications, electronic identification or data protection, among other things, are yet to be defined, which will surely have a technological basis and custody, and not face-to-face or manual. A study by the consulting firm Accenture assures that investment banking can reduce its compliance costs by 30% to 50% by 2025, thanks to DLTs.
1. THE INDUSTRY DRIVING CHANGE
For years, the financial services industry has been undergoing dramatic changes. Following the financial crisis of 2008, we have seen an increase in trading activity, declining interest rates, reduced profit margins in investment management and substantial progress in disruptive technologies. In addition, there are also changes in the new profiles, as well as in the needs of clients, investors and companies. Both active clients and new clients will demand digital solutions that are increasingly personalized, easy to access, cost-effective and with a wide range of offerings across all asset classes.
In general terms, the financial industry has begun to move from a market model with intensive and manual use of capital, to another with a more intensive and technological use of capital. Belobaba saw this some time ago, and as a result of this vision began to work on the design and implementation of this digital transformation, thanks to which our investors, customers and new users that will be incorporated, will be able to fully enjoy this type of services described above, from a single point, a Daap for everyone and everything.
2. BLOCKCHAIN ON THE RISE
For financial institutions (not only for them, but they are the first ones to suffer from this change), this disruption begins first with a change of thinking, understanding and attitude towards new technologies. The list of new technologies that companies will have to work with is both extensive and complex at the same time, especially at the beginning when they want to make them fit from a too traditional model, so they will have to do a more intense work.
Both Blockchain and DLT (distributed ledgers) are among the most innovative developments for the financial services industry, driving a new range of possibilities (previously unfeasible due to the very nature of the system) in new business models. The subset of applications in blockchain, such as consensus mechanisms, decentralization, cryptography or immutability, add new layers of trust and security to a world that will demand enormous digital interconnection.
Cryptocurrencies illustrate the enormous potential that Blockchain has in the financial industry, and that is still just beginning, but many see unprecedented potential. The announcement of Libra, where Facebook tried to launch a digital world currency, or that of some central banks working flat out to bring out their digital fiat currency or CBDC, foretells and recognizes the consolidation of the sector.
3. DIGITAL ASSETS AND TOKEN WEALTH
In the financial markets, DLT plays two fundamental roles:
First, they are used as an information and trust tool, to enable more efficient and effective processes (such as knowing your customer (KYC), etc…).
Secondly, focus on Digital Assets. Tokens represent a form of intangible value in digital format, being able to be produced and transferred as your network is defined.
Eyes are focused on the digitization of assets, a process that allows taking an asset (such as a value or a specific form of information) and creating its digital representation on the blockchain, including a lot of diverse information. This guarantees immutability, accessibility and liquidity, while allowing their holders to pay, produce them, also give rights of access, use or participation in blockchain-based applications to their holders and if we talk about a “Security Token”, it endows the holder with both rights against the issuers, how rights of profit or revenue sharing (as do shares for example), etc.
Tokenization therefore brings a variety of benefits, such as fractional ownership, instant settlement and improved flexibility and fungibility of assets (allowing for example a more holistic view of all their underlying assets). The figure below shows, in different categories, some examples and use cases of security tokens (along with the respective service providers), which are currently being implemented.
4. DIGITAL ASSET MANAGEMENT
When it comes to digital assets, it is clear that new rules have to be applied, one of those new rules is ownership, which is represented by a set of two cryptographic keys: a public key, which can be considered as the bank account (the account number), and a private key, which represents in this analogy the secret PIN to access the bank account. The private key is used to prove ownership of an address, and to authorize outgoing transactions with digital signatures.
Private keys are stored in wallets, which come in many forms, and can generally be differentiated into “hot wallets”, which are those connected to the Internet, and “cold wallets”, which are decoupled from the network. If we continue with analogies, “hot wallets” are like the cash registers in a gas station, while “cold wallets” could be compared to the safe in a vault in a security bunker.
to be continue……