The year is 2023, and the investment industry is being turned on its head by the rise of blockchain technology. From traditional Wall Street firms to small startups, everyone is looking for ways to incorporate this revolutionary technology into their operations. But what exactly is blockchain, and how is it impacting the investment industry?
For those unfamiliar with blockchain, here is a TLDR.
Blockchain is a decentralized digital ledger that allows for secure and transparent record-keeping of transactions. Its most well-known application is as the underlying technology for cryptocurrencies like Bitcoin, but it has the potential to disrupt many other industries as well.
In the investment industry, blockchain is being used to streamline processes, increase transparency, and reduce the risk of fraud. It’s changing the way that assets are bought and sold, and even the way that investment decisions are made.
In this blog, we’ll take a closer look at how blockchain is impacting the investment industry in 2023 and what the future may hold. So get ready to dive into the world of blockchain and explore the four most dominant use cases of blockchain technology in the vertical of financial investment.
Trading and settlement
In traditional securities trading, the process of buying and selling securities involves multiple intermediaries, such as broker-dealers, clearing houses, and custodian banks. This can undoubtedly be a slow and costly process, as each intermediary must manually reconcile their records and ensure that the transaction is settled correctly.
Blockchain technology has the potential to streamline this process by creating a decentralized and immutable ledger of all transactions. For your ease of understanding, I have abstracted how trading and settlement work on the blockchain network into 3 simple steps:
- A buyer and seller agree to a trade, and the terms of the trade are recorded on the blockchain.
- The buyer’s wallet sends the agreed-upon amount of cryptocurrency to the seller’s wallet, and the transaction is recorded on the blockchain.
- Once the transaction is recorded on the blockchain, it is considered settled, and the securities are transferred to the buyer.
This process is faster and more efficient than traditional securities trading, as it reduces the need for manual reconciliation and reduces the risk of errors or fraud. It also has the potential to reduce costs, as it eliminates the need for intermediaries to facilitate trade. There are several companies that use blockchain technology for trading and settlement:
- tZERO is a digital securities platform that uses blockchain technology to facilitate the trading and settlement of digital assets, such as security tokens.
- Digital Asset is a financial technology company that provides blockchain-based solutions for the trading and settlement of financial assets.
- Paxos is a financial technology company that uses blockchain technology to facilitate the trading and settlement of a variety of assets, including gold, oil, and foreign exchange.
- Symbiont is a financial technology company that uses blockchain technology to facilitate the trading and settlement of securities, such as bonds and equities.
Asset management
Asset management refers to the process of managing a portfolio of assets, such as stocks, bonds, and other securities, on behalf of investors. Blockchain technology has the potential to revolutionize asset management by providing a secure and transparent platform for tracking and managing investment portfolios. Here’s how asset management could work on a blockchain:
- An asset manager creates a blockchain-based platform for tracking and managing investment portfolios.
- Investors transfer their assets to the asset manager, and the asset manager records the assets on the blockchain.
- The asset manager uses the blockchain platform to track the performance of the assets in the portfolio and make investment decisions accordingly.
- The asset manager can also use smart contracts, which are self-executing contracts with the terms of the agreement written into lines of code, to automate certain tasks, such as rebalancing the portfolio or distributing profits to investors.
This process can potentially increase the efficiency and transparency of asset management, as it enables real-time portfolio performance tracking and allows investors to monitor their investments easily. It also has the potential to reduce costs, as it eliminates the need for intermediaries to facilitate the tracking and management of assets. There are several companies that use blockchain technology for asset management:
- ICONOMI is a digital asset management platform that uses blockchain technology to track and manage investment portfolios.
- Bitwise Asset Management is a digital asset management firm that uses blockchain technology to track and manage its cryptocurrency index funds.
- Blockchain Capital is a venture capital firm that uses blockchain technology to track and manage its investments in blockchain-based startups.
- Grayscale is a digital asset management firm that uses blockchain technology to track and manage its investment products, which include a range of cryptocurrency trusts.
Regulatory compliance
Regulatory compliance refers to the process of ensuring that a company or organization complies with relevant laws and regulations. In the investment industry, this includes ensuring compliance with regulations related to the trading and settlement of securities, the management of assets, and the protection of investors.
Blockchain technology has the potential to streamline the regulatory compliance process by automating the reporting and compliance process and enabling real-time tracking of regulatory requirements. Here’s how regulatory compliance usually works on a blockchain:
- A company creates a blockchain-based platform for reporting and compliance.
- The company records all relevant information, such as trade details, asset holdings, and investor information, on the blockchain.
- The company can use smart contracts, which are self-executing contracts with the terms of the agreement written into lines of code, to automate certain compliance tasks, such as generating reports or flagging potential compliance issues.
- Regulators can access the blockchain platform to verify compliance and monitor the company’s activities in real-time.
This process has the potential to increase the efficiency and transparency of regulatory compliance, as it enables real-time tracking of compliance requirements and allows regulators to monitor the activities of companies and organizations. It also has the potential to reduce costs, as it eliminates the need for manual reconciliation and reduces the risk of errors or fraud. There are several companies that use blockchain technology for regulatory compliance:
- Chainalysis is a blockchain analytics company that helps businesses and organizations comply with anti-money laundering (AML) and know-your-customer (KYC) regulations.
- Elliptic is a blockchain analytics company that helps financial institutions and other organizations comply with AML and KYC regulations.
- CipherTrace is a blockchain security company that helps businesses and organizations comply with AML and KYC regulations.
- Blockpass is a digital identity verification platform that uses blockchain technology to help businesses and organizations comply with AML and KYC regulations.
Identity verification
Identity verification refers to the process of verifying the identity of an individual or entity. In the investment industry, this is often done to comply with know-your-customer (KYC) and anti-money laundering (AML) regulations, which require financial institutions to verify the identity of their customers to prevent fraud and financial crimes.
Blockchain technology has the potential to streamline the identity verification process by providing a secure and decentralized platform for storing and verifying identity information. Here’s how identity verification could work on a blockchain:
- An individual or entity creates a digital identity on the blockchain by uploading their identity documents, such as a driver’s license or passport, and other personal information.
- The individual or entity’s identity is verified by a trusted third party, such as a government agency or credit bureau, and the verification is recorded on the blockchain.
- Financial institutions and other organizations can access the blockchain to verify the identity of an individual or entity in real-time.
This process has the potential to increase the efficiency and security of identity verification, as it enables real-time verification of identity and reduces the risk of identity fraud. It also has the potential to reduce costs, as it eliminates the need for manual reconciliation and reduces the risk of errors or fraud. There are several blockchain companies that are working on identity verification for investment purposes. Here are a few examples:
- Civic is a decentralized identity verification platform that allows users to securely verify their identity and control their personal information. The company has partnerships with several investment firms to provide identity verification services.
- Blockpass is a digital identity verification platform built on blockchain technology. It allows users to create a digital identity that can be used for various purposes, including investment and trading.
Now as we’ve seen, the impact of blockchain on the investment industry in 2023 is far-reaching and multifaceted. From streamlining processes and increasing transparency to reducing the risk of fraud and changing the way that assets are bought and sold, this revolutionary technology is here to stay.
While there are certainly challenges and uncertainties ahead, the future looks bright for blockchain in the investment industry. As more and more firms adopt this technology and find new ways to harness its power, we can expect to see even more exciting developments in the years to come.
So as we look toward the future in 2023, it’s clear that blockchain will continue to be a driving force in the investment industry. Whether you’re a seasoned Wall Street veteran or a small startup looking to make your mark, now is the time to get on board with this technology and see where it can take you.