Eldorado’s new financing market?

Blockchain is the technology behind many cryptocurrencies such as Bitcoin. This digital currency, which is blowing out its 14th candle, is often criticized by public opinion and industry professionals, especially for its nebulous “economic reality” and its detrimental impact on the climate.

On the contrary, blockchain is often presented as promising in many areas: in fact, it is a real innovation that has already proven its reliability. Thus we will see that this technology allows for many different applications other than just creating a digital currency.

1. What is a blockchain?

Blockchain, which can be translated as a “chain of blocks”, is a technology for storing and transmitting information in a transparent, secure and decentralized manner.

The National Society’s Joint Information Mission on the Uses of the Blockchain defines this technology as follows: “A blockchain is a record, a large database that is privately shared simultaneously with all of its users, all holders of that record, and all of them who also have the ability to enter data there, according to for specific rules set by a computer protocol that is very well secured thanks to encryption.”

Blockchain, with its approach to data storage and transmission, has many advantages, such as more secure, transparent, efficient, faster data flows, and automation capabilities. Thus, these various advantages enable the players in the finance market to envision a prosperous future for this technology, especially in the field of transactions.

2. What is the benefit of using these technologies to finance the market?

A system that allows transactions to be managed in a secure manner, with complete confidence between players and with liquidity, cannot fail to arouse the interest of players in the financing of the market and this is what is currently happening. We are seeing an explosion of projects around blockchain and shared ledgers (distributed ledgers).

These different initiatives are built around common goals:

● Reduce costs

Blockchain technologies will reduce intermediaries involved in financial transactions. Don Tate, principal analyst at IHS Market, believes that “blockchain can save financial institutions money by eliminating many of the traditional intermediaries involved in the financial sector.” Today, the Central Depository manages the record of the amount of securities in circulation. With the blockchain, the role of a central custodian will not be necessary, as is the case with many intermediaries that provide access to various purchases/sales of securities. This would represent a significant cost reduction for companies in this sector.

In addition, blockchain technologies make it possible to automate transactions through “smart contracts”, reducing human intervention: this potential automation will also allow for significant cost reductions.

● Simplify and speed up transactions

Transactions can be executed much faster than at present thanks to the blockchain. Thus, according to Nadia El Filali, Director of Blockchain & Crypto Asset Programs at Caisse des Dépôts, “From the moment you go from purchasing securities to paying in delivery in a few minutes, compared to a few days in normal times, it is extremely important. Interesting. For the investor. In fact, since the shared information is only digital, and not physical, its exchange is faster and more efficient.

● Secure Transactions

With a decentralized and end-to-end encrypted data system, transactions are more secure and less vulnerable to fraud, hacking, and cybersecurity risks. Indeed, due to the impossibility of end-to-end modification and encryption of data, this technology makes it possible to avoid fraud and illegal activities. Data anonymization is ensured in a more efficient and secure manner, as the data is stored on a network of independent computers and not on single or central servers, which makes hacking more difficult.

This increased security may be of great importance to transparency and security Derivatives traded in OTC markets and in repurchase / securities lending transactions. In fact, the blockchain will itself constitute the “commercial repository” (the entity that holds various information on OTC transactions) imposed by the EMIR regulation and will make it possible at any time to know which agent is holding which contract.

● Transaction Monitoring

Thus, the blockchain, with its increased traceability, will make it possible to monitor transactions, particularly those potentially related to illegal and fraudulent activities. Therefore, this technology will be more effective in combating money laundering, terrorism, enforcement of sanctions and compliance with respect to financial risks.

Thus, thanks to blockchain technology, it is possible to have an instantly updated traceability of the origin of data flows, which has many advantages, especially when it comes to ethical and/or legal issues. In fact, data flows linked for example to criminal or terrorist networks can be tracked and blocked, thanks to blockchain technology.
In addition, databases are stored symmetrically on all computers, and the blockchain allows complete transparency in data management, which also limits the risk of fraud.

3. The outlook for the short and medium term

According to IHS Markit, an American digital information company, projects using blockchain technology are expected to generate revenues of more than $100 billion in 2024 and $462 billion in 2030. The growth in the application of this technology is expected to be exponential in the coming years, Especially in the market finance sector.

In fact, according to IHS Markit, blockchain-related projects could potentially save investment firms around $12 billion. For example, Blockchain can be used for securities and equity settlement/clearing activities.

Using this technology, the Swiss exchange SIX, for its part, plans to develop an alternative trading and settlement platform for digital assets, called the SIX Digital Exchange. This summer, the SIX Board of Directors will decide when to launch this future infrastructure.

In France, Caisse des Dépôts created in 2015 the first European group dedicated to Blockchain technologies in the banking, finance and insurance sector. Caisse des dépôts then launched a project in 2021 to assess the potential use and implications of creating a digital currency, in collaboration with BNP Paribas, Crédit Agricole, Tokeny and The Blockchain XDEV.

Thus, in addition to the many advantages mentioned above, it appears that blockchain-related technologies are already gaining positive acceptance from regulatory authorities. Thus, according to Don Tait, “The Securities and Exchange Commission (SEC) in the United States, the Financial Conduct Authority (FCA) in the United Kingdom, the Hong Kong Monetary Authority and other regulators are interacting favorably with Blockchain technology in the financial sector. These regulatory authorities bolster the credibility of Blockchain technology by helping it become more traditional.”

Thus, these various elements allow us to imagine without difficulty that the blockchain will be an essential technology for players in the financial market in the future.

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