Insights Blog How Blockchain Can Boost Capital Markets


How Blockchain Can Boost Capital Markets

Blockchain technology is increasingly being explored by asset managers, investment banks, brokers and other capital markets organizations globally with the objective to increase transparency and modernize market infrastructure.

blockchain transaction

What is blockchain?

Blockchain is a decentralized ledger technology (DLT) that records transactions and provides secure and transparent verification of data without the need for intermediaries.

Blockchain technology enables a network of computers (businesses) to agree (consensus) at regular intervals on the true state of immutable ledger (transaction records, credentials, other information) which is distributed across all the computers.

For more information on how this works, read: Getting Started with Blockchain and Decentralized Technology.

What is blockchain’s value promise for capital markets?

Typically, capital markets technology presently uses disjointed IT and data architectures, is extremely complicated, and lacks uniform standards. This creates a continual need to reconcile data with massive systems and process duplication, leading to high costs and protracted time to execute tasks.

Storing and agreeing datasets of financial obligations and ownership forms the basic core of capital markets operations. Blockchain has the potential to transform capital markets, from the issuance of assets to clearing and settlements, blockchain technology can:

  • Reduce costs for capital markets providers by eliminating intermediaries and automating manual processes. This can result in lower transaction fees, reduced settlement times, and decreased operational costs.
  • Improve efficiency by reducing the time required for settlement and clearing. This can increase the speed of transactions and reduce the risk of errors.
  • Increase transparency by creating an immutable record of transactions that can be accessed by all parties involved. This can improve trust and reduce the risk of fraud.
  • Improve security by using cryptographic algorithms to secure transactions and protect sensitive data. This can reduce the risk of data breaches and cyber-attacks.
  • Increase liquidity by providing a more efficient and transparent platform for trading. This can increase market participation and provide better access to capital for issuers.
  • Enhance regulatory compliance by providing a transparent and tamper-proof record of transactions. This can help capital markets providers comply with regulations such as AML and KYC requirements.

How could capital markets players use blockchain?

Settlement and clearing

Blockchain technology can streamline the settlement and clearing process by reducing the number of intermediaries involved. In traditional systems, intermediaries such as custodians and clearinghouses can slow down the process and increase costs. By using blockchain, transactions can be settled in real-time, reducing the need for intermediaries.

Digital securities

Blockchain can be used to issue digital securities, also known as security tokens, which can represent traditional assets such as stocks, bonds, and real estate. These digital securities can be traded on blockchain-based platforms, which can potentially reduce the cost and time required for traditional securities trading.

Trade finance

Blockchain can be used to facilitate trade finance by providing a transparent and secure platform for trade finance transactions. The technology can help automate trade finance processes, reduce the risk of fraud, and increase the efficiency of trade finance operations. 

Know Your Customer (KYC)

KYC is a process that financial institutions use to verify the identity of their customers. Blockchain can provide a secure and tamper-proof platform for storing KYC data, which can reduce the cost and time required for KYC verification.

Regulatory compliance

Blockchain can be used to enhance regulatory compliance by providing a secure and transparent platform for storing and sharing regulatory data. The technology can help financial institutions comply with regulations such as Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements.

Blockchain ventures in capital markets

To realize the benefits blockchain promises, many large financial companies are working on DLT-based solutions to enhance their capital markets infrastructure. For example:

  • Schroders asset management has taken a strategic minority stake in Forteus, an asset manager focused on blockchain technology and digital assets. Schroders noted that it also intends to study the benefits of blockchain in the asset management industry as well as create its own tokenization strategy.
  • In April 2021, UK asset manager Baillie Gifford invested $100m in In August the same year, eyeing tokenized securities on Bitcoin, Baillie Gifford invested $210m in Blockstream. It later suggested it intends to use Blockstream to speed up blockchain ledger transactions.
  • Goldman Sachs launched the new tokenization platform GS DAP in November 2022. It facilitates the issuance, registration, settlement, and custody of digital assets, including digital bonds.
  • Northern Trust pioneered the use of blockchain for private equity administration, using the technology to create a new level of flexibility and versatility in managing fund data. By applying blockchain to the entire operational workflow of a fund, every transaction and occurrence – from capital calls to audits to exchanges between GPs and LPs – is automatically captured and encrypted.
  • In Feb 2022, London Stock Exchange Group announced acquisition of TORA, through its Caspian platform provides digital asset trading technology that cover the entire lifecycle of a crypto trade. It includes a fully developed OEMS, PMS, algos and reporting.
  • In September 2022, Societe Generale Securities Services launched new services for asset management firms that allow them to act as fund depositaries, valuators, and liability managers for cryptocurrency-based funds.
  • In November 2022, the European Investment Bank, in collaboration with Goldman Sachs Bank Europe, Santander, and Societe Generale, launched its second euro-denominated digital bond on a private blockchain. Similarly, during that same period, UBS launched a $370M bond on the SIX Digital Exchange’s blockchain-based platform. The digital bond is settled instantly and automatically via the SDX-distributed ledger-based central securities depository network without requiring a central clearing authority.
  • In December, UBS also issued $50M in tokenized debt securities to high-net-worth and institutional investors across Hong Kong and Singapore.
  • Companies involved in post-trade activities such as settlement and clearing are also integrating DLT technologies. In August 2022, the DTCC (Depository Trust & Clearing Corporation) launched a private blockchain-based equity settlement platform that uses DLT. The platform facilitates shorter settlement periods, including T+0, unlike the traditional T+2 settlement cycle.

When blockchain backfires

It hasn’t all been plain sailing to date, which is perhaps why adoption has been slower than it might have been. The absence of uniform standards and practices in the implementation of blockchain technology is leading to project failures despite organizations assembling teams to leverage its potential.

Notable failures in blockchain implementations include:

  • Mistakes in the code for a prominent project launch meant that $34m worth of Ethereum (ETH) was rendered apparently inaccessible and locked in a flawed smart contract.
  • A DeFi protocol bug accidentally gave $90m to users. Any further changes to the protocol required seven-day governance process to make their way to production. Another DeFi protocol gave out more rewards than intended.
  • Hacks resulted in loss of over $26m, rocking several prominent DeFi projects including Uniswap,, Hegic etc.

Building resilient and secure blockchain systems requires a holistic test approach

Blockchain testing is crucial for ensuring the reliability, security, and accuracy of blockchain systems. Some of the critical elements of blockchain testing that need to be considered when designing a test strategy include:

Smart contract testing

Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller directly written into lines of code. Testing is critical to ensure the accuracy, safety, and reliability of Smart Contracts. It involves testing for various aspects such as functionality, security, and performance to ensure that smart contracts work as intended and do not have any vulnerabilities.

Blockchain consensus testing

Consensus mechanisms are essential to ensure that blockchain networks operate as intended. Blockchain consensus testing involves testing for various consensus algorithms such as Proof of Work (PoW), Proof of Stake (PoS), and Delegated Proof of Stake (DPoS). Consensus testing aims to ensure that the consensus mechanism used by the blockchain network is secure, reliable, and resilient against external threats.

Blockchain integrity testing

Blockchain integrity testing involves verifying the accuracy and integrity of the data stored in the blockchain network. It includes testing for various aspects such as data immutability, consistency, and authenticity. Blockchain integrity testing aims to ensure that the data stored in the blockchain network cannot be tampered with and is reliable.

Integration with enterprise systems

Integrating blockchain with enterprise systems can present unique challenges, such as compatibility issues and security risks. Integration testing involves testing the integration of blockchain technology with other systems, such as applications, databases, and APIs. It aims to ensure that the blockchain network is seamlessly integrated with other systems and is working as intended.

Blockchain testing for finance companies

In conclusion, blockchain has the potential to rapidly bring about fundamental positive change in capital markets but only if applications of the technology are rigorously quality assured.

A successful blockchain implementation requires the aggregation of technologies into one ecosystem including, cryptographic security, data storage, consensus protocol, Web 3, dApps, digital assets like crypto etc.  It is essential to have a clear understanding of the requirements and standards for each blockchain system and perform testing accordingly.

At Qualitest, we’ve partnered with clients working on blockchain projects right from early stages to implement their blockchain test strategy. Our blockchain testing services and blockchain application testing focus on blockchain integrity, crypto testing, DeFi testing, Web3 testing, Web3 penetration testing and dApps testing, with bigger picture scalability and vulnerability testing factored in too.

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