The Transformation of Wall Street: Cryptocurrencies and Blockchain Technology

The adoption of cryptocurrencies and blockchain technology by the financial world seems to be an ongoing (albeit slow-moving) process. As the numerous benefits of distributed ledger tech were hard to ignore, some of the most prominent skeptics began adopting and implementing cryptography in their institutional activities. Unsurprisingly, Wall Street is starting to show signs of a transformation in which digital coins and distributed ledger technology are playing a significant role.

Banks Are Embracing On-Demand Liquidity

Despite any tensions between the crypto community and large centralized institutions, the large institutions seem to be eventually accepting the shift imposed by blockchain tech. Not only do these institutions want to stay relevant in a modern world of cryptographic money, but they also want to dominate the field of new opportunities offered by on-demand liquidity.

Recently, banks began implementing distributed ledgers in several areas of their services, and some of these banks even started developing their own coins that operate on blockchain-based systems. In February of 2019, J.P. Morgan introduced the JPM Coin, which was designed for making instant payments using blockchain technology between institutional clients; the digital currency could easily be transferred from one party to another via blockchain and then exchanged for fiat currency. Some other recent participants in the adoption of blockchain tech have been Citigroup and Goldman Sachs, which conducted their first equity swap via Ethereum’s blockchain.

As we can see, more banks are starting to embrace the convenience of the on-demand liquidity that the use of distributed ledger technology offers. But, of course, the mass adoption of the new tech will take time.

Hedge Funds and Investment Banks: Operation Costs and Compliance

Setting up a hedge fund is an expensive journey. Legal and administrative fees pile up, and breaking even can cost at least $300 million. Furthermore, the costs are increasing. The industry needs a change, and emerging tech may play a role in this shift. By integrating distributed ledger technology into the very core of their operations, hedge funds will be able to enhance their transparency, obtain smoother data flows, and increase efficiencies when it comes to custodianship and automated compliance.

Today’s investment banks and hedge funds are still relevant, but the way they run operations seems to be changing dramatically. Blockchain cryptography utilized by investment banks introduced the potential to use a shared client database on a blockchain; the new infrastructure allows the institutions to quickly onboard previously-validated investors from a network of other financial institutions.

Distributed ledger tech is particularly useful when it comes to Know Your Customer (KYC) rules and Anti-Money Laundering (AML) laws. According to Goldman Sachs, the new chain tech, which will enhance KYC and AML compliance, will result in global cost savings of as high as $6 billion a year. Commonly shared KYC documents provide easy access to information for all of the institutions that have access to the same nodes on the chain. AML is run in the same manner as KYC.

Private Equity Funds, Benefits of Blockchain Tech, and Tokenization

Just like in the VC world, it is in the interest of private equity (PE) funds to maintain transparency and efficiency when it comes to their LPs. The implementation of blockchain tech can establish such transparency and efficiency between the participating parties. Distributed ledgers have demonstrated their use in this field by providing a single interface between PE funds and their LPs.

Private equity funds are now trending toward the tokenization of financial assets. With tokenization, digital assets can be created and traded on a distributed ledger. Payments that are related to such assets (i.e., “dividends”) can be automated and rendered.

Cryptocurrency “Dividends” and the Next Generation of Digital Coins

As mentioned previously, “dividends” in the cryptographic world are up-and-coming. Cryptocurrencies that are believed to have no tangible value will eventually mature into assets that pay “dividends” and other derivatives. In fact, digital coins (such as Tezos) have already begun offering this option.

The next generation of digital coins will be backed by assets such as stocks, bonds, commodities, futures, real estate, and other financial derivatives. Companies (like Paxos) have already introduced cryptocurrencies that are backed by commodities. At some point, there may be a unique coin for each stock or commodity (tied to TSLA, gold, and others).

The Future of Financial Institutions

Blockchain tech is changing the operations of financial institutions. The new tech can help reduce the costs of traditional processes, and enhanced transparencies and efficiencies can help increase liquidity in the financial sector. Additionally, widespread adoption of the tech can offer entirely new investment opportunities, provided that the issuers of tokens further the development of market infrastructure for secondary market trading.

If implemented and used correctly, distributed ledgers and cryptography will allow the financial world to increase levels of transparency and efficiency. While efficiency will play a significant role in the health of an organization, transparency will give power to individuals by helping them build mutual trust for cooperative relationships.