There has been considerable coverage about how companies are able to use Blockchain technology to raise capital via tokens and while tokens are still being used as a funding mechanism - see here for a list of recent projects. The reality is that, until the volatility (the amount that the price of tokens zigs and zags up and down) declines and until we see real institutional buying of this new asset class, investors would be wise to commit a relatively small amount (3% to 5%) of their portfolio into tokens/cryptos. This leaves at least 95% and, arguably, this 95% of investors’ monies is where we could indeed see most disruption. The use of Blockchain technology to help improve the efficiency of issuing equity and debt by using smart contracts to report to compliance staff on an exceptions basis (by being able to monitor data that has been stored in a structured format) could prove to be a game changer for the financial markets.
The traditional ways of issuing debt and being tied to one jurisdiction (therefore needing to comply with certain tax requirements) may well not hold true for the issue of digital debt instruments. It is claimed by the German firm, Cash link, that over the life cycle of a bond, by using Blockchain technology it is possible to save 35% of costs by automating many of the current manual processes such as updating bond documentation. The use of blockchain could also reduce the number of intermediaries involved since bonds may no longer need to be registered with a central securities depository. Even more extreme, HSBC Blockchain technology could help streamline the process of tracking the use of bond proceeds, resulting in savings of as much as 90%. Either way, as costs are reduced it becomes possible for smaller debt issuance programs to be undertaken by firms which historically have not been able to access capital from the bond markets. Denis Coleman, from Goldman Sachs is reported as saying: “By lowering some of the barriers to participation in bond markets, blockchain technologies could eventually open them up to much smaller players. This is just the very start of a journey, but you could see the democratisation of bond markets.”
Therefore, it should be of no surprise to see the findings the Deloitte 2021 Blockchain Global survey (based on 1,280 firms world-wide) be so upbeat about the use of Blockchain and Digital Assets: “Banks and industries other have no choice but to embrace change. Participation in the age of digital assets is not an option - it is inevitable. Leaders are only left to decide how and when their organisation should start - and how to use digital assets and new global financial infrastructure to their greatest advantage”.
As we start to see the issuance of more Digital Assets backed by real estate, debt and equities, there will be a growing demand to be able to make income payments digitally - i.e, rent, coupons and dividends. There is no reason why such digital income payments cannot then be made on a weekly or at least monthly basis as opposed to the current six-monthly distributions, which is the norm in equity markets with quoted companies making interim and final dividend payments. As investors and managers of mutual funds are offered a choice of greater transparency (one of the key attributes that Blockchain technology enables) lower costs and potentially more frequent income payments and the demand for more Digital Assets is likely to grow.
Another increasingly important consideration for investors that has to be addressed by those organisations looking to raise capital is Environmental Social Governance (ESG) credentials. Once again, according to KPMG, Blockchain technology offers some real advantages: “The beauty of using DLT and blockchain is that it can be combined with a range of other emerging technologies to enable exactly the type of digitized, verified, tokenized, data-sharing platform that banks, insurers and asset managers so desperately need to unlock innovation around ESG criteria”. A considerable amount of work and infrastructure still need to be built before we see mass adoption of Blockchain technology by organisations looking to raise capital. However, there is a growing body of evidence that Blockchain technology can play an increasingly important role for those looking to raise capital and for potential investors alike. When looking at surveys from firms such as Deloitte it would certainly seem to be the case that executives are open for change too.