Blockchain and other digital technologies are unprecedentedly shaping the future of finance. We see a rapid integration of digital ledger technologies in capital markets, paving the way for more transparent, efficient, and secure financial systems.
Richard Baker (CEO and Co-Founder of Tokenovate) spoke at the London Blockchain Conference 2024 to talk about the role of blockchain technology in shaping the future of finance.
Baker showcased Tokenovate’s platform and its practical applications. He also illustrated his points through a practical use case, demonstrating how Tokenovate is helping transform the trade of assets using blockchain technology.
Changes in financial markets that affect everyone
Baker explained that finance is undergoing disruption and that we are all affected by this. He noted that while technologies like cloud services have transformed retail finance, capital markets are experiencing significant disruption through the re-engineering of financial market infrastructure, specifically the application of digital ledger technology (DLT) in capital markets and derivatives trading.
He elaborated on how the re-engineering of finance infrastructure affects everybody:
‘These derivatives are economic and legal contracts that the world uses in very high volume that underpin most financial assets that exist in capital markets but also underpin the propositions that you and I have as consumer experiences. And what I mean by that is when I go to the local retail store and buy a TV or a sofa or when I take out a mortgage or a loan, there is a derivative behind those products, ironing out volatility, taking out price risk.’
Baker identified blockchain as the driving technology of this re-engineering and predicted that over the next 5–7 years, blockchain will significantly reshape market infrastructure, including clearing houses, banks, exchanges, brokers, and other key participants in derivative contracts.
Renewed interest in public blockchain and the UTXO model
Baker discussed the process of selecting blockchain or digital ledger technology (DLT) for capital markets, referencing a study by GFMA (Global Financial Markets Association). He noted that early implementations focused on private, permissioned blockchains. These helped educate institutions but ultimately weren’t truly innovative, as they merely functioned like private databases, lacking the shared consensus and transparency that true blockchains offer.
In 2022-2023, there has been a shift toward public, permissioned blockchains in capital markets, with growing regulatory oversight and governance structures. Baker highlighted the importance of public blockchains for synchronised timestamping in complex trading processes and advocated for the UTXO model, which he explained in detail in contrast to the competing and more popular account-based model.
Role of digital ledger technology in finance
The technology’s ability to provide a synchronised, immutable record of transactions enhances trust among parties. In capital markets, where derivatives play a crucial role in managing risk and volatility, DLT simplifies complex processes. Real-time data synchronisation ensures accuracy and reduces counterparty risks. Moreover, DLT supports the automation of many back-office functions through smart contracts, reducing manual interventions and operational costs, as Baker explained.
This shift is crucial for clearing houses, banks, and exchanges, which traditionally rely on cumbersome and opaque systems. As DLT continues to mature, its integration into capital markets is expected to streamline operations, optimise collateral use, and improve overall market integrity. However, another key aspect of DLT technology is the ability to tokenise assets, as Baker explained further.
Tokenisation of real-world assets
Baker explained that tokenisation allows for greater mobility and fractionalisation of assets, improving the use of collateral in derivative trades, a market valued at over $1 quadrillion. He highlighted the role of custodians, such as banks, in onboarding and managing assets that are increasingly being tokenised to improve efficiency in processes like payments and collateral management.
Baker emphasised the inefficiency in the current system, where collateral obligations for derivatives total around $24 trillion, much of which is tied up on balance sheets. Tokenisation can unlock this capital, improving access to collateral and enhancing trading flexibility. He also noted the high costs of current trade lifecycle processes, which involve multiple manual steps and services, leading to settlement failures and misreporting. By introducing blockchain, smart contracts, and automation, these processes can be streamlined, reducing operational costs and improving accuracy.
Digitising legal agreements
Baker explained how Tokenovate is addressing the challenges in capital markets by focusing on the digitisation of legal and economic agreements, specifically the International Swaps and Derivatives Association (ISDA) master agreement, which has been in paper form since the 1980s. Tokenovate leverages the ISDA’s efforts to standardise and digitise these agreements, transforming them into a “common domain model” that expresses legal terms in code.
Tokenovate uses this model to create smart contracts on the BSV network, automating the fulfilment of financial and economic obligations. Baker highlights the importance of blockchain in managing the state and logic of these smart contracts, particularly for long-term agreements like 30-year interest rate derivatives. While initiating a trade is straightforward, maintaining it over time—daily updates on benchmarks, prices, and margin payments—is complex.
Automating this lifecycle is where blockchain adds value. He stressed the need to build on a durable, reliable blockchain protocol to ensure it can support trades even decades later. He also emphasised that blockchain is not a one-size-fits-all solution, but a useful tool within a broader microservices architecture.
Enhancing carbon markets with blockchain
Baker also highlighted Tokenovate’s work in the carbon credit market. The company is pioneering the enhancement of carbon markets through blockchain technology. By tokenising carbon credits, Tokenovate ensures transparency and trust in the trading process, addressing key issues like fraudulent activities and double-counting of carbon projects. Their platform uses smart contracts to automate and verify transactions, providing immutable records that enhance accountability. Collaborations with companies like Land Carbon, which focuses on restoring peatlands in the UK, exemplify the practical applications of this technology.
As global standards for carbon offsets evolve, particularly after initiatives like COP28, the demand for high-integrity carbon credits will grow. Tokenovate’s blockchain solutions ensure that companies can accurately account for their greenhouse gas emissions and meet their Environmental, Social, and Governance (ESG) goals. By improving the traceability and reliability of carbon credits, Tokenovate not only facilitates better market practices but also supports global efforts towards achieving net-zero emissions.
Visit the website of Tokenovate to learn more about their services.
