Towards Digital Capital Markets

Our latest whitepaper explores the transformative capabilities of next-generation technologies, focusing on Distributed Ledger Technology (DLT), and their potential effects on global Capital Markets.

Currently, Capital Markets face several key constraints. These include operational inefficiencies due to isolated and sometimes outdated platforms and processes, high costs and heightened risks, especially in cross-border transactions, and a heavy dependence on intermediaries, which increases costs and limits liquidity optimization. Additionally, inefficient settlement cycles lead to delays in trade execution and settlement, while regulatory fragmentation adds to costs and complexity.

The whitepaper suggests a hybrid model that combines emerging technologies and elements of Decentralized Finance (DeFi) with Traditional Finance (TradFi). By utilizing DLT and selectively applying Artificial Intelligence (AI), this new business model could standardize and streamline transaction processes, minimize the role of intermediaries, and speed up settlement times. Moreover, Digital Capital Markets would involve the tokenization of financial instruments, automation of settlements through smart contracts, and where suitable, the shortening of settlement cycles to nearly instantaneous 'atomic' settlements.

The optimization provided by DLT and AI-based business models offers numerous benefits. Real-time transaction settlement and reduced operational costs are among the primary advantages. Enhanced transparency and improved systemic resilience are also achievable through these digital business models. Additionally, digital analytics can significantly assist with risk management and uncover previously hidden commercial opportunities, while AI-driven trade reconciliation can support regulatory compliance.

The transition to Digital Capital Markets is recommended to be phased. This approach allows for structured testing, iteration, and refinement, ensuring that regulatory adaptation occurs smoothly and market stability is maintained throughout the process.

In conclusion, the transition to Digital Capital Markets promises several compelling advantages. These include enhanced transparency, better connectivity and systemic resilience, reduced risk and cost through the streamlining of intermediaries and mitigation of liquidity buffers, and improved speed, scalability, and connectivity, facilitating broader adaptation and acceptance.

Not a product of UBS research and does not constitute a financial promotion. UBS AG (London Branch) is a shareholder of Fnality International.