written by Olivier Truquet

Metaverse: a potential solution for the Capital Markets

In 2016, CNBC reported in an article the major progress Barclays had achieved in successfully completing a trial to trade derivatives using Blockchain technology. In his article, Arjun Kharpal reported that the bank used smart contracts to complete a derivative trade test. Simply put, a smart contract is a piece of code that is executable electronically and that could become legally binding if counterparties agree to use it in their daily operations upon signing a traditional contract. Indeed, derivative trading via smart contracts could be easily monitored by the International Swaps and Derivatives Association, which is in charge of setting standards for OTC derivative contracts transactions. In the following article, I would like to briefly introduce how Blockchain could be applied to the derivatives market and how the derivatives industry could benefit from Metaverse in the future.

I. Capital Markets and Derivative Markets on the Blockchain

Over the past year, the number of Blockchain reports from large consulting firms such as Oliver Wyman reporting on the disruptive opportunities in financial markets have increased significantly. According to Oliver Wyman, the most important opportunities will lie in the areas of securities settlement and asset documentation. Currently, the capital market industry is plagued by a number of problems. First, the transactions are extremely complex and opaque as each company keeps their own records and different companies may have different ways of keeping their books. Second, the data and IT infrastructures on which financial institutions operate are neither uniform not interoperable because financial institutions do not share their data. Third, there are no common standards for bookkeeping and reconciliations and other processes are unnecessarily duplicated. This generates high costs for compliance and security and is a source of inefficiency for financial institutions. In the same report, Oliver Wyman goes on to define key areas in which Blockchain could generate significant efficiency gains such as securities transactions, asset servicing and derivatives transactions.

Securities transactions

Blockchain technology has the potential to significantly improve the securities transaction process by allowing all stakeholders to verify more easily that counterparties are in possession of sufficient funds and assets to complete their transactions. In addition, using Blockchain technology, a securities trade for fiat currency will happen in the following way:

1. The transaction is signed using the private key of an institution to allow institutions to trade assets as soon as they decide to execute the contract.

2. Following a smart contract’s execution, the transfer of ownership is instantaneous and is proved by the transfer of assets from one address to another.

3. Following this transfer of assets, the transaction is broadcast to the whole network and recorded in the next data block while the corresponding accounting entries are automatically recorded on a separate ledger.

Asset servicing

Another area that could benefit from Blockchain is asset servicing. In the near future, assets that comply with the laws and regulations of the country in which they are used can be issued almost instantly on the Blockchain. It could even be possible to transfer the ownership rights of an asset independently of the rights to cash flow of the asset. In this situation, a smart contract could be used to distribute earnings and manage other complex events. Furthermore, Blockchain can improve the visibility of fund availability as it can be tokenized and managed more simply. Financial institutions might be able to create their own tokens to better manage their individual and corporate investors funds. Lastly, wallets will significantly reduce the levels of custody as the final beneficial owner of the asset is the wallet holder, which will greatly simplify asset management.

Derivative transactions

Blockchain will enable the creation of innovative investment instruments with precise timing and credit risks. There are strong use cases for smart contracts in the derivatives industry as they can reduce execution times to a fraction of a second while including valuable information such as the obligations of counterparties (e.g. margin agreement and swap conditions). In addition, smart contracts will also enable the system to perform complex financial transactions in a transparent manner, with records available to all stakeholders who need access to the contract and all its previous forms.

II. Capital Markets and Derivative Markets on Metaverse

As the Metaverse ecosystem matures, I expect to see an growing number of financial applications on the Metaverse Blockchain. Indeed, Metaverse provides the infrastructure that financial institutions require to operate their business in a convenient, transparent, and secure manner.

Customer Registration can be done using Metaverse’s Digital Identity service while staying compliant with relevant AML/KYC laws thanks to its Oracle service. If Metaverse’s services convince financial institutions in the future, financial regulators such as the International Swaps and Derivatives Association can access all the information and transaction data they need by becoming Oracles. Currently, companies such as ZenGold are using the Metaverse Blockchain to digitize commodities such as gold.

In the future, use cases for financial institutions are countless. They will be able to use Metaverse’s digital identity services to improve KYC and AML procedures. Contracts might be transferred from wallet to wallet in a fast and convenient fashion. Finally, almost any kind of data can be hashed and stored on the Blockchain, which means financial institutions could use it to store all their data on a decentralized database. All data stored can be encrypted and made available only to users who need and are authorized to view the information, reducing risks related to information privacy as well.

In order to learn more about the Metaverse Blockchain and its ecosystem, you could visit Metaverse official website: mvs.org, read the white papers and follow Metaverse on all major social media platforms. Metaverse is currently open to partnerships with financial institutions in order to better understand their services and propose a tailored solution to their business issues. It also welcomes any suggestion you may have.

Resources Consulted in order to write this article:

http://www.dltmarket.com/docs/BlockchainInCapitalMarkets-ThePrizeAndTheJourney.pdf

https://www.cnbc.com/2016/04/19/barclays-used-blockchain-tech-to-trade-derivatives.html

https://www.forbes.com/sites/rogeraitken/2017/01/22/what-dtccs-ibm-blockchain-transition-reimagining-credit-derivatives-signifies/#5a84dafa4c25

https://www.coindesk.com/11-trillion-bet-dtcc-clear-derivatives-blockchain-tech/

https://www.cyberscoop.com/dtcc-blockchain-ibm-bank-setttlement-hyperledger/

http://www2.isda.org/

https://www.r3.com/

https://www.corda.net/

https://docs.corda.net/