The impact of blockchain technology on financial markets is a key topic in the field of economics. This technology has revolutionized transactions and asset transfers, acting as a large and powerful decentralized ledger that allows extensive financial transfers for users without any restrictions for individuals anywhere in the world, granting it numerous advantages. Join FFMag to become more familiar with this complex world.
Blockchain Technology in Financial Markets
To understand the impacts of digital technologies on financial markets, one must first thoroughly comprehend the nature and function of blockchain. After grasping what blockchain is, we will delve into its applications in financial markets.
What is Blockchain?
This concept was first introduced with the advent of the digital currency world and refers to a massive digital database that serves as a large ledger, holding countless encrypted transaction data. Blockchain is filled with asset tokens that are created for each asset on this platform; meaning any asset that generates a token on blockchain or is offered and traded will be recognized as an asset token.
This extensive ledger operates in a decentralized manner and has various features that demonstrate the effects of blockchain technology on financial markets, which we will introduce:
- Very high speed in conducting transactions
- A cost-effective and very cheap way to conduct financial activities
- Formation of smart contracts
- High level of security
- Significant customization capability
- Operations with encrypted data
- Elimination of the paper system
- Elimination of visual and human errors in data recording
- No need for intermediaries
- Providing the ability to monitor and track banking operations and various transactions
Effects of Blockchain on Financial Markets
Capital markets and banking systems have found ways to make their relationship closer, more integrated, and more effective through interaction. Blockchain, with its features, has caused widespread structural changes in the dimensions of major financial markets and still has a long way to go before the full effects of blockchain technology on financial markets are revealed.
With this introduction in FFMag, it’s time to see what impact this technology has had on the economic world and financial markets.
Emergence of a New Generation of Investors
Traditional markets thrive on individuals with traditional perspectives and motivations and are less attractive to some investors interested in the world of technology and modern transformations. The emergence of modern technologies like blockchain has opened the field for a new generation of investors who prefer speed, integration, uniqueness, and technological power and are willing to provide the necessary infrastructure for these capabilities and create the conditions needed for economic development through technology.
Read More: Stock brokers and their role in the investment process
Formation of Security Tokens
The experience of traditional financial markets and their entry into the digital world has led to the creation of a concept known as security tokens, which experts consider a result of the combination of the capital market and blockchain, greatly overturning the economic world; especially since both markets and the financial world, as well as blockchain, are known for two prominent features: transparency in operation and trust and confidence.
Asset Tokenization
Asset tokenization is known as the process in which a specific entity owning certain assets or valid shares publishes its assets for public access and allows their trading in secondary markets. With this explanation, asset tokens are divided into “tokens backed by tokenized assets” and “tokenized tokens”. The first category has been valued outside the blockchain space and with minor changes in their appearance by a token, they gain the ability to be presented on the blockchain.
Reducing Regulations and Traditional Challenges
The traditional method of investing in companies, startups, and various centers has its challenges and is associated with issues such as time consumption, fluctuations due to interest rates, liquidity risks, and the like; the entry of blockchain helps eliminate these complications and unnecessary regulations.
Improving the Performance of Tax Authorities
Digital technologies have enabled tax organizations to operate with greater transparency and clearer performances in calculating and implementing tax laws, improving their actions.
Modern Asset Management
Another effect of blockchain technology on financial markets is providing suitable and efficient conditions for asset management. Conditions that significantly improve security, increase transaction speeds, save costs, and allow non-physical and digital storage of important data and information, and share them with others in an encrypted and secure manner. Benefiting from these advantages is not limited to government organizations and companies; private organizations, companies, and individuals also have the opportunity to enjoy them.
Transformation and Improvement of Payment Systems
With the introduction of blockchain technology, payments undergo positive transformations and improvements, and unnecessary intermediaries in them are eliminated, which reduces costs and increases transaction speeds, making payment and remittance processes more diverse and much simpler than before.
Facilitating Financial and Banking Services
The traditional banking system follows intermediary processes, which, in addition to the need to comply with numerous and varied laws and navigate through complex administrative paths, require considerable time and extra costs. To these issues, one must add the lack of sufficient transparency and the application of systemic centralization. Additionally, user information and their financial accounts are always at serious risk that may arise for databases. With the entry of blockchain into the banking world, almost all these issues are considered resolved.
Accelerating Large-scale Trade
The importance of commercial prosperity and its development is undeniable. In traditional processes, financing and mobilizing resources, especially on an international scale, sometimes require months and years; registered information on paper systems exposes them to disclosure risks and the possibility of capital loss; however, with the implementation of digital systems, these defects and concerns disappear.
Conclusion
With the entry of modern and emerging technologies into the economic world, extensive transformations have occurred in global financial markets, necessitating their study, among which is understanding and examining the effects of blockchain technology on financial markets, including increased speed, time reduction, elimination of intermediaries, security enhancement, and the formation of smart contracts, just to mention a few impacts of this technology.