Applying the same blockchain technology that underpins crypto and AI to financial markets may help financial instruments issuers cut costs over the next 5 years. However, despite blockchain’s promising potential, Moody’s warns that unless there’s adequate regulation, we may see it challenging sovereign authority and encourage tax evasion.
Blockchain technologies to help reduce costs – but at what cost?
Credit ratings agency, Moody’s Investors Service, recently published a report about how the blockchain technologies behind crypto and AI can help financial instruments issuers reduce costs in the next few years.
The report added that while integrating these technologies into the business model may lead to higher IT costs and require businesses to make a substantial upfront investment first, it will also help to lower expenses over time.
Recent innovations have boosted the disruptive potential of technologies like DLT (distributed ledger technology) and AI when used in financial markets, according to Moody’s. While AI has the potential to cut down financial institutions’ expenses by automating manual tasks, DLT can help to gradually lower financing expenses over time, particularly for smaller issuers – the report added.
Head of DeFi and digital asset analytics, Vincent Gusdorf, recently stated in a press release that DLT can potentially improve financial market efficiencies, foster better financial inclusion, and modernize the payment system beyond anything that’s currently known.
As tokenized bonds continue to gain popularity in global financial markets, they may help to lower transaction expenses and make capital markets more accessible by enabling organizations to bypass the usual intermediaries, such as banks, and also by increasing secondary market liquidity. Hong Kong’s central actually seconded this, after the successful tokenization of a $100 million bond issue from early 2023.
DLT may also enable businesses to tap into previously unknown revenue opportunities and penetrate new markets. However, it’s worth noting that even though the effects of integrating such technologies in finance will yield positive results – how positive though will largely vary between regions, countries, companies, and workers. In fact, some businesses will likely suffer from this technological disruption.
As mentioned at the start of the article, the technology’s promises do come with a little bit of baggage: potentially challenging sovereign authority and encouraging money laundering, tax evasion and terrorism – IF not used and regulated properly.
Moody’s also stated that they will track how the current technological transformation in financial markets pushed by DLT and AI could potentially affect credit risk due to borrowers’ inability to repay loans.
Conclusion
With such promising potential, two of the greatest innovations of our era, AI and blockchain, can transform the way businesses conduct their operations and how consumers utilize their respective services.
However, the inherent risks are there, unless a robust regulatory framework is put in place to prevent money laundering, tax evasion, and compromised sovereign authority.
Moreover, the effective integration of AI and DLT into business models will require a significant upfront investment – something that not every business may be able to bear in order to improve market liquidity or lower expenses over time.
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