The potential limited only by imagination, blockchain technology which is the foundation of cryptocurrency, and artificial intelligence (AI), could revolutionize the financial markets in the next half-decade. This innovative proposition, according to a report by Moody’s Investors Service, could offer businesses a way to lower their costs associated with issuing financial instruments like bonds. However, despite the intriguing allure of lower costs offered by AI and Distributed Ledger Technology (DLT), the incorporation of these technologies is not without its initial stumbling blocks. They demand a hefty upfront investment and could temporarily inflate IT costs.
This technological duo—AI and DLT—has the potential to significantly shake up the financial markets. Through autonomous handling of routine tasks, AI could slim down operating expenses for financial institutions, while DLT may systematically lessen financing expenses, predominantly for smaller issuers. Vincent Gusdorf, head of DeFi and digital asset analytics, voiced a positive outlook on the likely impact of these changes stating that they would enhance the efficiency of financial markets, modernize payment systems, and contribute to financial inclusion.
One example of the blossoming potential of these technologies could be seen in the rise of digital or tokenized bonds. These new-age financial instruments might cut down on transaction expenses and democratize capital markets. This is achieved by allowing organizations to sidestep traditional intermediaries, like banks, and result in heightened liquidity in the secondary market. Such promising results were observed in a successful $100 million tokenized bond issue by Hong Kong’s central bank earlier this year.
Even though the potential benefits sound encouraging, the transition to AI and DLT brings with it a delicate balancing act. These technologies could disrupt the sovereignty of nations and, if not properly moderated, could become platforms that harbor activities like tax evasion, money laundering, and terrorism. Mindful of these risks, Moody’s commits to monitoring the impact of the technological transformation in financial markets on the credit risk resulting from failed loan repayment by borrowers.
Despite mixed sentiments, the full potential of these technologies is still unfolding. They usher in an era of excitement and caution, where the opportunities for smaller businesses and challenges for regulators co-exist. As we press forward, the navigating compass will undoubtedly be a robust regulatory framework that can harness these breakthroughs while mitigating their associated risks.
Source: Coindesk
