Moody's Forecasts a Financial Market Revolution through Blockchain and AI

Integrating artificial intelligence and digital ledger technology into business models may demand significant initial investment, but it holds the potential to reduce expenses and enhance market liquidity over time, according to a report.

The application of blockchain technology, which forms the foundation of cryptocurrencies, along with artificial intelligence in financial markets could lead to cost reductions for issuers of instruments like bonds in the coming five years. However, Moody's cautioned that without effective regulation, blockchain could pose challenges to sovereign authority and potentially facilitate tax evasion.

Moody's Investors Service, a credit ratings agency, highlighted that blockchain technologies underlying cryptocurrencies could aid issuers of financial instruments, particularly bonds, in lowering financing costs over the next half-decade. Although the adoption of these technologies may initially entail higher IT expenses and necessitate substantial investment, the report, released on Wednesday, emphasized the potential for long-term cost reduction.

Moody's pointed out that recent advancements have significantly expanded the transformative capabilities of technologies like artificial intelligence (AI) and distributed ledger technology (DLT) when applied to financial markets. While AI has the potential to automate manual tasks, potentially reducing operating expenses for financial institutions, DLT is expected to gradually decrease financing costs, especially for smaller issuers.

Vincent Gusdorf, Head of DeFi and Digital Asset Analytics, highlighted the positive effects of DLT on financial markets, including enhanced efficiency, modernization of the payment system, and increased financial inclusion. He emphasized that the overall economic and financial impacts of these technological changes, along with the policy and strategic shifts they prompt, are likely to be beneficial.

The report noted that digital or tokenized bonds, gaining popularity in global markets, have the potential to reduce transaction costs and enhance accessibility to capital markets. This can be achieved by allowing organizations to bypass intermediaries like banks and by boosting liquidity on the secondary market. The report cited Hong Kong's central bank, which reached similar conclusions following a successful issuance of a $100 million tokenized bond earlier this year.

Furthermore, DLT could enable certain businesses to tap into previously unexplored revenue opportunities and venture into new markets. While the overall impact of integrating these technologies into the finance sector is expected to be positive, the report cautioned that outcomes will vary significantly based on factors such as country, region, company, and individual worker, with some potentially experiencing disruptions driven by technology.

While these technologies hold great promise, they also come with potential drawbacks. Without effective regulation and usage, they could challenge sovereign authority and potentially contribute to issues like tax evasion, money laundering, and terrorism.

Moody's stated its intention to closely monitor how technological transformations in financial markets, driven by AI and DLT, could impact credit risk stemming from borrowers' repayment failures.