As blockchain-based assets move from the fringes of innovation to the heart of global finance, they challenge not only asset definitions but the very infrastructure of capital markets. The layers of intermediaries, compliance structures, and regulatory institutions that evolved to solve 20th-century inefficiencies now face a paradigm shift. This edition of Knowledge Starts Here features an interesting discussion paper by Tuongvy Le and Austin Campbell, published under the auspices of Columbia Business School and NYU Stern. It explores how blockchain technology could deliver a faster, safer, and more transparent alternative to legacy securities infrastructure, especially in the context of the USA. Their work highlights why regulators must stop retrofitting outdated tools—and instead rethink market architecture from first principles.
The Legacy Architecture: A System Born from Crisis
The traditional capital markets infrastructure in the US is not a product of modern design but a historical workaround. In the 1960s and 70s, paper-based stock trading led to back-office chaos known as the “paperwork crisis.” Congress responded by introducing centralized clearinghouses and depositories, formalizing a deeply intermediated system still in use today. This legacy model, while effective in its time, is now characterized by fragmented responsibilities: brokers, market makers, custodians, clearing agents, and transfer agents each control slices of a process that should be seamless. With every layer comes cost, delay, and the risk of rent-seeking or misaligned incentives. Market reforms, though well-intentioned, have largely fortified these structures rather than disrupted them.
Blockchain Trading: A Simplified and Safer Market Stack
The authors highlight how blockchain enables near-instant, peer-to-peer asset transfers without relying on traditional gatekeepers. On-chain trades collapse multiple roles—brokerage, custody, settlement, and recordkeeping—into a single programmable transaction governed by smart contracts. This architectural transformation reduces costs, enhances transparency, and eliminates the counterparty risk associated with delayed settlement.
Even when centralized exchanges are used, the process is leaner and more direct. Ownership records are clear, execution is immediate, and withdrawal to self-custody wallets restores user control—features that traditional systems cannot match.
Transparency, Settlement, and Security: The Blockchain Advantage
Key structural benefits of blockchain-based capital markets include:
- Atomic Settlement: Trades settle in real-time or not at all, eliminating clearing delays and counterparty defaults.
- Programmability: Smart contracts allow customizable financial transactions, from time-locked derivatives to decentralized auctions.
- Transparency: Public ledgers provide a real-time audit trail for regulators and market participants.
- Resilience: Distributed systems eliminate single points of failure, reducing systemic risks that plague centralized institutions.
These benefits not only improve operational efficiency but also empower retail investors through direct access and greater market clarity.
Regulation by Design: Risks and Policy Considerations
The authors caution that blockchain-based markets are not risk-free. Smart contract vulnerabilities, key management errors, and new forms of market manipulation such as front-running and sandwich attacks must be addressed through thoughtful regulation. However, instead of retrofitting outdated rules, policymakers must architect frameworks that preserve the gains of decentralization while embedding essential safeguards.
Legislation like the FIT21 Act and the Lummis-Gillibrand Bill signal promising shifts in the U.S., but the authors argue for a more fundamental rethink: regulators must distinguish between legacy intermediated risks and the structural advantages of blockchain.
Implications for India’s Capital Markets
For India—home to the world’s largest population of retail investors and a thriving digital innovation ecosystem—the findings of this paper are particularly relevant. As regulators contemplate frameworks for tokenization and capital market modernization, blockchain presents an opportunity to leapfrog legacy inefficiencies. Initiatives like GIFT City, SEBI’s token sandbox, and CBDC pilots could all benefit from this architectural rethink.India’s chance lies not in regulating crypto as an appendage to existing securities law, but in reimagining capital market infrastructure from first principles, using blockchain as the foundation.
Such studies make a compelling case that crypto trading is a preview of what the next generation of capital markets will look like. The real-time, transparent, and interoperable infrastructure offered by blockchains could make today’s complex systems obsolete.
As the authors write:
“Let’s not build tomorrow’s system with yesterday’s tools.”
The challenge for regulators and industry leaders alike is to embrace this shift—not cautiously, but deliberately. The opportunity is not just to regulate crypto better, but to reimagine how all assets can be owned, traded, and settled in the digital age
