LUSAKA, Zambia – 29 June 2023 – Capital markets are part of financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. The Securities and Exchange Commission made a presentation on innovation in the capital market as a way of educating, protecting investors, and improving capital market trading.
During this presentation, the Securities and Exchange Commission, Directorate of Enforcement and Legal Services Officer, Mr. Kalonga Numero Sakala, stated that technology drives innovation in the capital market. The critical points in technological advancements are as follows.
Distributed ledger technology (DLT) and blockchains. Distributed ledger technology is a database shared across multiple computers on a network. It has database copy; all computers must approve changes before applying them. Blockchain technology is a type of distributed ledger technology. It is a chain of blocks, each containing a transaction record. It records transactions securely and transparently. The blocks are linked using cryptography, making changing or tampering with blockchain data difficult.
Distributed ledger technology and blockchain products are as follows.
Coin. A crypto coin is a digital or vertical currency that uses cryptography. A defining feature of a crypto coin is that it is generally not issued by any central authority, rendering it theoretically immune to government interference or manipulation (decentralized), for instance, bitcoin.
Token. A token is a digital asset that utilizes blockchain technology and represents ownership, access, and other rights. However, coins are typically used as a medium of exchange, while tokens can be used for various purposes, such as representing ownership. Coins are also typically more secure than tokens built on blockchain networks. On the other hand, tokens rely on the blockchain network’s security.
Security token. This type of digital token represents ownership of an asset or security. They are like traditional securities, such as stocks and bonds, but they are issued and traded on a blockchain. It can be used to raise capital for startups and other businesses through an offering.
Assert tokenization. This is a process of representing ownership of an asset in the form of a digital token. This can be done for various assets, including real estate, art, and intellectual property.
Digital asset trading. They buy and sell digital assets, including cryptocurrency, non-fungible tokens (NFTs), and security tokens. Some exchanges offer crypto trading.
According to the presentation, Mr. Sakala highlighted the essential benefits of distributed ledger technology and blockchain. He espoused that DLTs are very secure and tamper-proof, and there is transparency because everyone in the network can see all the transactions recorded. In addition, there is a quick commerce process, and they are secure without central authority. They can be scaled up to handle many transactions.
Artificial intelligence and machine learning. This branch of computer science deals with creating intelligent agents, systems that reason, learn and act autonomously.
Machine learning is artificial intelligence that allows computers to learn and improve from experience without being explicitly programmed. Machine learning algorithms use historical data to predict new output values. According to his explanation, artificial intelligence is a program that senses, reasons, acts, and adapts. In contrast, machine learning is an algorithm whose performance improves as it is exposed to more data.
Alternative data. This is the term used to describe data not traditionally utilized in financial analysis. This data can come from various sources, such as social media, satellite imagery, and sensor data. Alternative data can provide insights into market trends and behaviors that traditional data cannot.
Predictive analytics. This field of data science uses statistical techniques to predict future outcomes. Predictive analytics can predict stock prices, customer behavior, and other events. These predictive analytics can also be used with alternative data to provide even more accurate predictions.
It is imperative to note that artificial intelligence is increasingly applied in capital markets to automate tasks, improve decision-making, and provide new insight. For instance, banks use artificial intelligence to automate loan approvals and risk assessments. Hedge funds use artificial intelligence to trade stocks and other assets. Not only that, but asset managers also rely on artificial intelligence to manage their portfolios. Artificial intelligence can help asset managers optimize their portfolios for risk and return. Regulators also rely on artificial intelligence to monitor financial markets for fraud and other illegal activities. Artificial intelligence can analyze large amounts of data faster and identify suspicious activity patterns.
Below are some ways artificial intelligence operates.
Robo-advisors. These automated investment platforms use artificial intelligence to help investors manage their portfolios. Robo-advisors automatically provide personalized financial advice.
Automatic trading. This type of trading uses artificial intelligence to trade automatically. For example, algorithmic traders can analyze vast data and make transactions faster than humans. This can give algorithmic traders a competitive edge in the market.
Sentiment analysis. This technique uses artificial intelligence to analyze text and identify underlying sentiments, such as positive, negative, or natural. Sentiment analysis tracks market sentiments, identify investment opportunities, and manages risks.
Risk management. Artificial intelligence can manage risks incapital markets by identifying potential hazards, assessing the likelihood of those risks, and developing mitigation strategies. Artificial intelligence can monitor market conditions and identify potential market volatility.
Fraud detection. Artificial intelligence can detect fraud incapital markets by analyzing data for suspicious activity. Artificial intelligence can be used to develop predictive models to identify potential fraudsters before committing a crime.
Compliance. Artificial intelligence can assist financial institutions in complying with regulations by automating tasks, identifying potential violations, and providing insights into compliance risks.
In Zambia, the merging innovation in the capital market includesPeer-to-peer lending/Crowdfunding platforms, Global securities offering, Crypto asset trading, Assert tokenization, Robo-Advisory, and Multi-purpose investment platforms.
Innovation in the capital markets increases efficiency, enhances market transparency, improves access to capital, risk management and compliance, market expansion and diversification, global connectivity, customer experience, and engagement.
We must also understand that capital market innovation does not come quickly. Below are some challenges with capital market innovation: technology risk (cyber, data protection), market conduct, system risk, limited knowledge & capacity, money laundering, and territorial limitations in regulations.
However, regarding regulating innovation in the capital market, below are some key points: Wait and see, Test and learn, Regulatory sandbox (innovation hubs/offices, accelerators), Regulatory law, and reforms.
In conclusion, Mr. Sakala pointed out some essential aspects of the future trends and outlooks of innovation as being greater financial inclusion, streamlined and quicker trade and transaction settlements, enhanced transparency, improved efficiency, automated compliance (enhanced fraud detection and control), real-time market insights and optimized trading strategies.