The future of contracts in a digital economy : the impact of smart contracts on transaction costs in financial markets

Blockchain technology is regarded as one of the most important digital innovations of the last decade. Its increasing popularity has made applicability beyond cryptocurrencies a growing topic of interest. Smart contracts, based on blockchain technology, have created much excitement in the financial community, but their potential to significantly impact the way businesses and individuals trade with each other has yet to be examined. Building on case study research and a review of recent literature on the topic, this thesis evaluates their ability to decrease transaction costs in financial markets. Results suggest that smart contracts reduce moral hazard and adverse selection problems by automating trading processes, lowering information asymmetries and enhancing market transparency. Successful implementation of blockchain technology is likely to occur first in the clearing and settlement of financial securities, therefore challenging the traditional service portfolio of many financial intermediaries. Based on the findings, implications for market structure are discussed and a number of practical recommendations for financial institutions are given.