Blockchain technologies that underpin crypto could help issuers of financial instruments like bonds reduce financing costs in the next five years, according to a report by credit ratings agency Moody's Investors Service.

While incorporating these technologies into businesses could increase IT costs and require "substantial investment" at first, it could help lower expenses over time, the report published Wednesday said.

Recent innovations have increased the transformative potential of technologies like artificial intelligence (AI) and distributed ledger technology (DLT) when applied to financial markets, Moody's said. While AI could potentially reduce operating expenses for financial institutions by automating manual tasks, DLT could "gradually lower financing expenses, especially for smaller issuers," according to the report.

"DLT could improve financial market efficiency, modernize the payment system, and foster financial inclusion," Vincent Gusdorf, head of DeFi and digital asset analytics, said in a press statement shared with CoinDesk. "The overall economic and financial effects of technological changes, including the policy and strategic changes they prompt, are likely to be positive."

Digital or tokenized bonds, which are becoming popular in global markets, could lower transaction expenses and make capital markets more accessible by letting organizations bypass intermediaries like banks and by increasing liquidity on the secondary market, the report said. Hong Kong's central bank arrived at similar conclusions following a successful $100 million tokenized bond issue from earlier this year.

DLT could also enable some businesses to capture untapped revenue opportunities and enter new markets.

Although the effects of employing these new technologies in finance will likely be positive, "they will vary greatly by country, region, company, and worker, with some suffering from technology-driven disruption," the report said.

The technology's promise, however, comes with drawbacks such as potentially challenging sovereign authority and fueling tax evasion, money laundering and terrorism if not used and regulated well.

Moody's said it plans to track how technological transformation in financial markets fueled by AI and DLT could affect credit risk stemming from borrowers failing to repay loans.

Read more: Tokenization Could Improve Bond Market Efficiency, Hong Kong Regulator Says