Blockchain – Impending Revolution in Global Stock Trading?
Blockchain – Impending Revolution in Global Stock Trading?
What started out as a ledger for Bitcoin transactions, turned out to have so much more potential. It has become clear that blockchain technology has many promising applications.
It’s immutable and decentralized nature makes it appealing to many industries. It’s apparent that blockchain is one of the most revolutionary inventions of the century. While Bitcoin has many critics who raise valid points, that doesn’t seem to be the case for the technology behind it.
The finance industry is going through massive changes at the moment. And now that visionaries and innovators have realized that the technology can be separated from cryptocurrency, we might be on the brink of a new revolution.
The Benefits
In fragment market systems of today, there are many trust, compatibility, and transparency issues. Moreover, intermediaries, regulatory processes, and operational trade clearance make things difficult for regulators, brokers, traders, and stock exchanges.
Decentralization and automation can smooth things out. Blockchain can speed up transactions while reducing costs and commissions. The technology can eliminate the need for third-party regulations.
It can also have a role in settlement and clearing, especially when it comes to transferring ownership. Let’s take a closer look at some of these benefits.
Transparency and Fairness
The system can serve as an automated surveillance system for all transactions. So, an exchange that’s based on blockchain can be designed to track all activities and automatically report, and block any nefarious activities.
It can automatically implement security standards and policies. The ledger provides a full record of transactions to every participant. When it comes to the holdings of investors, everything would be crystal clear. In that case, there would be complete trust and transparency in the market.
No Need for a Middleman
Having no intermediaries could be one of the critical game-changers. There might be no need for intermediaries since the community itself would validate all the transactions based on a mathematical probability. The whole system would possibly eliminate the need for trusted intermediaries.
The stock exchange would be decentralized. Clearinghouses, settlement processes, and brokers might become a thing of the past.
Post-Trade Events
When it comes to post-trade activities, smart contracts (feature enabled by blockchain) can provide a platform for swift trade settlements, reduce operational risk, and eliminate the need for intermediaries. It would be possible for trusted online brokerage firms and other financial institutions to settle securities in just a couple of minutes.
The most significant benefits are increased transparency, improved liquidity, streamlined real-time settlement, and supply chain optimization. The innovation offers a single source of truth that is shared between all parties participating in the system. It is a possible solution to post-trade events processing.
Higher Liquidity
The automation can reduce various inefficiencies. That would lead to a reduction in cost. The market base would increase due to lower entry barriers. People who hadn’t had access to markets will be able to join in on the party, all thanks to lower costs. More participants mean more investments and increased liquidity.
Fees and Costs
Since trade confirmations don’t have to be done by intermediaries, blockchain transactions are faster. Thanks to Ethereum, peers can do all trade confirmations through smart contracts. Undoubtedly, audits, trade verifications, and trades record keeping will all get reduced or eliminated as the intermediaries in the system get minimized.
Wheels in Motion
When it comes to blockchain and stock markets, the future is not certain. However, the revolution might have already started. Whether or not it will be successful, we are yet to see. But, the following examples could be a great indicator of what is yet to come.
Nasdaq
The famous American stock exchange is at the forefront of the revolution. A few years back, the exchange implemented its Linq Blockchain Ledger. It all started with, Chain.com, the first client to use the new system. The system could help them record and complete private securities transactions.
Nasdaq hasn’t stopped there. Recently, they partnered up with Citi to deliver an integrated payment solution that automates reconciliation and allows for straight-through payment processing. It operates on a distributed ledger, using it to transmit and record payment instructions. Nasdaq announced the new system in May.
JPX
The Japanese Exchange Group is exploring the potentials of blockchain. They have partnered up with IBM for this endeavor. The duo is testing the technology’s use in trading in low transaction markets. The corporation has embraced a proof-of-concept that aims to investigate how can the technology be used to develop new platforms for trading low-liquidity assets.
ASX
The Australian Stock Exchange figured it’s time to find a better solution of clearing and settling trades. Their aim is to replace CHESS (Clearing House Electronic Sub register System) with a distributed ledger. VM Ware and Digital Asset are helping them achieve that.
Deutsche Börse Group
The reputable German marketplace organizer has been investing significant funds into the development of highly-advanced blockchain services. They are working on a few models that incorporate digital ledger and blockchain technology. Together with Liquidity Alliance, they have developed a new solution for transferring securities.
Korea Exchange
Blocko’s blockchain technology is the engine behind the Korea Startup Market. The aim is to provide a platform for trading equity shares of startup companies in the open market.
India’s National Stock Exchange
The country’s leading banks, RBL, IndusInd, ICICI, Kotak Mahindra, IDFC, and HDFC Securities, participated in a trial orchestrated by NSE. They tested the technology through a know-your-customer data trial.
London Stock Exchange
LSE leads a $ 20 million bet on capital markets startup Nivaura. Their aim is to make markets run like vending machines. Nivuara wants to build a platform for corporate equity issuance. If they succeed, corporate will be able to do a self-service issuance, without humans having to touch anything.
Luxembourg Stock Exchange
The exchange already has a new system in place. In the new security system powered by blockchain, the document type and URL, as well as the Officially Generated Signature by Appointed Mechanism, are stored in the ledger.
Santiago Exchange
This is one of the latest players on the field. The SE and IBM have designed blockchain-based platform which they plan to apply across Chile’s financial sector.
Challenges
There are some situations when more transparency can do more harm than good. There are private equity firms, mutual funds, and mega hedge funds that sell large positions gradually, during a prolonged period of time.
So, If the public were able to identify such transactions, it could trigger a rally or major market collapse. The driving force for that would be—insider information. So, if the exchanges decide to overhaul the traditional system, it might destabilize the market.
Moreover, a new blockchain-based clearing system will bring a new kind of fee. In many cryptocurrency blockchains, miners solve optimization problems in order to process transactions. Typically, their rewards are settlement fees coming from users whose transactions they are processing, as well as the newly-mined cryptocurrency.
Because of that, miners prioritize transactions based on the difficulty of problems and the fees offered. If the stock exchanges implement, investors might have to compete with each other for faster transactions.
Conclusion
Without a doubt, growing pains are a part of radical change. Because of that, only the strongest survive. Leading experts see a bright future for the revolutionary technology.
In conclusion, stock markets are just one aspect of life it could turn upside down. Above all, the technology has the potential to revolutionize governments, industries, businesses, healthcare and even civilization as a whole.
Image Credit: Pascal-Bernardon –Unsplash
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