Despite the size and growth of global stock exchanges, many still use outdated technology to trade and gather information. These inefficiencies not only take time, they cost businesses billions of dollars every year in lost profit potential. Blockchain has the potential to address these challenges.The complexity of the stock market makes it difficult to streamline and reduce the time and cost inefficiencies.Blockchain could potentially improve the existing system and reduce the inefficiencies associated with third-party banks and regulators. Blockchain will, however, require significant cooperation with regulators and cause widespread changes for businesses and investment firms.Despite the disruption, leading stock exchanges such as the NASDAQ, ASX and TSX remain keen to explore blockchain technology to improve their systems, remove clearinghouses, and test the implementation of smart contracts.
The stock market currently has complex procedures. These procedures include pre-trade, trade, post-trade and custody, and securities servicing. These multi-layered steps are time-consuming, cost inefficient, cumbersome and highly prone to risks.It often costs stock market participants like traders or brokers at least three days to complete transactions. Transactions take so long because the multilayered steps involve intermediaries. Steps such as operational trade clearance and regulatory processes often cause compounding delays to the process.A report by global financial risk consultancy Oliver Wyman suggests that IT and operations in capital markets cost banks $100-150 billion per year. The post-trade and securities servicing fee is an additional $100 billion. Stock market participants also incur significant capital and liquidity costs because of delays and inefficiencies in market operations.
There is significant hope that blockchain technology will enable transactions to clear and settle faster, cheaper, and with much ease compared to the existing system. Blockchain enthusiasts also believe that the technology can address issues concerning transparency and criminal activity in the stock market. Stock exchanges are currently focussing on blockchain’s automation and decentralization properties to reduce large costs levied on customers for trades. With smart contracts, blockchain technology eases paperwork concerning trade and legal ownership transfer of the security. It can also reduce the need for extensive third party regulators, since rules and regulations can be built within smart contracts. Blockchain technology is also used to explore current issues in the stock exchange market. These include the loss of data, fragmented data, insider trading, reconciliation, and ticket matching. For blockchain technology to work as an information source and research platform, the blockchain network will require greater scalability and common regulation.
The US stock exchange Nasdaq is currently leading the blockchain revolution. In 2015, Nasdaq revealed its Nasdaq Linq blockchain ledger technology has completed and recorded private securities transactions for their client Chain.com. Nasdaq and Citi also created a payment solution using blockchain technology to record and transmit payment instructions based on the Chain’s blockchain technology.The Australian stock exchange, ASX began working with US-based blockchain startup Digital Asset Holdings in 2015 to replace their current clearinghouse system.In 2016, The Toronto Stock Exchange, TSX is also exploring new blockchain capabilities by hiring a bitcoin entrepreneur in March 2016 as their first chief digital officer. He subsequently left the TSX to focus on Jaxx, a digital currency wallet. The blockchain network has great potential and capabilities in the finance sector, including the implementation of private blockchains in the stock exchange market. Although the various steps required to invest or trade in the stock exchange are complex, the blockchain can ease this process by speeding up transactions, removing the need for clearinghouses and increasing transparency within the network. For blockchain to live to its real potential, it will require significant time and various tests. Beyond that, it will also require the proper regulatory and legislative frameworks.
Effective governance is necessary to protect stock market participants and stakeholders. Further, it works to ensure that the system is resilient when it comes to privacy and cybersecurity threats.With the blockchain network, regulators need to play an active role in shared data management for reporting. Blockchain’s full potential can only be recognized if there are widespread changes in the business processes. Investments from both the purchasing and selling side of the stock exchange industry will need to shift.Image credit: TSX
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