Blockchain technology has already helped different sectors like finance, banking and logistics evolve new and more efficient platforms that leverage the use of the decentralized technology’s fast and cheap transactions to provide better services to their users. Blockchains run independently and can provide a universal “truth ledger” that is updated in real time. Having a shared ledger that every trader and stockbroker could agree upon is very useful for stock exchanges as it helps them get rid of redundancies. Here’s a look at how blockchains are revolutionizing global financial markets.
Fundamentals of Blockchain
Blockchains are shared repositories of data that are maintained by the people using the blockchain, instead of a centralized service. They are governed by the community that shares their computing resources to secure the network and are generally considered very resistant to tampering or hacking. For that reason, they are referred to as “truth ledgers” because information stored on blockchains cannot be modified. What makes blockchains very useful is the consensus mechanism employed by the blockchain which ensures that there is always a single shared ledger that every node in the network can agree upon. Maintaining consensus like this has never happened before in the history of mankind and has a lot of promise for the financial industry.
Blockchain Technology in Clearing Houses
The process of settlement of stock exchanges and other securities exchanges is very slow and expensive in part due to intermediaries, operational trade clearance, and regulatory processes. Blockchains combined with smart contracts can cut through the bureaucratic red tape and expedite the settlement process, also making it much cheaper than before. In effect, this means that the transaction fees can be significantly cut down. For example, a large investor using the Australian Stock Exchange typically pays 1.2% of the transaction fees on an average transaction and has to wait until the next business day for the Clearing House Electronic Subregister System (CHESS) to settle the transaction. Blockchains could make the settlement almost instant and reduce the transaction fees by over 80%. This is the reason why ASX is betting big on blockchain technology and is set to become the first major market to move to blockchain technology in the next two years.
Blockchain in Core Finance
The scope of blockchain technology goes far beyond just clearing and settlement of transactions. In fact, blockchains can be very useful for fundraising using Initial Coin Offerings, along with asset management, and monitoring systemic risk. With public ledgers, securities lending can easily be tracked to ensure no surreptitious activities are taking place. Not only do blockchains help make the trades more efficient, post-trade they can also eliminate the need for intermediaries, reduce counter-parties and operational risk while providing the infrastructure for faster trade settlement. This promotes fairness and transparency as the data is available for every network participant to view. Additionally, with smart contracts, exchanges can have inbuilt characteristics to track, block and report illegitimate attempt made by anyone on the network.
Adoption of Blockchain in Stock Trading
Nasdaq, the Australian Stock Exchange (ASX), the New York Stock Exchange, Shanghai Stock Exchange, the Tokyo Stock Exchange, the Deutsche Boerse, and India’s Securities Exchange Board have all began trials with blockchain technology to facilitate private securities exchange. ASX and NASDAQ are among the early adopters in this space. ASX is planning to make the switch to blockchains for settlements in the next two years. In 2015, Nasdaq announced its first private securities transactions using blockchain technology. The appeal for exchanges is clear – faster transactions and lower transaction costs. That is why it will be exciting to see which exchanges successfully implement blockchain based transactions first.