In the recent past Blockchain has been the most talked about technology, it was originally designed to digitize and decentralize currency (Bitcoin) by using multiple ledger systems. What if there are multiple application of this technology and not just limiting it to the use of currencies. Experts over the world are now validating the use of this technology over the areas such as supply chain management, cross border trades & finance, etc.
Blockchain has gained so much attention and admiration because
- It is decentralized, no single entity owns it
- The data is cryptographically stored inside
- Data tampering cannot be done inside blockchain, it is immutable
- It is transparent
So the question raised is that can blockchain tech be used in stock trading and if yes then how will it change the dynamics of it.
Recently, SEBI has appointed a Committee on Financial Regulatory Technologies (CFRT) , exploring the possibility of using Blockchain platform in areas of post-trade settlement and fundraising. Japan is already the front runner, as it has already implemented blockchain as its core trading infrastructure at Tokyo Stock Exchange. Japanese brokerages have reportedly initiated an consortium, dedicated to adopt the process of blockchain, the founding member were Rakuten Securities, SBI Securities, Daiwa Securities and Nomura.
Back in 2015 Nasdaq, started the use of its Nasdaq Linq Blockchain ledger technology, this allows private non listed companies on the stock exchange to represent their own shares digitally. With the help of Linq and blockchain it is now possible for private companies to successfully complete and record securities transactions.
A single trade between buyer and seller involve stockbrokers, depositories, bank, clearing corporation, etc. The intermediaries are for efficient functioning of the markets but they are not indispensable. Consider brokers, most of them require you to keep a minimum deposit to start an account, forget the stock trading fees, then there are other fees like option fees, etc. In a world where DIY is given so much importance such high fees is unjustified. One survey found that 9 out of 10 millennials would prefer free digital trading platform instead of a regular broker. Budget conscious investors who are unwilling or unable to buy entire shares would be happy to use blockchain powered apps which allows micro-investing.
Built in Regulation
October 24th 1929, also known as “Black Thursday”, as 13 million shares were sold in panic by the investors on NYSE. Nearly 90 years later there is no way to shape up financial sector as such incidents have had happened since then (Black Monday, Black Tuesday, etc) Perhaps blockchain will take the regulatory imperative from traders hands for goods. Users of blockchain with the help of a passkey can access the ledger remotely. Traders could save money by permitting the regulators some oversight into blockchain powered trading. National Stock Exchange (India) is also piloting on such a blockchain system for automatic KYC process.
Some investors buy shares which gives dividends on regular basis and also who wont like some additional money coming in form of dividends. A significant portion of returns is attributed to dividends. “Cash on hand is music to an investors ears.” Automation in the dividend payment process would help the companies in saving a lot of time and money. Blockchain smart contracts help in creating process of self-executing payments. This payment will release the dividends to the customers on behalf of the companies. TMX Global and Natural Gas Exchange (NGX) are testing automatic dividend payments.
Ease in post trade events/ settlement
Over a million securities in India change hand on daily basis. The size of global investing marketplace cannot be comprehended by humans. Efficient trades settle on T+0 or T+1 day. There is need for automation in the settlement of trades happening. The way to do it maybe is with the help of blockchain powered smart contracts. Smart contracts can replace human oversight which happens in settlements of trades which by the way is also very costly. As soon as some pre-requisite is fulfilled these contracts execute. For eg. If a buyer and a seller agree on a price point the trade will be executed, resulting in shorter time lag. Shorter time lag means more money is available ko keep wheeling and dealing. Nasdaq Linq Blockchain Ledger, Australian Stock Exchange, Deutsche Borse are already using such technology for after trade settlement.
Asset Management and Fund Raising
A lot can be said about a company through its fundraising. Tesla’s management has admitted that it often runs negative cash flow. Even if the public weren’t privy to such an admission, Tesla’s relatively frequent return to the fundraising table would have clued investors in. Elon Musk’s electric car company raised $270 million in capital in 2010, $451 million in 2012, and over $18 billion total between 2010 and 2018. Experts don’t expect Tesla to be cash flow positive for quite some time. But perhaps Musk and the heads of other publicly traded companies who require capital could execute fundraising even more efficiently and cost-effectively by adopting blockchain technology next time. Companies will be able to sell stock directly to public without time constraints. Blockchain’s value comes from its ability to conduct fundraising sales and agreements without any middlemen involved. It dispatches cost-effective and immediate smart contracts to execute the transactions, saving money and time without sacrificing quality. aXpire is a blockchain powered company trying to solve this problem.
Tracking Securities Lending
Security lending is not understood by a mass of population. Traders lend ETFs or a commodity within ETF to other parties in exchange of a collateral. Nearly 3.5 trillion USD worth of ETF as of December 2018 was the market share. ETFs are considered as safe return instruments but are not so safe after all, using technology to hedge the ETFs could be critical as the market worsens. Leveraged loans that led to last financial crisis, most of the ETFs are heavily invested in such leveraged loans. For ETF manager lending securities to short seller is low stress and high upside proposition. Tracking the price of ETF is important. They can be tracked through blockchain powered ETFs, and triggers the issuance of collateral if the short seller becomes over-leveraged. Nasdaq Linq Blockchain ledger is tracking the purchase of securities.