Blockchain in stock market

“The first generation of the digital revolution brought us the Internet for information. The second generation — powered by Blockchain technology — is bringing us the Internet of value: a new platform to reshape the world of business and transform the old order of human affairs for the better.” ~Don Tapscott on digital technology.

Blockchain heralds the “the future of financial services infrastructure.” Ever since cryptocurrencies (Bitcoins, Altcoins,etc.) have become an important investment destination, Blockchains are the next big opportunity for every financial service to cash on.

Honduras is looking towards Blockchain to solve land registry problem; banks are looking forward to it to make transactions safe, transparent and quick; payment gateways are eyeing for better efficiency through Blockchain and next in the line are stock markets.

You can read how Blockchain technology works here[1] and let us go ahead and understand how the Blockchain technology can revolutionize the stock markets.

Stocks market is a place where you invest to incur profits. Earliest evidence is from the market for selling bonds and shares for the Dutch East India Company in 1602. The Company was fulfilling imperial aspirations of the Dutch government in West Indies like British East India Company’s functioning in India.

The expeditions were risky and needed investment. But once invested, they could incur profits in fortunes. This trend continues in the modern era where the investors capitalize their resources and earn profits. Nowadays, the process is conducive with technology. Even then, mode of transfer and trading of these stocks is often complicated, expensive, and time-consuming.

Here comes the Blockchain technology for the rescue.

The Blockchain—a distributed public ledger—is an unalterable record of peer-to-peer transactions transparent to all, and not reliant on a third party for management. Instead, a distributed transaction processing community keep the system honest and do the intensive computing needed to “mine” Bitcoin and support the ledger.[2]

I will explain it in simpler terms. When you are about to make a phone call, you dial the number of the other person, with no involvement of anybody in between. Imagine making a call 50 years ago, there was a telecom operator in between who would connect the call.

It was Irritating, complex, time-consuming and expensive

Almost like the current stock market! The mediator is the stock transfer agent who keeps the track of the stocks.

There are multi-layered processes involved—pre-trade, trade, post-trade and custody, and securities servicing and all of them are complex and exorbitant.

A report by Oliver Wyman suggests, “IT and operations expenditure in capital markets is close to $100-150 billion per year among banks. Post-trade and securities servicing fees are near $100 billion. Significant capital and liquidity costs are also there because of current delays and inefficiencies within market operations.”

The difference between centralised ledger and distributed ledger is as follows:

The advantages of using Blockchain technology in stock market

• Decentralization: The money will not be at the helm of one single transfer agent, owing to the distributive nature of the protocol.
• Transparency: The assets possessed will be in the public domain and everyone will have an access to it.
• No duplication of the process: The creditor will meet the debater and there will be no double process involved in a single transaction.
• Operational overhead: As mentioned before, the saving in pre-trade, trade, and post-trade servicing fees will be huge.
• Privacy and security: This is the biggest advantage of using Blockchain, the secrecy around your identity is always maintained.
• Settlement time: The digital modes of the transaction are always quick to perform. The mining speed is low at present, but it will improve with advancement in technology.
• Ease of integration and global interoperability: One can easily go global with their stock trading and international boundaries are no bar.
• Higher Liquidity: Blockchain cuts inefficiencies, which leads to reduced entry barriers and costs. This means a lot of people for whom the markets were just inaccessible due to these barriers, can now participate

Flowchart to explain the entire process:[3]

The firsts to assess the potential of Blockchain

• Nasdaq: [4]“We’ve taken it upon ourselves to be a leader in terms of encouraging people and companies to explore this technology and understand it better,” says Fredrik Voss, Vice President of Blockchain Innovation at Nasdaq. In October, Nasdaq unveiled Linq, a solution enabling private companies to digitally represent share ownership using blockchain-based technology.
• IBM (NYSE: IBM) and Japan Exchange Group (JPX) [5]announced an agreement to test the potential of blockchain technology for use in trading in low transaction markets.
• A blockchain startup in Korea,[6] Blocko Inc. participated in the KRX Startup Market Exchange project and implemented its blockchain technology 'Coinstack' for document and identity authentication.
• The blockchain-based prototype is the first result of a collaborative research project between Deutsche Börse and the Deutsche Bundesbank. [7]The prototype is purely a conceptual study
• India’s biggest stock exchange [8]and a group of domestic banks recently collaborated on a know-your-customer data trial involving blockchain.

Blockchains are an untapped resource that can be of very much help in leveraging stock market to another level.