Blockchain Can Lower Costs and Raise Efficiency in the Securities Market

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Written by
Shivani Tripathi
Published on
September 12, 2022

In 2019, the global securities market size was valued at $92.98B. This figure is projected to grow to $167.12B by 2025 at a CAGR of 10.3%.

The global securities market comprises four products - equity, debt, hybrid, and derivatives, which essentially entail the buying and selling of shares of publicly traded companies, either directly or indirectly.

Blockchain in Security Markets

On the other hand, cryptocurrencies like Bitcoin and Ethereum are considered to be commodities. The major difference is that by buying crypto-currency, you are not purchasing a share in a publicly traded company but investing in a commodity.

The exponential growth in participation by newer retail and institutional investors will ensure that the global securities markets continue to scale. However, alongside this spurt, the potential for fraudulent activities, lack of data transparency, lack of efficiency, and higher costs are also growing.

Enterprise blockchain has the potential to address these challenges head-on.

The Existing Framework for Post-Trade Services

When security is traded, it comprises three steps:

  • Trade execution: The buy or sell order is executed by the investor.
  • Clearing: This step comes immediately after the trade. The terms of the contract must be carefully checked, reconciled, and confirmed.
  • Settlement: The final step is the settlement, which involves the transfer and ownership of securities to the buyer and the transfer of money from the transaction to the seller.

Existing Challenges

Despite the digitization of trading platforms, settlement can take more than three days. In a digital world, investors are looking for a much quicker turnaround time on transactions.

In the clearing stage, several details need to be verified extremely carefully. These include the exact identity and trading entity of both the buyer and seller, the exact security, quantity, price amount of cash to be transferred, settlement date, and the accounts and instructions for delivery of the securities and cash.

The potential for errors in data capturing is high due to the massive amounts of data being produced every second.

Several entities are also involved in the transaction - traders, brokers, regulators, stock exchanges, and banks, which means that they must all seamlessly talk to each other.

These transactions also come with several potential risks, from phishing attacks to fraud, which can happen on a massive scale. Though regulators are continuously introducing new legislation to reduce the risk associated with digital transactions, the existing safeguards are far from enough.

On the other hand, there is a thrust by the financial markets to expedite the timeframes within which transactions are settled.

Enterprise blockchain offers a promising solution to current challenges.

Blockchain Tech in Use

Today, regulators of securities markets such as SEBI, as well as stock exchanges, including the New York Stock Exchange and Deutsche Borse, have demonstrated a serious intent to evaluate the feasibility of leveraging the blockchain in their trading infrastructure.

Some exchanges have already made shifts. For instance, NASDAQ announced its first securities transaction using blockchain as early as 2015. Since then, it installed Linq, a blockchain-backed platform that expedites trade settlements in minutes rather than days.

The blockchain-backed BSTX exchange has also got the green light from US regulators to expedite the turnaround time for stock exchange services. This means that clearance and settlement procedures will conclude on the same day, as opposed to two to three business days.

In Japan, the Financial Services Agency has permitted the Japan Exchange Group, which operates the Tokyo Stock Exchange, to leverage blockchain as part of its core trading infrastructure.

Use Case: Blockchain and the Stock Market

Blockchain and Stock Market

The reason blockchain tech appeals to the stock trading ecosystem around the world is multifold.

Blockchain tech brings several advantages - enhanced security, higher transparency, and more importantly, instant traceability. Its characteristics have earned it the term "trustless" network because, by its very nature, it embeds trust into every transaction. 

Here's a look at blockchain's transformative potential when applied to the stock trading platforms:  

  • It enables the automation of post-trade events like clearing and settlements, thus reducing the need for counterparties and intermediaries. 
  • It enables complete transparency for any transaction. However, a permissioned blockchain will be used, where information can only be accessed by those users with permission. 
  • As the need for intermediaries, audits, and trade verifications gets eliminated, the cost of transactions also comes down. This creates more cash for investments and related profits. 
  • When costs reduce, so do the barriers to access, thus nudging more consumers to participate in the equity markets and growing the influx of capital into the market.

The Takeaway

Any network, platform, or business that leverages blockchain can track everything from orders to accounts in a matter of seconds. All stakeholders share a single view of the truth, thus enabling high trust, instant traceability, and credibility for any business.

The key challenge faced by businesses is transitioning their operations to a decentralized framework. It can also get pretty confusing with the range of terminology connected to these new systems - smart contracts, public blockchains, Hyperledger, wallets, tokens, etc.

The best approach is to partner with a provider offering the full blockchain stack of developer-friendly APIs, along with hassle-free integration.

Early investments in blockchain tech can transform the efficiency, value, and ROI of businesses. The future is blockchain, and it's only a matter of time before all businesses embrace it.

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