The Role of Blockchain in the Future of Stock Markets
At the same time, blockchain helps to improve operational efficiency for investors and companies in many ways. For example, it can automate a large number of operations that were previously manually handled, including settlement of trading transactions that could take days or even weeks before blockchain, with faster settlement times. Additionally, blockchain enhances traceability of the data.
Many stock exchanges, such as NASDAQ and the Australian Securities Exchange (ASX), are now running trials using blockchain to improve their trading infrastructure. Here are just some of the ways they are doing so.
Improved Transparency
Although still seen in connection with cryptocurrencies, blockchain may soon be most associated with financial institutions helping to overhaul capital markets. This distributed ledger technology could one day realise a utopian world in which every actor works from the same dataset, and most of the back-office functions are simplified or altogether removed.
This is possible because blockchain by its nature is transparent and every transaction is published in an open manner, with every block containing details of those transactions linked by a cryptographic hashes to the preceding block, or hash. Inconsistencies between two blocks can be readily spotted because every transaction carried out on the blockchain is fully published and visible to all the participants; new blocks are added only to the chain that has not been altered; and new blocks are added to the chain from back, not the other way around.
In fact, blockchain’s transparency and un-alterability also means that it could be applied to domains that require trustworthiness. For example, its usefulness could be harnessed at the time of making a democratic election: votes could be tallied and transmitted in blockchain format without requiring an un-biased third party to count a pile of ballots in real time, removing the possibility of fraud in the process.
Lower Transaction Costs
One way to increase operational efficiency on the stock exchange is to use blockchain technology to trim down the number of intermediaries involved in processing the transactions. Blockchain provides a faster and seamless workflow without out any errors or fraudulent activities.
Among the many benefits of blockchain is the fact that it allows thousands of stock transactions to be settled in real time, greatly reducing transaction costs and releasing capital that can then be reinvested back into the market. And because clearing no longer needs to occur, shareholders can plough their money back into buying new shares and other investments within minutes, rather than waiting several business days for the transaction to clear and settle.
Similarly, the traceability of shares could be facilitated by blockchain solutions that enable buyers and sellers to verify ownership in real time, and establish trust among investors, fostering a transparent environment. Achieve this and it will be the responsibility of regulators – to set the standards of regulations that encourage innovation but with high standards of security and transparency – and operationalise an effective user adoption plan, which crucially will require education and communication campaigns.
Tokenization of Shares
Tokenised shares might transform fundraising for new companies and how investors gain access to these new markets. By digitalising fundraising, tokenised shares make it possible to divide ownership – fractionalise shares, if you will – and remove geographical and financial-status barriers to entry.
Tokenised shares remove the manual and bureaucratic procedures that currently exist from the share certificate process and, by having the transactions managed by blockchain, transaction validation and settlement times are drastically reduced – while many of the risks attached to processing, such as mistakes and fraud – are greatly reduced; market efficiency and liquidity will be improved as a result.
Some of the world’s leading exchanges are already dabbling in the use of blockchain technology for the trading and settlement of stocks: Nasdaq Linq enables the private recordation and transfer of securities, as well as the automation of post-trade data processing and the reconciliation of trade discrepancies, making it potentially far better than current systems at market surveillance, while better enabling the analysis of investor behaviours. Of course, there are risks inherent to such undertakings, including security concerns that must be addressed and regulatory compliance that must be done.
Increased Liquidity
Though Blockchain is the technology behind the Bitcoin currency, banks and other traditional finance firms are recognising the potential benefits of Blockchain for speed, transparency, and cost effectiveness. In effect, Blockchain is an infrastructure layer of the internet that enables participants to work from a shared database, as opposed to relying on third parties or expensive manual processes.
Blockchains are distributed ledgers that record transactions via cryptography, which is kept in an immutable and unhackable record called a blockchain that keeps itself updated in a similar way to cryptography. Each block contains details of current and previous blocks in the chain, so participants can check whether the data in a block is correct. Durable storage eliminate points of failure and network chooses at random one of its computers containing cryptocurrency as voters to verify a block before adding it into a chain.
Its value lies not only in cryptocurrency, though it is enhanced by the three cardinal virtues that Blockchain offers: transparency, trust and accountability. Additional and pertinent applications include, but are not limited to, smart contracts, Internet of Things (IoT) devices, cybersecurity, non-fungible tokens (NFTs) and non-fungible tokens (NFTs). Blockchain applications are trackable, thus enabling their use in supply chain management.