#2. Blockchain – the future of share trading
5 blockchain use cases in financial services
Share trading will soon be impacted by the blockchain. Utilizing blockchain technology potentially allows for greater trade accuracy, and a shorter settlement process.
November 8, 2016
Cutting out the middlemen
The blockchain is one of the most exciting technology innovations being developed right now. It has the potential to improve many processes within the financial sector, including share trading. Buying and selling stocks and shares has always involved many middlemen, such as brokers and the stock exchange itself. Creating a decentralized and secure ledger – a blockchain – that gives every party a say in the validation of a transaction, speeds up the settlement process, allows for greater trade accuracy, and can cut out some of the ‘middlemen’ (such as brokers) while changing the role of others (such as those determining share price).
So how does it work? Bitcoin is the world's first and most well-known blockchain application. It is a decentralized network for transactions in digital currency, which can be stored and transferred in the form of cryptographic tokens. Bitcoin uses a peer-to-peer network to broadcast information about transactions, which are then added to blocks that are cryptographically secured, forming an immutable blockchain. Because the entire blockchain is shared by all participants, it is easy to prevent double-spending and check who owns which tokens at which time. Furthermore, a powerful scripting system can be used to automate transactions or make them dependent on certain pre-conditions.
Originally, bitcoins are a neutral medium of exchange. However, by tracking the origin of a bitcoin, a set of bitcoins can be ‘colored’ to distinguish them from the rest. These bitcoins can then be given special properties and can be associated with the ownership of precious assets, such as gems, art, cars, or stocks and bonds. In this way many different assets can be exchanged using the Bitcoin blockchain, but there are also cryptocurrency networks that are dedicated to exchanging multiple assets, such as Ripple.
Trading has already changed significantly with the introduction of computers. In the near future, share trading will change even more dramatically. The blockchain can not only cut out brokers, but the stock exchange itself could also become decentralized, without a central system being required to bring supply and demand together.
Brick and mortar locations all around the world are already being replaced by servers, but by using the blockchain the trading could move from dedicated servers of the stock exchange into a decentralized network running on countless computers around the world. In fact, this could happen much sooner than expected. The main reason that developments are not speeding up more than they might, is that blockchain developers are even scarcer than other software developers.
Nasdaq blockchain technology initiative
Blockchain will also impact the process of going public with a company. For instance, only a year ago Nasdaq announced plans to leverage blockchain technology as part of an enterprise-wide initiative. In their own words, ‘blockchain will be used to expand and enhance the equity management capabilities offered by its Nasdaq Private Market platform’. It will offer ‘efficient, fully-electronic services that facilitate the issuance, transfer, and management of private company securities’. The blockchain will be able to take over the role of notary offices in this field, since its content is so well secured.
Is the blockchain completely safe? Well, the chain itself is, but there is still the risk of the ‘private keys’ that prove ownership of a certain asset being lost or stolen. The private key is a variable that is used for digital signatures and can potentially be stolen in the same way as losing your passwords due to phishing or malware. This allows its owner to change the ownership of assets recorded on the blockchain.
However, developers have already come up with solutions to protect the owners of private keys and blockchain assets. For instance, all parties within a blockchain could agree that a majority of the parties should sign before a transaction is agreed upon. This will prevent hackers from changing ownership by simply stealing a single key. Such multi-signature transactions can be programmed directly into the asset trading applications running on the blockchain.
Another challenge is scalability. Using the blockchain implies recording and broadcasting an enormous amount of transactions. Because it is shared with so many people, this creates a lot of overhead for data storage. And because every block is linked cryptographically to the block before, it requires a lot of computing power for the entire network to secure and check all transactions.
Reducing redundancy of information and improving performance
Bitcoin developers are therefore working on options to reduce redundancy of information and improve performance. An example is the lightning network, which allows smaller transactions between groups of traders to be handled quickly outside of the Bitcoin blockchain, with only the end result of the transactions being written to the blockchain itself, thus recording the end state securely without burdening the network with all intermediate steps. Other, dedicated blockchain trading networks such as the one being built by Nasdaq, are created from the ground up with high volume trading in mind, but are still very much in the testing phase.
Preparing for change
What is crucial for the financial sector, is to become an active part of blockchain developments. This means recruiting and training blockchain developers or partnering with them. Even though blockchain is still very new and its possibilities are still being explored, it is important to jump in and join forces with other parties in your ecosystem. Deloitte can help. For instance, together with you we can develop a proof of concept for your financial process on the blockchain or brainstorm with you about the impact and opportunities of blockchain for your organization and other organizations in your value chain. With blockchain, more than ever before, staying in business means looking ahead.
What are the possibilities for your organisation?
Do you want to discuss the possibilities for you organisation? Please contact Jacob Boersma via +31(0)882882069 / JBoersma@deloitte.nl, Bart Korteweg via +31(06)83339500 / BKorteweg@deloitte.nl or Jasper van Gelder via +31(0)882886311 / JvanGelder@deloitte.nl.
5 blockchain use cases in financial services
08/11 #2. Blockchain – the future of share trading