It’s like going from pigeon mail to instant messages… but for stocks, bonds, and other assets.
If you are a trader, you heard about the Depository Trust and Clearing Corporation, or DTCC.
It’s a financial services company based in the US. The most important thing it does for traders or investors is trade settlement.
And it’s slow… painfully slow.
It could take up to two business days for a transaction to complete.
That’s unacceptable. In the world of 2021, where you can send money instantly, there’s no need to wait for days if you just want to trade some shares.
And the solution comes from the crypto world…
Blockchain-Based Trading Is Better
If you haven’t heard about blockchain, let me explain… Blockchain works as a shared ledger.
So if you have a network of five computers, each computer will host the whole ledger… and any changes happening on it will show on all five computers instantly.
This is the beauty of it. And here are the two reasons why it so good for settling trades.
First, they settle instantly. You don’t need to wait for two or three days to see who owns what. If you buy a share or a cryptocurrency, all the computers connected to this particular blockchain will have updated information in seconds. It’s like getting a notification on your smartphone—you don’t need to do anything, not even refresh the app. It does everything by itself.
Second, they cut out the middlemen. This is great news because third parties like DTCC add complexity. So why should trades go through them if they can get executed directly between the seller and the buyer?
That’s another major reason why blockchain coming to the world of stock market trading is great news. It’s faster, and it’s more direct.
And bitcoin, the world’s most technologically advanced currency, also uses blockchain for settling trades and accounting.
Blockchain Trading Is Coming to the US
Just days ago, in the United States, Credit Suisse, a bank, and Instinet, a broker, settled trades via blockchain.
This is a first-of-its-kind project, but it will not be the last.
And there are already thousands of financial instruments and processes that run on a blockchain. None of them is big yet, but it’s a matter of time before they grow and expand.
Blockchain has a lot of support from both new-generation trading apps like Robinhood and even hedge funds like Citadel.
And it’s great for individual investors because it will make trading cheaper and faster. Instead of waiting for days and paying fees to some slow-moving third party, you can settle your trades instantly and at very little cost.
Paxos, the company that is running this blockchain implementation, will work with the United States Securities and Exchange Commission (SEC) to get full registration this year.
In other words, watch this space. And it’s likely that by the end of the year, you’ll be able to settle your stock trades in the US faster and cheaper than now.
Blockchain Has More Applications than Trading
Besides stock trading, blockchain will be used to transform other areas of finance and banking.
Payment processing will be faster, cheaper, and more direct when blockchain solutions are used more broadly. In payments, blockchain has the same advantages as in stock trading—the ones we mentioned before, plus excluding the middlemen.
Supply chain transparency will be improved when more blockchain is integrated into the global trading system. With blockchain, you would be able to tell where each component or ingredient of a certain product was produced and whether the producer complies with global quality standards.
This will help more companies achieve higher ESG (environmental, social, and governance) scores by adding transparency and accountability.
ESG, as you remember, is one of the megatrends we’re monitoring on your behalf.
And as often happens, these large trends work with one another. Blockchain, which makes investing faster and cheaper, could play a role in trends like ESG taking off.
And you heard about it from us first.
Thank you for your loyal readership,
The Financial Star team