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Is a Blockchain-Based Stock Exchange a Pipedream?

 5 min read / 

Blockchain technology has been one of the most revolutionary technological concepts over the last few years. Several publications, covering various aspects where the distributed ledger technology could use its disruptive force to allow a change in different markets, have been written. As such, there are barely any critics of blockchain technology. However, there is a group of critics emerging from different parts of the world with regard to some of the applications that the distributed ledger technology is being experimented.

For instance, there have been recent reports suggesting that in the not so far future, stock exchanges, which have already started to experiment with blockchain technology, could overhaul the traditional systems and replace them with blockchain-based peer-to-peer networks, but they have received their fair share of criticism.

Ideally, replacing the traditional exchange systems with blockchain-based systems would effectively render ‘John and Jane’, who have been tirelessly working behind the scenes to settle, audit and confirm equities transactions, jobless. However, things are not as straightforward as they have been in other markets where blockchain technology has been very effective.

There Is Something Good About a Blockchain-Based Platform

The good thing about this is that it would significantly cut transaction costs and bring about a seamlessly efficient system where participants would confirm trades via a decentralised network. Some have alluded that the peer-to-peer network could as well be composed of brokers and dealers, while others believe it could be significantly akin to the bitcoin trading process.

However, stock market industry experts have come out with differing opinions about the idea of replacing stock exchanges with a system comparable to the one that bitcoin is traded. With bitcoin, there is no fungibility, which means that one can easily identify transactions that are made and track them for eternity. This might not be applicable when it comes to stock trading.

The Stock Market Is Segmented to Suit Various Classes of Investors

In their current format, stock exchanges are centralised, and this ensures some level of security of trading information. The stock market is very different from bitcoin or the forex market. The market is composed of different classes of investors.

There is the most common, which is retail investors, then institutional investors, mutual funds, hedge funds, and a few others. For the same reason, these investors have different investing goals and prefer to use distinct types of brokerage firms that suit their varying investment styles.

For instance, there are some brokerage firms that are popular with online retail traders, while others are the best for options trading. There are also others that are famed for retirement investing – the list goes on and on. This uniqueness is what separates stock trading from crypto and other instruments.

So, saying that exchanges will overhaul their current systems in favour of a blockchain-based platform is far from becoming a reality. In fact, the experiments that are currently ongoing at the Australian Stock Exchange (ASX) and many other places across the world could be cut short before they enter their second or third phase of implementation.

When the Benefits of Transparency Become Subjective

According to an article published by The Conversation, ASX’s proposed system could be too transparent, thereby allowing distinct orders to be identified by the public. While transparency is generally a good thing for the market, it might do more harm than good in some situations.

There are mega hedge funds, mutual funds and even private equity firms that sell large positions on a gradual basis for prolonged periods. Allowing the public to identify such transactions could trigger a major market collapse or a rally that’s driven by what, under normal circumstances, would have been insider information.

This could destabilise the market and thus serves as one of the top challenges that exchanges might face should they choose to overhaul the traditional systems and implement blockchain-based exchanges.

Blockchain Could Work in Special Situations

However, there are a few exchanges that have identified specific markets in which such systems would work. For instance, Japan Exchange Group (JPX) has teamed up with IBM to test the potential of blockchain technology for use in trading in low transaction markets.

On the other hand, Korea’s exchange teamed up with Blocko to launch a blockchain-based platform that will enable equity shares of startup companies to be traded in the open market, while Russia’s Moscow Exchange (MOEX) successfully trialled a blockchain-based e-voting platform last year for bondholders at the National Depository.

So, as it is clearly demonstrated, a blockchain based share or bond trading platform might work, but only under special scenarios. However, trying to come up with distributed ledger platform for an entire stock exchange is unlikely to yield results any time soon.

Conclusion

In summary, blockchain will revolutionise several markets. Numerous publications have discussed its potential impact on real estate, the diamonds market, as well as the energy market, among others, with a high degree of optimism. However, as far as stock exchanges are concerned, the challenge might be a little too huge to overcome.

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