The rules that govern trades in financial assets have changed little over the past two or three centuries. Some say those rules have worked relatively well (apart from a few world-shattering crashes now and then). Does it need to change? Should it change? Can it change?
I believe it needs to, should, and can. What can we do to convince boards, investors, sellers, buyers, intermediaries and supervisory bodies to adopt new solutions? Assuming change is feasible, will blockchain be a major step toward doing away with traditional stock exchanges?
That not-so-good old-timey exchange
Today’s investor relies on a traditional system of buying, selling and accounting for transactions that’s old enough to be called ossified. The system generates considerable costs and adds to the time needed to close transactions. This is because trading in financial assets requires multiple entities arranged in a complex web of intermediaries, settlement systems and business partners. Whether they are investors, brokers, depositaries, stock exchange management or central supervisory bodies, all actors taking part in asset trading – buying, selling, or transferring – are obliged to generate messages, receive authorizations, and continuously update transaction status records.
Blockchain can change all this. Key transaction-related processes such as issuing securities, trading, clearing and settlements could be handled swiftly and without much friction with the use of blockchain’s distributed ledger.
And then came the crash
There is another factor to consider: trust, the willingness of investors to believe and have faith in the general rules underpinning the stock exchange system.
The fiscal crisis of 2008, triggered (in part) by the proliferation of opaque financial instruments, called into question the transparency of the existing global model. The crash we experienced a decade ago laid bare the need to search for alternative solutions that would help build a more transparent, tamper-proof system. What emerged in the wake of the crash were new government regulations that today, in the U.S., are being rolled back.
Blockchain cannot be rolled back.
Given its properties, I think that blockchain would give us hope for a stock exchange of the future. In a blockchain-based exchange, murky transactions would become a thing of the past. Smart contracts could dispel doubts as to whether settlements have been made correctly. Supervisory mechanisms – today indispensable, albeit inefficient – would no longer be needed.
Trust would be a given.
Blockchain hits the largest trading floors
The investment market is on the cutting edge of early blockchain deployments.
For instance, Nasdaq management has been looking at blockchain for three years. As early as May 2015, the private share-trading platform, Linq, was launched to enable unlisted companies to represent their shares digitally. Last year, Nasdaq Stockholm and the Swedish bank SEB started testing the use of blockchain to register all transactions in real time. Blockchain-based solutions have undergone rigorous testing on the Nasdaq Tallinn exchange. The premise of the project is that corporate shareholders would be able to vote during investor meetings or digitally transfer their voting rights to a proxy.
The London Stock Exchange Group, in cooperation with IBM, has begun testing a blockchain-based platform to fully digitalize trades in the shares of small and medium-sized enterprises. The tests are being carried out by the Italian operator of LSEG, Borsa Italiana. And the Australian Securities Exchange plans to finish its two-year-long process this year to develop a system that will increase operations transparency and enhance investor security.
One remarkable example of how blockchain can become a fact of life is the “Delaware Initiative.” In 2017, Delaware, known for its high concentration of listed companies (and business-friendly regulations and taxes), legally recognized blockchain as an official settlement system. State authorities are now setting up a system that will allow businesses to generate and store any company-related data. People who lobbied for blockchain in Delaware noted the complex nature of the securities market. They were particularly concerned about the challenge of tracking share ownership. The project’s promoters said that blockchain is a good solution that will make it possible to more easily verify share ownership and considerably reduce transaction times.
This is neither fantasy nor hype. This is happening now.
How the blockchain future will flower
Financial institutions must, above all, be certain that their customers’ money is secure. It is therefore unsurprising that even given the examples related, capital markets are still slow to embrace blockchain. To see genuine progress, certain conditions must be met, primary among them the establishment of the most stringent security standards for the block system. Blockchain implementations require proper laws. Unfortunately, right now, the legislative environment everywhere is somewhat polarized and inconsistent.
We must also bear in mind that the technology continues to be limited. Work is underway to boost its capacity and reduce transaction costs. On the New York Stock Exchange, there are around three billion trades on a normal day. The development of new platforms to handle such volume is likely to prove complicated and time consuming. And that translates into costs.
Nevertheless, I believe that financial markets will see the most important implementations of blockchain. They will become the training ground for other sectors.
. . .
New York Time, Alan Rappeport and Emily Flitter, Congress Approves First Big Dodd-Frank Rollback, link, 2018.
NASDAQ.com News, Nasdaq and Citi Announce Pioneering Blockchain and Global Banking Integration, link, 2017.
The Wall Street Journal, Markets Diary: Closing Snapshot, link, 2018.
Forbes, My Say, Why The Delaware Blockchain Initiative Matters To All Dealmakers, link, 2018.
. . .
– Blockchain poised to shake up our lives
– Will quantum computers doom the blockchain?
– Why do we care about blockchain technology?
–Blockchain – the ultimate financial crash
Blockchain in its current implementation is 99 percent shitty, sort of like like programming my first computer (IMSAI 8080 lol) using switches and leds to indicate ones and zeros.
What people don’t understand is that distributed ledgers don’t replace trust…. They merely replace the core of existing trust systems.
They provide internal governance, enforcement, and record keeping. By and large, except in cases where that encompasses the entirety of what they are replacing, they still require an interface to external events.
They replace a core element of business that is otherwise fraught with systemic risks through internal fraud, external coercion, risk exposure, and overhead.
We desperately need to separate the terms blockchain/distrubted ledger technlogies from cryptocurrency.
Cryptocurrency and cryptoeconomics was first and foremost a way to raise money globally without being suffocated by regulations. What it achieved is actually the opposite of the original idea, i.e. a centralized manipulable system. However the fact alone that many people rather buy tokens, which could also be trading cards, instead of stocks is in itself an invaluable achievement. Working at a financial institute I know that the effort to motivate people for stocks, e.g. via robo advisors, is very costly and near impossible job.
Blockchain according to Satoshi Nakamoto 08 is highly ideological cryptoanarchism: if a system has an administrator it promotes manipulation, inequality and will therefore fail at one point. We are very far from this original idea and the current solutions have many weak points.
DLT is a consensus machine with a database but just like I don’t buy an Oracle DB and expect it to solve an issue automagically, I need to apply it correctly or buy it included in a specific product, e.g. IOTA for M2M communication and included payment system.
99% of cryptos are blatant cash grabs by douchebags trying to tie the latest tech fad to random use cases. They are trash to be sure. I’ve also been against smart contracts from the start. They are interesting from a distributed app perspective, but to replace legal contracts…no.
The core use case however remains eCurrency. Btc and other cryptos cash value is volatile, and the fees are unpredictable. When these issues are addressed it will always be cheaper and easier to use than a bank. And of course it’s free (as in freedom). You don’t NEED a middle man to send your parents in another country some money.
This guy has valid arguments (check his previous article too) but I disagree with a bunch of his premises namely what constitutes a good vision for the future and the way he dismisses current uses of the blockchain even when he acknowledges them. For example he says that cryptocurrencies are used for illegal transactions but then somehow claims that it is not a reap-world use. You may disagree with the morality of say selling drugs but drug trade is very real economy which produces value (in the economic sense) for its customers.
I agree, the premise of blockchain is not great applied cryptography, that is just a tool that is used to acheive decentralized trust(even if not absolute trust). Sure it has its flaws but like you pointed out, its still an early technology. From a tech POV its nothing groundbreaking but it does provide a paradime shift from centralized to decentralized. Blockchain is trying to create decentralized trust that can be a powerful thing in most systems. I dubit the current blockchains and cryptocoins will survice the test of time. I also agree that theres a lot of gambling with in trading those coins/tokens but it is important to have such stupid amounts of money to finance development of the underlying tech. and explore ideas in different areas of application.
There are problems that can be solved through blockchain, just not cryptocurrency. Take a look at etherium DAPPS, and solidity.
Lets be honest here. The main driver behind 99% of the enthusiasm towards blockchain and crypto is the chance of striking it rich by betting on some coin or token or ICO to pay out in 1000x gains before cashing out one forgetting it ever existed.
If someone is thinking blockchain could solve X problem, they are really thinking more about how they could get rich by convincing other people that it would solve X problem. Once you invest early on, that’s the main goal. It’s basically a decentralized snake oil vending machine.
The issue here is that banks and financial institutions actually are amazingly trustworthy with all of the issues that bitcoin claims to solve. If I send 50 million via Wells Fargo I am guaranteed to have it show up at its destination with the same amount of trust as I would via bitcoin.
The difference is that if I get scammed over bitcoin then I’m out the bitcoin, meanwhile if I get scammed via a chase bank transfer then I can get a court order to have those funds reverted back to my account.
I like to compare Blockchain to solar panels. I remember a few years back when there were people who were going to training classes to learn how to install solar panels so that they could get jobs doing that. Problem is that those jobs never materialized. When somebody wants solar panels they usually just get a general contractor to install them. I think Blockchain is going to be like that. When companies want to implement it they will just get experienced developers and get them trained up on it rather than looking for specialized Blockchain engineers.
Because Visa takes like a 3% fee on all transactions, you have to get approval to set up a bank account, you need to wait days to transfer money between accounts, your money doesn’t work in every country, and if you live in some countries like Greece, Venezuela or Syria your banking system is completely fucked.
Blockchain token projects are sometimes pressured to use such market-making operators because they need to show their major investors and token holders that there is significant market interest in their project and things are going well.
Adam Spark Two
While there are a number of things in this article I’d like to comment on, this quote from the article actually concerns me: “All information used to identify citizens and any other citizen-related data could be kept in a single global decentralized blockchain-based peer-to-peer database. Forging a document would require breaking into and modifying a blockchain, which is practically impossible.”
Interesting and thought provoking article – thanks Norbert
blockchain = crypto hype
Great article! I’m working on a paper about systemic risks of CCP and I am curious about your opinion if there is a solution for such a problem triggered by Einar Aas(Norwegian trader)?Maybe new technologies implemented by CCP could prevent waterfall? Can distributed ledger technology minimize the risk caused by lack of information? Is it all about lack of transparency or just bad luck? I need help to investigate the core problem of CCP and how to prevent it. I would appreciate any information, I am still learning and I see you understand AI and DLT and I was wondering if they might help improve efficiency of CCPs.
Several U.S. firms seeking regulatory approval to launch a bitcoin exchange-traded fund (ETF), has estimated that 95 percent of bitcoin trading volumes are faked and only 10 exchanges publish reliable data about volumes on their platforms, without inflated numbers.
It’s so impossible that it’s happened already! Don’t you remember when Ghash.io regularly gained >50% of the bitcoin network? I know you’re not new to this bitcoin stuff. There’s no way you just forgot about it.
Everyone knew what was happening. It was plastered across /r/bitcoin. People boycotted them – and it continued anyway!
In all probability, they exploited that power to carry out a different attack – the greedy mining attack – that caused them to find a higher proportion of blocks than their network share should have allowed.
If you traceback to the genesis of the idea of blockchains as a tool to be used for things other than money, then we are talking about late 2015. But it’s been much more recent than that when you see people actually building out these types of networks (almost exclusively as ERC tokens on Ethereum).
The first ERC token standard (ERC-20) wasn’t even formalized until September of 2017. That’s only 14 months ago. If you wanted to try to turn one of your 2016 ideas into a reality, you’ve basically only had one year to try to make it happen. One year for fundraising, building the network and trying to encourage adoption. That’s it. For a problem previously considered interactable.
A friend of mine was explaining the idea of smart contracts to me and started with “imagine that you wrote a contract as a bit of code and both people looked at it and were confident that it did was it was supposed to.” I had to stop him there. That hypothetical is absolutely impossible. I do this professionally, and most of my job is figuring out that the code that I thought I understood and tested and checked thoroughly didn’t 100% do what it was supposed to. And that’s without adding in the fact that the person who wrote the code will probably try to hide some behavior I’m not aware of. And this is how everyone is supposed to deal with contracts?
don’t get me wrong. This is very compelling article
Bitcoin had a fair launch. Anyone who knew about Bitcoin and had access to a PC could mine from day 1. Over time, mining became more difficult but people could easily buy BTC on various exchanges or from other people who had Bitcoin. You didn’t have to be a member of a privileged class to get into Bitcoin at the ground floor.
Ethereum had a fair launch. Unlike Bitcoin, the project was far too ambitious for the people who conceived of it to pay for its development out of pocket. So they held an open crowd funding to pay for development. Anyone who heard about Ethereum could participate in the crowdsale, priced at about 30 cents/ETH. After the chain launched, anyone with a modern graphics card could also mine Ether and put some away.
Some founders on the team didn’t care for that funding model for Ethereum. They wanted Ethereum to be funded by insiders and VCs and held private for a long time. Some even left the project, or were encouraged to leave, over the difference in vision between an open community non-profit project, and a VC-held and VC-controlled for-profit organization.
And of course both Bitcoin and Ethereum are open-source projects with licenses that encourage the ability to copy, rework, and reuse the project code.
These days there are lots of Ethereum “killers”, ETH 2.0 “killers” and ETH competitors launching and planned for launch. For the most part, they do not adhere to the Bitcoin or the Ethereum open participation models. Some are closed-source, copyrighted projects. Almost all were and are funded by VCs and the wealthy via SAFTs, often through secret deals where price and amount of tokens are not disclosed. The public is generally not allowed to participate until the tokens get marked up 5x, 10x or 100x before an exchange listing. So you will end up with the vast majority of tokens owned by a very few, already very wealthy people.
But a radically unjust token distribution isn’t all that these new “Ethereum Killers” have. No, they also are, almost to the last, designed around plutocratic governance. That is, if you are one of VCs, the insiders and wealthy allowed to buy in early before the marking up to retail, you will have orders of magnitude more tokens and therefore you will have orders of magnitude more control over future changes to blockchain rules than the hoi polloi. Some even see this kind of governance as a feature and a good thing. I disagree emphatically!
Ethereum was an open, community-supported launch organized by a non-profit entity. It is today an open and community-participatory project. There are no fees to attach your application to Ethereum, other than gas costs. The blockchain is permissionless, no plutocracy can “vote you off the island”. Ethereum is not run by rich VCs and “accredited investors” who got in on the ground floor when you couldn’t.
I do hope that Ethereum wins out. I think there is an enormous difference between an open community project and almost all of the competitors who launched after. I do not want the future of humanity’s financial internet to be based on plutocratic control by the fabulously wealthy. How would that be one bit better than the existing financial system?
If making these observations, if hoping that Ethereum becomes the global financial commons, instead of a pluto-chain taking over, makes me a narrow-minded Ethereum maximalist, so be it.
Quntum Intenet in the long term is a fantastic development that reshapes security and encryption. But during early adaption, it may create some imbalance as systems transition from legacy models to QC.
Your thoughts on mitigating this, please.
Great article. Thank you
🙂 Love your comment
Blockchain today may be compared to what the Internet was in the early 1990s. Commercial enterprises and venture capital (VC) firms have invested more than $1.4 billion1 in blockchain since 2014, rivalling Internet investments in the early ’90s. Funding into blockchain companies is already up, to USD 2.4bn in 2017, with 25% coming from Venture Capitalist investment and 75% from Initial Coin Offerings (ICOs)2. While we have witnessed how the ‘Internet of Information’ has changed our society over the past two decades, we are now entering a phase where blockchain may do the same by ushering in a new paradigm comprising ‘Internet of Trust’ and ‘Internet of Value’. While the financial services industry has been one of the first adopters of this technology, applications abound in other industries as well. Blockchain could well be transformative for the global economy as a whole.
If you do a job search for “blockchain” you’ll find a lot of places (many very established like Amazon, Facebook, Fidelity, etc) hiring blockchain developers or more commonly software engineers that work with blockchain in some form. However, the odds of you landing your first job as a blockchain developer is unlikely to happen. I don’t think many people want a junior blockchain dev due to the immutable nature, probably makes the cost of screwing up higher.
I’m not big on legal questions, but I think doing on NASDAQ what we are doing here would be a financial crime. And the exchanges will have to monitor it that people are not trading with themselves. Otherwise the exchanges will get blacklisted.
I think FATF will shut it down quickly: the cryptocurrency exchanges will be regulated like NASDAQ and pumping fake volumes will be banned.
Excellent article, thanks for posting
Maybe the article didn’t go out and say it, but the point is pretty blunt: blockchain offers easy fix to complex problems but it accomplishes nothing, similar to “get rich quick” schemes or fad diets. As long as humans are inputting data, they can manipulate however they want and blockchain only gives people false sense of security they shouldn’t have. We already seen that though numerous exchanges getting “hacked” or ICOs taking money and dropping from the face of the earth, the fact that transactions were on public ledger accomplished nothing.
There is no easy solutions to this other than building trust, independent institutions, demanding better regulations and consumer rights. Its not as sexy as blockchain but it actually works. Once the craze ends, I think there will be applications but they will be extremely niche.
You can say the same thing about the internet bubble. When a new technology or asset class is created there will always be people jumping on the train to get rich. That doesn’t take away from the potential of the technology.