The National Bank of Canada noted that the technology of blockchain could dramatically change the future of financial services. Compared to the classical method of issuing securities, the blockchain allows to tokenize any type of equities and makes transactions instant, safe and transparent. Christopher Giancarlo, Chairman of the Commodity Futures Trading Commission of the USA, affirmed that if blockchain technologies were available in 2008, they could have prevented triggers of the financial crisis of 2008-2009. There is a wide range of applications for Distributed Ledger Technologies (DLT) in the equities sector. For example,
- Reducing risks of manipulation and automatically paying dividends. Storing ownership information in a distributed ledger minimizes the risk of securities manipulation, and via smart-contracts, dividends can be paid automatically. In other words, the application of blockchain technology can transform rules of the game in the market.
- Tokenization of assets and minimizing quantity of mediators. Since the blockchain is designed to remove intermediaries, tokenized assets can crowd out custodian banks. After all, assets are transferred directly through the blockchain and there is no need to store them with third parties. So, at traditional stock exchanges, the central role is played by Stock Transfer Agents, which are a third-party intermediary in the transaction. In the United States and Canada alone, there are more than 350 stock transfer agents who on behalf of more than 15,000 issuers, keep records of more than 100 million shareholders. Currently, one security can be stored at five or six levels of trust (exchange brokers, banks from the seller, local trust managers, global trust managers, the central depository). Only the Depository Trust & Clearing Corporation (DTCC) alone generates more than US$ 1,000,000,000 in revenue annually, serving 1.6 quadrillion transactions.
- Gradually diminished time of transaction. Typically, to confirm and settle each transaction, you need to complete a series of confirmations and checks. This is the reason for the current T + 3 market, in some cases, T + 2, settlement time, which makes investors wait for funds to arrive. Blockchain technology reduces this time almost to zero. Closing the “temporary gap” could save banks billions of dollars as a result of reduced capital spending. There is also a place to make STO from classical IPO and use all the benefits of blockchain. For instance, the Singapore Exchange has already established its own STO market.
- Lower transaction costs and more efficient interaction between investors. Clients of financial market institutions will have a number of advantages of implementing blockchain technology at equities, including lower transaction costs and the cost of servicing securities. Small and large investors will be able to interact with each other more effectively, transactions will become faster, more reliable and safer. This will allow the broad masses to gain access to the securities markets.
JPMorgan and the National Bank of Canada have already used blockchain to issue debt papers for US$ 150,000,000. Such giants of the industry as Goldman Sachs, Pfizer, Legg Mason and Western Asset have taken part too. According to Forbes journal, the mass introduction of blockchain technology will occur in an interval of 4-7 years.
The Benefits at a Glance
- Trades with security tokens
- Minimized time of transaction
- Security Token Offering (STO)/Tokenized IPO
- Greater liquidity
- Dividend distribution
- Reducing of transaction costs