Is Blockchain Technology likely to disrupt or innovate stock markets?

What exactly is Blockchain? Blockchain is a write-only database which is cryptographically secured. It is a shared database on a central server, where every authorized person accesses an identical back-end database. Blockchain is a distributed ledger system where one can transact on the ledger and also generate reports.

The beauty of Blockchain is that it can make a huge difference in the way stock markets operate, especially considering that it is very data intensive and the margin of error is quite small. What makes Blockchain uniquely suited to data intensive activities is that the input data, once authenticated by the Blockchain, remains there permanently. It becomes a veritable source for storing information pertaining to a variety of applications ranging from land records, property link documents, title documents, legal records, capital market transactions, settlement data, among others. Such data is held to perpetuity. The access protocols ensure that you need to go through quality checks and a process of authentication before inputting data into the ledger. This also makes Blockchain a genuine source for smart contracts and data sets that are virtually inviolable.

Enhanced security makes the Blockchain almost tamper-proof

Blockchain has additional blocks of security built in. Blockchain permits data inputting only after there is consensus on the validity of the action. For Blockchain to fail there will have to be multiple points of failure which has a very low probability. Blockchain addresses the rising threat of frauds in the financial markets by providing immutable storage. Data once entered into the ledger, cannot be changed with ease. Any change will need the entire audit trail of previous blocks to be changed. This almost makes the Blockchain tamper-proof. That is why experts are talking about the multiple applications of Blockchain across stock market trading.

How is Blockchain useful in capital markets?

Considering that Blockchain has a very foolproof method of storing and maintaining records in a common verifiable ledger, it can be used to create a seamless chain between operations, back office and trading functions in a stock broking business. Let us look at some of the probable applications of Blockchain in capital markets.

• Blockchain can assist in automating matching of stock market trades and clearing and settlement. All shared database of online trading ensures full transparency.
• Compliance in broking can become seamless. Brokers can reduce the amount of time spent on communication as most stock trading limit compliance will be on distributed ledgers and the responsibilities can be clearly laid out.
• Blockchain catalyzes seamless MTM reporting, so potential losses in stock market trading don’t remain hidden at any point of time.

Global initiatives in application of Blockchain in capital markets

Even as India is seriously considering the use of Blockchain in capital markets, global market places have already started its practical application.

• NASDAQ has launched Blockchain private trading platform called Linq, which allows private companies not listed on stock exchanges to digitally discover prices.
• Moscow Stock Exchange is creating Blockchain based e-voting system for bond holders. This gives greater assurance to investors that their tokenized votes are recorded.
• London Stock Exchange (LSE) has partnered with IBM to digitally issue private shares of mid-sized companies in Italy.
• Australian Stock Exchange has pioneered Blockchain solutions for clearing and settlement of trades. This will simplify and speed up post-trade processing.
• The Myanmar Stock Exchange is likely to become the first to launch a fully Blockchain based exchange, in collaboration with Daiwa of Japan.

The big challenge is that capturing Blockchain value will require total buy-in from all concerned parties like clients, service providers, vendors, banks, lawyers and the regulator. The effort has to begin with requisite modifications to Indian Cyber Laws and the Indian Contracts Act.