Let’s face facts; the notion of using blockchain technology to revolutionise the financial marketplace is nothing new.
Back in 2015, the Nasdaq stock exchange used blockchain to transfer shares through a decentralised ledger, removing the historic need for a middleman or clearing house. More recently, Goldman Sachs has filed a patent application that would leverage the principles of blockchain technology for buying and selling of currency, in a bid to speed up transactions and reduce the cost of trading.
While it would appear as though blockchain was a more natural fit for an already liquid and real-time marketplace, there is no doubt that this technology could also be applied to stocks. But how would it impact on these markets, and would make trading more accessible?
How will Blockchain Challenge and Change the Face of Trading?
In the current market, currency and share trading tend to be conducted through third party brokering sites and clearing houses, who facilitate orders in exchanged for predetermined commission fees. This can be a relatively elongated process (for financial institutions in particular), while it can also prove increase fees in instances where more than one middleman is involved.
By leveraging a transparent and decentralised ledger, however, Blockchain technology would create a direct link between participants who could complete their transactions through a peer-to-peer network of brokers and independent traders.
So while participants would still execute orders through an online trading platform, the underlying, back office function and final settlement will be completed by using blockchain, boosting efficiencies and market liquidity in the process.
There are numerous benefits to this practice, even though its application would vary between stocks and currencies due to the diverse nature of these assets. Blockchain would universally create a more efficient and cost-effective trading process, however, minimising third party or custodian delays while also virtually eliminating associated auditing costs. This would also lend itself to instantaneous and real-time trades, which could prove crucial in a volatile and constantly changing entity such as the foreign exchange.
Given the recent scrutiny of questionable practices by banks and other financial institutions, blockchain technology may also offer timely benefits in the form of transparency. This would solve an issue that sits at the core of financial market trading in the digital age, particularly in liquid and malleable entities such as the foreign exchange. In short, blockchain would act as a decentralised and virtually impenetrable ledger of completed transactions, listed encrypted orders that are then distributed through a public network for the purposes of transparency, compliance and accountability.
Suddenly, the ownership of trades would be indisputable, making it far harder for anyone to manipulate records or commit fraud in the financial marketplace.
What Are the Challenges?
Despite the universal advantages of blockchain, not all marketplaces are created equal and some challenges may arise when the technology is applied.
Take the stock market, for example, which would suddenly become a far more liquid entity should real-time blockchain technology be introduced. So while this would theoretically make it easier to short-sell stocks and most likely lead to increased investment in shares, we would also see a significant increase in trading activity and greater volatility in price shifts. Given that stocks are seen as a more secure store of wealth than currency, this may not benefit every single share trader or their underlying philosophy.
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In this respect, blockchain technology offers a far more natural fit for the forex market. After all, this is already a market that boasts high levels of liquidity, while the speed and efficiency of short-selling and spread betting would be enhanced by blockchain. Even then, the volatile nature of the foreign exchange means that prices can fluctuate wildly in instances where trading volumes rise at a disproportionate level, with practices such as high-frequency trading having triggered sizeable losses in certain market conditions.
With blockchain optimising the number of real-time trades and short-sells, investors could see similar issues if the technology was widely applied.
The rise of transparency may also provide challenges, even though it will have a positive impact from the perspective of regulators and independent traders. The notion of having accurate market positions exposed to the public as a form of trading ID may be too much to bear for some financial institutions, however, particular high-level investors and lucrative hedge funds. With these trading vehicles typically active over a prolonged period of time, there is a risk that other investors could leverage the data to replicate successful strategies for their own financial gain.
The Bottom Line: Why the Rise of Blockchain as a Trading Staple is Inevitable
These challenges aside, there is no doubt that the accessibility, efficiency and security of blockchain mean that it will play an increasingly pivotal role in the future of the financial markets. Its impact will vary, of course, as while it will simply increase the liquidity and trading volumes associated with the forex market, it has the potential to revolutionise share trading and alter its fundamental nature.
The principles of blockchain would even be applied to way in which share ownership is detailed, with the volumes, prices and timing of each individual transaction recorded for prosperity.
In truth, there is no limit to the potential of blockchain in the financial market. Even the commodity market, which is affiliated with the physical economy and still utilises physical documents as part of its value chains, has flirted with the idea of leveraging blockchain, in a bid to remove the use of manual processes and unlock collateral. Once again, blockchain would also modernise the commodity market and offer faster access to finance, bringing it in line with more liquid entities across the board.