Will Blockchain Power the Stock Exchange of the Future?
Ever since Bitcoin first exploded onto the scene over a decade ago, blockchain technology has been at the fore of discussions across many industries and, while cryptocurrency’s potential to transform the world of finance seems less likely than ever, there are still plenty of advocates who claim the tech which underpins it has a future.
From its use in supply chains to track and record various stages of a shipment’s journey, to smart contracts able to provide transparency to multiple stakeholders in a value chain, blockchain certainly does have applications outside its initial role as a financial transaction facilitator.
There are even some who believe the technology will form the backbone of the stock exchange in the future, and certain recent developments seem to be supporting this position.
The US Securities and Exchange Commission
A big part of this evidence comes from the SECs decision in January of 2022 to approve America’s 17th stock exchange.
This exchange, itself a subsidiary of Boston-based BOX Exchange, is unique in that it has incorporated blockchain technology into its operation. Initially designed to trade securities, such as stocks or exchange-traded funds, first listed on its exchange, but with the intention for those securities to eventually be tradable on rival bourses.
"BSTX ultimately aims to expand trading to all U.S. stocks and potentially tokenized securities,” Director of Strategic Partnerships, Jay Fraser said speaking to Reuters. "Stock tokens are digital versions of equities pegged to the underlying share, usually traded in fractional units. The aim is for BSTX to look "more like" crypto exchanges such as Coinbase (COIN.O) as opposed to traditional exchanges like Nasdaq (NDAQ.O).”
It is expected that the use of blockchain technology will result in faster settlement times for transactions. Additional blockchain functionality will come in the form of a market data feed which will operate on a private chain. Through this ledger, exchange members will be able to review their own stock exchange activity, as well as that of other participants on an anonymized and delayed basis.
"Compared to a traditional exchange where it typically takes two days to settle a trade, BSTX will offer same-day and next-day settlements," reports Nasdaq. "It will also use a private blockchain to offer a market feed that will allow members to see their own trades, as well as that of others, on an anonymous basis."
It’s intended for the new Boston stock exchange to eventually support products such as tokenized securities. In fact, the BSTX was originally going to be named the Boston Security Token Exchange and trade exclusively in these kinds of securities but was rejected by the SEC in 2020 – presumably because of the fetid swamp the NFT market has proven to be.
The blockchain technology is being provided by tZero.
The Future of the Stock Exchange
So, does this mean, the future of stock exchange technology lie with blockchain? Well, given the developments outlined above, combined with the fact that earlier this year the SEC allowed for the introduction of a Bitcoin futures ETF in the US, we can say with absolute certainty… maybe!
However, the technology is still very much in its nascent stages, and it’s unclear yet whether it truly offers anything which can’t be achieved more effectively and efficiently with other methods of transactional processing.
"Although blockchain has much potential in transforming the traditional stock exchange market, blockchain research in this field is still in its infancy,” reports a recent literature review on Research Gate. "The findings also provide important insights into the current state of a blockchain scholarly study, including its top advantages and legal obstacles, the risk associated with implementing this technology, and the identification of various promising blockchain models currently being proposed in the stock market. We find that blockchain transforms the stock market remains in an early-stage research domain in terms of theoretical basis, methodological diversity, and empirically grounded work.”
In a nutshell, this means there is still significant work to be done before it can be established whether blockchain has a future in the stock exchange. With questions to be answered about its legal standing, not to mention the environmental impact of the typically huge processing power it takes to process the algorithms necessary for it to operate, that work has barely begun.
Final Thoughts
It’s all too easy to get excited about new technology, especially one as potentially disruptive as blockchain. However, with so much bad press around cryptocurrency and blockchain technology, it would seem prudent to step back and properly assess its advantages and shortcomings before fully investing.
Blockchain technology is sure to be part of the conversation at Equities Leaders Summit 2023, taking place in January at the Eden Roc Miami Beach, FL.
Download the agenda today for more information and insights.