Blockchain and securities: Democratizing investments

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Blockchain and securities: Democratizing investments

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Blockchain and securities: Democratizing investments

Subheading text
Blockchain can optimize securities trading and settlements through smart contracts.
    • Author:
    • Author name
      Quantumrun Foresight
    • September 14, 2023

    Insight summary

    Blockchain technology is being explored in the securities industry to streamline and modernize many processes involved in trading, settling, and clearing securities. One example of this is the use of blockchain in securities lending, which is a financial transaction in which one party loans a security to another party in exchange for collateral.

    Blockchain and securities context

    Clearing and settlement refer to the process of completing financial transactions and transferring ownership of assets from one party to another. In the securities industry, clearing and settlement involve the transfer of securities and the corresponding payment between buyers and sellers. This process can be complex and time-consuming, with many intermediaries and manual processes involved.

    One way in which blockchain is being used to automate clearing and settlement is through the use of smart contracts. A smart contract self-executes the terms of the agreement between buyer and seller, which are directly written into lines of code. The code and the agreements contained therein are stored and replicated on the blockchain network. Smart contracts can be used to automatically execute the terms of the contract once certain conditions are met. For example, if a buyer and seller agree on the terms of a securities trade, a smart contract could transfer the securities and the corresponding payment once the transaction has been executed. 

    Several companies are developing blockchain technologies for securities services. An example is EquiLend, which has developed a platform based on distributed ledger technology (DLT) to automate and digitize the securities lending process. The platform allows lenders and borrowers to efficiently match and execute trades while providing a secure and transparent record of all transactions.

    Disruptive impact

    There are several advantages to using blockchain in securities lending. The first is increased efficiency. By automating many of the manual processes involved in securities trading and settlement, blockchain can help to reduce the time and cost involved in executing trades and completing transactions. Reduced reliance on intermediaries is also a major advantage. The technology can eliminate the need for clearing houses and custodian banks, lowering the cost of trading securities and increasing competition in the industry.

    Another advantage of using blockchain in securities is Increased transparency and reduced risk of fraud. A shared, distributed ledger allows all parties to see a clear record of all transactions, helping to increase trust and minimize errors and tampering. Finally, blockchain can enhance security. The decentralized nature of blockchain makes it more resistant to tampering and cyber attacks, which can help to protect the integrity of securities transactions. This feature could reduce the risk of financial losses due to cyber attacks or other forms of data breaches.

    However, there are also several limitations to using blockchain. The major challenge is the lack of regulation. The securities industry is heavily regulated, and it can be challenging to ensure blockchain-based systems comply with all relevant laws. Interoperability is also an issue. For blockchain-based systems to be widely adopted, they must be able to interoperate with existing systems and infrastructure. Finally, while blockchain technology has the potential to handle a large volume of transactions, it may still face scalability issues as adoption increases. 

    Implications of blockchain and securities 

    Wider implications of blockchain and securities may include: 

    • Blockchain making financial services more accessible to underserved or unbanked communities by reducing the need for intermediaries.
    • Blockchain facilitating the creation of new types of financial instruments or enabling the development of decentralized financial networks.
    • More fintech startups creating decentralized finance (DeFi) or open banking initiatives and applications.
    • More people will be able to participate in investing or explore financial instruments, particularly younger generations who are digital natives.
    • Faster and safer settlements through smart contracts. However, this feature can also facilitate unregulated transactions, such as money laundering.

    Questions to comment on

    • If you're investing, how is blockchain affecting the way you invest?
    • How else can financial institutions take advantage of blockchain technology?

    Insight references

    The following popular and institutional links were referenced for this insight: