(Davidstankiewicz, CC BY-SA 4.0)
2019 may go down in history as the year when the stock exchanges widely adopted blockchain technology. Last year, in a report prepared by the Nasdaq stock exchange and the consulting company Celent, 70 per cent of the stock exchange operators declared that they were working on the utilization of Distributed Ledger Technology. This year we can take a look at the results of this work.
“There is no doubt that in the future almost every single entity on the capital market will use blockchain technology in one way or another. Each exchange will be decentralized, and blockchain will play a key role in trading, identifying entities, or in loyalty systems,” said Ron Quaranta, CEO of the Wall Street Blockchain Alliance (WSBA), during the conference “Money Talks: Blockchain’s impact on business and finance” in the Warsaw Stock Exchange (WSE). The very fact that an institution such as the WSBA had been established shows the seriousness with which capital market entities are approaching blockchain technology.
Poland awaits eVoting and a new Private Market platform
The National Depository for Securities (NDS) is completing work on the Blockchain Platform for the Capital Market. This is supposed to provide an open and fully secure infrastructure for the capital market, supporting solutions in the area of post-trade services. One of its most important features will be an eVoting application servicing the general meetings of shareholders. According to the NDS, the application “will provide capital market participants — such as the NDS, the public companies, as well as banks and brokerage offices — with a common insight into data on the exercise of voting rights almost in real time, and will provide access to reliable results of electronic (remote) voting. Blockchain technology will provide a shared, decentralized registry that stores the history of events associated with a given shareholders’ meeting, the list of resolutions that were voted on, the number of registered participants and votes, and data on the voting results. This will ensure greater accessibility, accountability and transparency for all the participants of the system.” Meanwhile, the WSE is working on a blockchain-based Private Market platform, which is supposed to connect investors with non-public (unlisted) companies seeking capital. This means that it will be in fact a crowdfunding platform, but dedicated to companies at every stage of development. The creation of this platform is one of the main items in the WSE’s strategy until 2022.
“We could build the Private Market without blockchain technology. But we decided to utilize it, because it provides interesting opportunities for the development and expansion of the platform’s features in the future. Besides, the customers of the Warsaw Stock Exchange are young and will be increasingly younger. Such people want to use the latest technologies, and we are building the Private Market for young businessmen and investors,” explained Monika Hałupczak, the Private Market project manager.
Others are already taking advantage of the new technology
The blockchain-based eVoting platform developed by the National Depository for Securities and the Private Market built by the Warsaw Stock Exchange will not be the first solutions of this type in the world. A system of e-voting at the general meetings of shareholders has already been in operation for several quarters at Russia’s Moscow Exchange (MOEX). The exchange has also launched a bond trading platform based on blockchain technology. It was described in the presentation of the exchange’s results for 2017. Meanwhile, the National Stock Exchange of India (NSE) is also working on the implementation of an e-voting system.
DLT-based stock exchanges devoted to trade in the shares of small and medium-sized companies are already operating (read more). One example is the Korea Startup Market (KSM), created by the Korea Exchange, which has been functioning since November 2016. The London Stock Exchange (LSE) and the Japan Exchange Group (JPX) are working on similar projects.
On various small exchanges we can find other innovative solutions which are based on Distributed Ledger Technology. In 2018, the Santiago de Chile Exchange (Bolsa Comercio Santiago) launched a DLT-based tool which facilitates the lending of securities (it was created as a result of cooperation with IBM). A DLT-based system for storing and publishing information from issuers has been functioning on the Luxembourg Stock Exchange since the end of 2016. Meanwhile, a platform for trade in investment fund participation units, known as FundsDLT, has been operating there since July 2017. Starting from January 2019, the tokenized shares of some American technology companies can be traded at the DX.Exchange in Estonia.
As quick as the Swiss?
All of this pales in comparison with the plans of the Swiss stock exchange. The SIX exchange is completing work on a digital asset trading platform — the SIX Digital Exchange (SDX). This service — based on blockchain technology — is supposed to lead to the “tokenization” of the securities listed on the SIX stock exchange (shares, units of ETFs) and other types of assets (such as paintings or cars). The objective is to make all kinds of assets easily and quickly exchangeable. In this case, quickly means literally in a matter of seconds. The aim of the SDX service is to significantly reduce the time needed to conclude transactions on the stock exchange. The president of the SIX stock exchange, Romeo Lacher, announced at the beginning of February that the new platform would be launched in the second half of 2019.
In any case, the SIX stock exchange is a genuine innovator. It is not afraid to invest in projects that are not directly related to the investment market. At the end of 2018, it launched a cyber-threat protection system for banks and insurance companies (SIX Cyber Security) and a tool supporting the trade in Swiss franc-denominated bonds (SIX Deal Pool).
Australia is betting on the Distributed Ledger Technology
The Australian Stock Exchange (ASX) is implementing what is perhaps the boldest of the discussed projects. It wants to base all trading on the main market on blockchain technology. This is supposed to increase the transparency of transactions and reduce the transaction execution time.
It should be noted, however, that the works on this project are not progressing according to schedule. The ASX has been working on the new system since 2015. In September 2018, it once again postponed its implementation date: from the fourth quarter of 2020 to the first quarter of 2021. The ASX may end up being the first stock exchange of such global significance to be based on DLT technology, but for the time being it has clear difficulties with the completion of the project.
The largest stock exchanges are cautious
Perhaps the approach of the Australians results not so much from technical problems but from caution. It’s worth noting that the largest stock exchanges in the world are not in a hurry to introduce Distributed Ledger Technology. Nevertheless, almost all of them claim that they are working on its implementation.
Deutsche Börse is conducting several research projects related to the application of DLT. They concern, among other things, the facilitation of international trade on the stock market or the transfers of money from commercial banks to capital market institutions. In its “road map” until 2020, the Deutsche Börse announced expenditure of hundreds of millions of euros on the development of new technologies, including those based on blockchain.
“The digital economy is characterised by decentralisation so that there will be more peer-to-peer governed marketplaces and fewer intermediaries. In that regard, DLT/blockchain technology could potentially be disruptive to capital markets and will most certainly cut across our whole value chain. However, DLT/blockchain technology is not yet mature. A sound legal and regulatory framework must be shaped and the technological scalability needs to be elevated to the next level. The technology will bring up market-ready applications and lead to high efficiency gains and new revenue pools. Will there be major shifts within the next 12 months? It will rather be a matter of years, not months,” said Dr Theodor Weimer, CEO of Deutsche Börse, in an interview for the World Federation of Exchanges website.
In January 2019, Germany’s second largest stock exchange, Börse Stuttgart, launched the Bison application for cryptocurrency-trading. In this way it hopes to take advantage of the investors’ interest in virtual currencies, while at the same time giving them a guarantee of solvency (the investors’ funds are stored by its subsidiary Blocknox).
The American technology stock exchange Nasdaq has adopted a step-by-step approach to the introduction of blockchain technology. It launched the Nasdaq Linq platform for trading in the shares of private companies as early as 2015. In May 2017, it started cooperation with the Citi group on the development of an integrated payment system based on blockchain technology. It is also working with the Swedish bank SEB on a platform for trading in mutual fund units. This year Nasdaq Ventures invested USD20m in the blockchain start-up Symbiont.io and in the ErisX platform. Meanwhile, at the end of February, Nasdaq will launch Nasdaq’s Bitcoin Liquid Index (BLX) and Ethereum Liquid Index (ELX) indexes.
“At Nasdaq, we are working to help cryptocurrencies gain investors’ trust by offering our technology for trade matching, clearing, and trade integrity to start-up exchanges. […] We believe that digital currencies will have a role in the future. The extent of its impact will depend on the evolution of regulation and broader institutional adoption,” the CEO of Nasdaq Adena Friedman wrote in an essay entitled “New chapters in innovation and disruption will be written in 2019”.
Meanwhile, the New York Stock Exchange (NYSE) — and more specifically, its main shareholder, the Intercontinental Exchange (ICE) — is investing in the development of the trading platform Bakkt. Its first product, the Bakkt Bitcoin (USD) Daily Futures Contract, is to appear on the market later this year. It’s also worth recalling that Bitcoin futures have been listed at the CME and CBOE exchanges in the United States since December 2017.
The London Stock Exchange Group has built its own blockchain-based Millennium Exchange platform. At the beginning of the year the LSE commenced cooperation with the Hong Kong-based company ATOM which is planning to launch the AAX digital asset exchange. Additionally, in the sandbox of the UK Financial Conduct Authority, the LSE and the company Nivaura are continuing their cooperation on solutions that could decentralize the trade in shares on the main market.
The implementation of Distributed Ledger Technology on the capital market is not easy. It takes a lot of money, because the development of blockchain-based tools requires an entire system to be built from scratch (and for that you need the right software, hardware and people with the appropriate skills). Additionally, the stock exchanges must ensure the highest possible level of trading security and stability. Furthermore, these new blockchain-based tools cannot operate in a legal vacuum — they must either adapt to the existing rules or wait for new ones to be enacted. Because of that, as the head of Deutsche Börse has claimed, it will probably take a few more years before we see a genuine blockchain revolution in the capital market.