Why are Nasdaq, JFX, and other traditional exchanges switching to the blockchain?
For many people, the blockchain and cryptocurrencies are the same thing. When, actually, cryptocurrencies are a part of the blockchain-based ecosystem and blockchain technology doesn’t necessarily require publicly selling a cryptocurrency.
Using the blockchain gives many new opportunities for businesses to cut costs, make their products more transparent on a distributed ledger, and boost the speed of internal transactions, which is why many large businesses adopt it. It’s why Microsoft and IBM develop so many blockchain products and it’s the reason why a lot of traditional exchanges switch to the blockchain. In this article, we’re going to learn why they are now making the switch.
What are exchanges looking for?
As we previously mentioned, there are several benefits to using the blockchain for any established business (and for non-established ones, too):
- Increased transparency — The blockchain is known for its immutability; anything recorded on its ledger can’t be rewritten, so any suspicious transactions can be later investigated if necessary.
- Speed — In a blockchain system, there’s no need to manually verify all transactions; for example, when stock owners sell their stocks, the process can be facilitated via the blockchain and the transfer of ownership can be settled in seconds instead of days. There’s no single point of trust, every participant can trust that the information written on the ledger is accurate.
- Security — the blockchain can’t be hacked, so it’s very secure when storing tokenized assets on it.
Nasdaq executives are very positive about implementing the blockchain in their exchange operations. Nasdaq CEO Adena Friedman said, “We see technology as a relentless change agent and our job is to embrace that change, to bring it to the industry, and make it so that our industry continues to be a very successful industry in the next decade or even beyond that. There are a lot of exciting things in the machine intelligence space. There are a lot of exciting things in the trading space. [Blockchain technology] takes a lot of risk out of the system and therefore it makes it so that the banks don’t have to be as capital intensive. And that’ a big incentive.”
That’s why Nasdaq is all open to this technology — they see a lot of potential for its use cases. But they aren’t the only exchange that looks forward to using it. A lot of other exchanges embrace its potential as well. Let’s see why they do it.
Blockchain use cases on traditional exchanges
Let’s start with Nasdaq, as we talked about it already. The first all-electronic stock exchange, launched in 1971, has always been about innovation. That’s why they have already built a few blockchain-based products:
- In 2015, Nasdaq presented LINQ, the platform that enabled private companies to issue and sell assets representing the right of shared ownership. Any private company’s owners can find a private investor via this platform, instantly recording the deal on blockchain.
- The next thing that Nasdaq developed was the platform for shareholder voting. The blockchain-based voting and proxy assignment application enables companies, investors, market infrastructures, and custodians to reduce costs and complexity in general voting through the web-based interface. It was tested on Nasdaq Tallinn and has since moved to a broader market.
- They even developed a solution for Swedish Mutual Funds. It facilitates the issuance and settlement of mutual fund shares, removing numerous intermediaries from the process. Of course, there is a strong possibility that we’ll see more blockchain products from Nasdaq in the future. The CEO stated, “It’s harder to implement because it requires an entire network to implement it simultaneously.”
Kinesis offers a framework where users can tokenize their precious metals, including gold and silver, and use them as money, KAG (silver backed), and KAU (gold backed) tokens. They can use these tokens anywhere VISA and MasterCard are accepted. The assets backing them are stored in the vaults of the Allocated Bullion Exchange:
- By partnering with Kinesis, the Jakarta Futures Exchange wants to facilitate physical delivery settlement of its futures, increase the speed of trades, and cut costs of all operations. The blockchain of Kinesis, which is capable of handling 3,000 transactions per second is suitable for this task, according to the exchange’s executives.
Another traditional exchange implementing a blockchain solution is the Hong Kong Stock Exchange. Partnered with the distributed ledger startup Digital Asset, they developed a platform for post-trade processing. It’s a process where the details of the trade from the buyer and the seller side must be compared and it usually requires the involvement of clearing houses, the financial entities that verify each trade.
- They solved the settlement of trades between international and homeland investors on their platform, the Northbound Stock Connect. In mainland China, there is a tight window, only 4 hours, to settle the trade. The difference between time zones makes this task even more difficult. But a blockchain-based solution solves the problem due to the instant settlement between all parties on the platform.
The same company, Digital Asset, developed the post-trade settlement solution on the blockchain for the Australian Securities Exchange, thus making it the first exchange in the world to move one of its main functions onto the blockchain. It took them two years to develop it, the principles and the goal are the same as in the Hong Kong Stock Exchange case — fast and easy trades settlement. It replaced the old Clearing House Electronic Subregister System (CHESS) that was used prior.
Deutsche Bundesbank and Deutsche Börse, the owner of the Frankfurt Stock Exchange, have completed trial tests for securities settlements on the blockchain. Aside from settlements, it also allows one to conduct payments of interest and repayments upon the expiration of bonds.
The Japan Exchange Group is also testing the waters, partnering with IBM for testing its Hyperledger blockchain on post-trade settlements. But post-trade settlement isn’t the only possible application for blockchain technology.
The Korea Exchange launched the Korea Startup Market, an OTC service on the blockchain for startup companies, allowing them to issue and trade shares on the open market. It was developed in partnership with Blocko Inc., a Korean startup, which added blockchain-based document and identity verification services to the platform.
The exchanges are created and run by people who know what to do with money. They are eager to save every penny and they always watch for any opportunity to cut operational costs. Before the invention of the blockchain, traditional exchanges weren’t very efficient. Even today, there is a lot of manual work in trade verification and the research done by Deutsche Börse shows that the post-trade fees on the European market amount to 16 billion euros per year — and that’s only in the European market!
Implementing blockchain technology will allow traditional exchanges to become more efficient and competitive by cutting down on these fees and offering cheaper services to customers. It will help exchanges become more global, linking them through a common ledger.
Currently, there are some hurdles related to the complexity of each exchange’s framework (the need for local clearing houses and custodies) that make the implementation of a truly global ecosystem hardly realizable. By removing intermediaries, the blockchain will allow exchanges to share information between each other and offer their customers access to every single trading instrument, stock, bond, and obligation in the world. This will, of course, take time, because it requires implementing the technology on every exchange. But it will definitely be worth it.