Research from the international management consulting firm Oliver Wyman, and the FinTech investment group Santander InnoVentures, shows that the cost of clearing, settling, and managing post-trade processes for securities ranges between US$65 billion and US$80 billion a year globally.
Blockchain FinTech supporters point out that the nearly instant nature of each transaction’s settlement is sure to completely overhaul the existing financial system and save billions of dollars each year in the form of fees, collateral, and other regulatory upkeep.
“Our analysis suggests that distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022.”
- Santander InnoVentures and Oliver Wyman Consultancy
Creating an immutable entry of each transaction for all the world to see is a new functionality that can enable powerful new financial products and tools. Visa Europe recently stated that “2015 has turned blockchain into something the industry has to live with. It is no longer a choice anymore.”
It’s little wonder that many exchanges want to be the first to make a securities trade over a distributed ledger system, and it appears that we have at least three contenders.
Nasdaq's blockchain technology initiative debuted in May. Nasdaq Linq was developed for their private securities market by the company's in-house technologists, in collaboration with San Francisco-based blockchain technology provider Chain, and award-winning global design and innovation firm IDEO.
Already a leading blockchain infrastructure provider for financial institutions and enterprises, and the inaugural Nasdaq Linq client, Chain has additionally become one of Nasdaq's first private company clients for Nasdaq Linq, along with ChangeTip, PeerNova, Synack, Tango, and Vera.
Chain is funded by leading venture firms Khosla Ventures, RRE Ventures, and Thrive Capital, as well as strategic investors Visa, Citi, Nasdaq, Capital One, Fiserv and Orange. Its platform, based on the Open Assets protocol, enables the secure issuance and management of digital assets.
Nasdaq demonstrated Linq at the Money20/20 event in Las Vegas in October, and yesterday announced that Chain was able to use its Nasdaq Linq blockchain ledger technology to “successfully complete and record a private securities transaction.”
"We believe this successful transaction marks a major advance in the global financial sector and represents a seminal moment in the application of blockchain technology. Through this initial application of blockchain technology, we begin a process that could revolutionize the core of capital markets infrastructure systems. The implications for settlement and outdated administrative functions are profound.”
- Bob Greifeld, Nasdaq CEO
Chain completed and recorded its issuance of shares to a private investor, which qualifies as a private securities transaction as Chain is not a public company, and its securities are not available in the public markets. Nasdaq disclaimed that no solicitation for an offer of securities is being made.
“For this transaction, Nasdaq enabled the issuer to digitally represent a record of ownership using Nasdaq Linq, while significantly reducing settlement time and eliminating the need for paper stock certificates. In addition to its equity management function, Nasdaq Linq also provides issuers and investors an ability to complete and execute subscription documents online.”
This proof of concept is a significant step in Nasdaq's use of blockchain technology, and also holds promise for expediting trade settlement for transactions in public markets.
"No doubt this is a powerful milestone for Chain and our partnership with Nasdaq. We couldn't be happier with the results of the transaction. It was seamless and met our objective of drastically reduced manual ownership transfer."
- Adam Ludwin, Chain CEO
While Nasdaq's press release states that this transaction represents “the first of its kind using blockchain technology,” there are at least two other companies that have previously announced similar achievements.
A blockchain startup called Symbiont appears to have beaten Nasdaq to the punch. Symbiont is backed by several trading veterans including ex-NYSE chief executive Duncan Niederauer. In August the company announced that it had issued the first Smart Securities™ on the bitcoin blockchain.
“Symbiont is bridging the gap between Wall Street and the emerging blockchain ecosystem. It’s an exciting, timely and much-needed development for the long-term health of the markets.”
- Duncan Niederauer, Symbiont board
It should be reiterated that Niederauer was no longer in charge of the NYSE, Nasdaq’s primary competitor, at the time of the announcement.
Symbiont says that they use the blockchain for its Smart Securities™, which are faster and more secure than legacy ledger systems, enabling more efficient markets, added liquidity, transparency, and lower costs.
The plan for their platform is to allow institutional and retail users to issue and trade their Smart Securities™ more efficiently using a public blockchain, likely bitcoin’s blockchain, so that they can access a single, global, decentralized and distributed peer-to-peer financial network.
Initial use cases suggested for Symbiont’s Smart Securities™ include corporate bonds/debt, syndicated loans, securitized instruments, and private equity.
"We are proud to be on the leading edge of this blockchain and distributed ledger movement. With interest in distributed ledger technology growing rapidly, financial institutions are exploring how to leverage it to improve the efficiency and security of trading and processing financial transactions. Smart Securities™ will ultimately change the way that financial instruments are issued, managed, and traded."
- Mark Smith, Symbiont CEO and co-founder
T0, pronounced tee-zero, is also in the running for being the first to use the blockchain for securities issuance. Overstock.com CEO Patrick Byrne issued a release in June, stating that his new zero-day trade and settlement platform had already used the blockchain to issue a private bond.
Byrne recently confirmed that the U.S. Securities and Exchange Commission (SEC) has approved the company to issue public securities using the bitcoin blockchain.
A security is typically defined as a fungible ownership instrument that can be a stock, bond, or an option. Given that definition, Byrne’s crypto-bond purchase over T0 would appear to be the very first to complete and record a private securities transaction.
For the sake of historical accuracy, perhaps it would be best for Nasdaq to clarify exactly what they meant when referring to their transaction as “the first of its kind using blockchain technology.” No matter if they are mistaken or not, they certainly are an important pioneer in the space, and have helped promote the usage of the blockchain in the financial world.
Nasdaq is also exploring a proof-of-concept application that applies its blockchain technology to proxy voting, in Estonia. It seems their team of financial technicians are rarely out of the spotlight for long. “What's impressive to me is that by the end of this year for private markets securities we will be able to settle and clear those trades within 10 minutes,” Greifeld told Financial News in October.
With the potential of this technology to significantly speed up the clearing and settlement of equity trades, which currently takes three days in the US and two days in Europe, other financial institutions have also been exploring this usage. UBS, for example, started experimenting with their ‘settlement coin’ in September, although there have been no claims of a successful trade yet.
“The development of this coin could be a key element in ensuring widespread adoption of blockchain-based platforms in the financial market.”
- Oliver Bussmann, UBS Chief Information Officer