Traditional stock markets are centralized, expensive and have limited transparency. Keeping this in mind, stock exchanges all around the world are now exploring how they can use modern technology, including Blockchain, as a way to improve efficiency, security and to reduce costs.
Blockchain is the technology that allows Bitcoin and other cryptocurrencies to be traded. It can be the answer to many issues in traditional market systems, such as security, transparency and cost issues. It revolves around a ledger (database, network) that is decentralized and accessible to the public. Users verify transactions by completing complicated mathematical equations. In the Bitcoin world, these validators are called “miners.” Miners are compensated for their work with Bitcoin. There is no “middle man” or third party, which makes transactions cheaper and more efficient. Thanks to all of these qualities, Blockchain can improve or replace different operations in the stock exchange.
Stock exchanges could run using the blockchain technology, with no need for a centralized settlement. Rules and regulations are built-in within smart contracts so the technology eliminates the need for a third party. This is cheaper, faster and more secure. A blockchain-based exchange can have inbuilt characteristics to track and report anyone’s illegitimate access to the network – all users have a full record of all transactions which makes the whole process much more transparent than traditional stock markets.
The technology can have a use in many aspects of the stock exchange, such as clearing (reconciling purchases), settlement and it can automatize a post-trade process. Stock exchanges taking a serious look at the way they can use this technology are Nasdaq (U.S.A.), The London Stock Exchange (U.K.) and The Australia Securities Exchange (Australia), to name a few.
Given blockchain’s decentralized nature, it is being adopted across the entire world and the number of exchanges signing up to be part of this is still growing.