In this second part of the two parts series titled “application of Blockchain on The African Stock Exchange Market,” we shall explore some case studies of existing solutions using blockchain technology to tackle the existing problems of the traditional stock exchange.
From our previous article, we gave background the African stock exchange market and why blockchain is a viable solution to the existing challenges of the traditional stock exchange.
Many years after the release of Satoshi Nakamoto’s whitepaper called “Bitcoin: A Peer-to-Peer Electronic Cash System” triggering the invention of the blockchain technology. Blockchain is still a very young technology with low levels of mainstream adoption and innovative solutions for everyday problems.
Blockchain since then has been widely adopted in various fields like finance, railways, energy sector, etc. One of the useful of application of blockchain technology in finance sector would be in stock market.
The most advantageous way blockchain technology can be utilized in stock trades is by accelerating the settlement of these trades. Securities traders, representatives, and brokers are required to experience a cumbersome, and costly, process which regularly takes three days or more to finish exchanges.
Blockchain technology could make stock trades substantially more proficient through automation and decentralization. Blockchain technology can also help with fundraising and asset management, as well as margin financing, post-trade settlements, tracking securities lending, and monitoring systemic risk as explained on disruptodaily.
Ultimately, it can also help lessen expenses imposed on clients, and in some cases it could completely eliminate the need for a middleman. Major current pain points, particularly in cross-border payments and trade finance, can be solved by blockchain-based solutions, which reduce the number of necessary intermediaries and are geographically agnostic.
This basically allows you to trade any stock belonging to any stock exchange or country as long as your are connected onto the blockchain. Blockchain is gradually being accepted by leading security exchanges as a possible solution.
NASDAQ has led the journey towards adoption of blockchain for stock trades. ASX (Australian Securities Exchange) is additionally moving in the direction of supplanting its present stage CHESS (Clearing House Electronic Subregister System) with blockchain for clearing, settlement and other conceivable exchange administrations for Australian stocks.
In attempt to cut expense, HKEX (Hong Kong Exchanges and Clearing) is looking to execute blockchain and now working with ASX to share their experience on blockchain usage up until this point.
London Stock Exchange (LSE) is additionally moving in the direction of using blockchain in a critical manner. In July 2018, LSE has banded together with tech monster IBM which is considered as one of the worldwide pioneers in giving open- source blockchain solutions.
These stock exchanges are aiming to provide a ease of use, transparent and reduced cost to encourage investors and traders to trade more actively. These stock exchanges also aim to encourage those investors and traders based in other countries who are geographically bound and barred to invest and trade stocks belonging to other countries and stock exchanges.
Digital Stocks – The Possible Future of African Stocks?
Digital Stocks are tokenized versions of stocks. Essentially one token equals one stock. For example: 1 Tesla Stock = 1 Tesla Digital Stock. In many cases the Digital Stock owners are entitled to the dividends that are paid out to the stockholders.
These Digital Stocks are also known as equities tokens in blockchain technology.
What are equity tokens?
Equity Tokens function as a traditional stock asset. An equity token represents a share in the underlying company. As with any stock purchase, holders literally own their given percentage of the total enterprise.
They are entitled to a portion of the company’s profits and a right to vote on its future. The only significant difference between an equity token and a traditional stock is the method of recording ownership.
A traditional stock is logged into a database and can be accompanied by a paper certificate whereas an equity token records corporate ownership on a blockchain. The tokens are blockchain based and are issued on various blockchains such as Ethereum.
Digital Stocks or Equity Tokens can be traded when stock exchanges are closed as the tokens themselves are not listed on stock exchanges such as the NYSE or NASDAQ. Rather the tokens are on a crypto or digital asset, the exchange which is generally open 24/7.
Equity Tokens open new trading opportunities as it allows investors to access different markets globally that they may not have been able to. For example, a London based trader who does not have access to U.S. company stocks such as Apple can now invest in the company via Digital Stocks.
What is tokenization of stocks?
Tokenization is the process of converting rights to an asset such as stocks, bonds, etc into a digital token on a blockchain. There is great interest by financial intermediaries and technologists around the world in innovating how to move real-world assets onto blockchains to gain the advantages of Bitcoin while keeping the characteristics of the asset.
Why tokenize a real world stock?
Our world is full of assets: stocks, real estate, gold, carbon credits, oil, etc. Many of these assets are difficult to physically transfer or subdivide, so buyers and sellers instead trade paper that represents some or all of the asset.
But paper and complex legal agreements are cumbersome, difficult to transfer and can be hard to track. One solution would be to switch to a digital system along the lines of Bitcoin but linked to an asset.
Stock exchanges have largely done away with physical paper by substituting electronic transactions and standardized agreements, but the overhead of these systems is enormous and they generally rely on trusted participants and exchange boards to regulate the smooth functioning of a trade.
Just like you can buy fraction of bitcoins, it is possible to buy fraction of digital stocks even though the real world stocks are bought in whole numbers .
An example of how digital stocks could solve Africa’s traditional stocks problem
When an investor wants to buy or sell a stock, he can do so through a stock exchange broker. The stock exchange broker works on a commission basis which is basically a percentage of assets involved in the trade, whether you are selling or buying the stocks.
A central hub or database is maintained about the ownership of stocks and they are updated after the trade takes place according to a long protocol, which needs to be followed. This may take a few days to be completed.
Imagine Bob sells a stock of tesla worth 1000$ and he informs the stock exchange broker about his intention to sell it and also agrees to pay a brokerage commission of 3% which is 30$. The broker then finds a buyer for the stock and informs him about the stock price and his charges as commission.
The buyer agrees and pays 1000$ to the seller and 30$ as commission to the broker. The stock exchange broker makes 60$ for just helping the buyer and seller perform a trade. There are some cases where millions of shares may be bought and sold and in such cases the brokers make thousands of dollars just as commission out of buyer and sellers net profit.
This trade may also take a few days for the transfer of ownership of the stocks and e-certificate for the stock ownership. Imagine the traditional stock was replaced with digital stock.
The buyer and seller can perform peer-to-peer transaction between themselves without the need of stock exchange broker or bank or any other financial institution acting as intermediary.
The brokerage fee charged is saved by the buyer and seller. The digital stock can be easily transferred through the blockchain without much time needed. Since the blocks store accurate and immutable trail, you can keep track of the ownership of digital stock permanently.
Bob could directly send the digital stock across the blockchain to Alice without paying any fee for trade.
Future Growth of African Stocks
This speaks to the emerging token economy where equities will be tokenized via blockchain technology. A projected tokenized asset market of $24trn of financial assets only in 2027 is predicted .
This includes tangible assets such as listed equities, unlisted equities, etc and intangible assets such as patents, copyrights and trademarks. The first company to offer Digital Stocks is DX Exchange which is a NASDAQ powered EU regulated Crypto and Digital Stocks exchange.
Whether or not the stock market is broken, this article provides an alternative form of trading that addresses several of the current problems with the traditional stock exchange.
Using Bitcoin’s underlying technology — the Blockchain — issuers will be able to create digital stocks that will allow anyone in the public to be able to buy, sell and see each transaction as it is takes place, which will remove some of the shroud of secrecy surrounding much of the high frequency and dark pool trading occurring today.
This alternative market will also allow traders to trade completely peer-to-peer — cutting out several layers of intermediaries including stock exchanges, brokers and transfer agents.
The key is that a digital stock market would not require the replacement of the traditional stock market; rather it would be an alternative market for users dissatisfied with the current regime.
It is likely there will always be a need for both systems, just as with the advent of email there is still a need for the post office to manage traditional letters.