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Blockchain has already proven its use for bitcoin, said Fredrik Voss, vice president for blockchain innovation at Nasdaq, where it is in early pilot. Share in private equity deals are deployed in paper certificates and transferring them is very time consuming, he explained.
“We have taken it upon ourselves to reform that and decided to try the blockchain, distributed ledger. We are now with five pilot clients rolling out a solution before end of year where the shares will exist as a registration, a transaction on the blockchain. When there is a transfer we will transfer through the blockchain in another transaction, replacing a slow paper-based process with a more efficient solution.”
Ron Papanek, managing director at Symbiont, which is building the first issuance and trading platform for smart securities on blockchain technology, said the company’s own convertible bonds and shares were issued on blockchain. The company sees opportunity in syndicated loans which now require extensive back and forth faxing.
“One entity we spoke with had 2.5 million faxes exchanged last year, just faxes, not total pages,” he said.
Industry analysts see strong potential in blockchain. Dan Connell, managing director and head of market structure and technology at Greenwich Associates, expects major transitions in 2016.
“It’s way too early to see really significant implementation of complex securities, syndicated loans or leveraged loans. But private shares have less volume, are less complicated and have more pain points and you don’t have to change established behavior or infrastructure. I don’t think we will see U.S. equities settling on the blockchain in the near term, but you have to start somewhere.”
Ray Kahn, head of agency derivatives services Americas at Barclays, said the real benefit of a distributed ledger is that an entity, clearing house or trading organization will have shared records across the participants.
“The opportunity is that you can eliminate almost 100 percent of reconciliation processes because each node is simultaneously validating the transactions. Reconciliation is from 50 to 90 percent of the process in financial markets, and there’s a huge amount of waste in that process.”
“It will be a journey of very many small steps, said Nasdaq’s Voss.
“You could see faster settlement. When an option expires, you will see immediate settlement of the underlying asset. During the lifetime of trade to expiry, you could see a much more efficient utilization of collateral if we have these assets in a format that works on a blockchain.
“Addressing inefficiency will disrupt those business models that depend on inefficiency. The really exciting disruption comes when we can, using blockchain technology, create market structures that can”t be supported with today’s technology,” he added. “It is difficult to see what that could be. This technology will totally change some of the business models in this industry. If you haven’t already sat down with colleagues and discussed businesses that are under threat or present opportunity you should. Then experiment, stand up a blockchain and write some apps and simulate different market modes.”
