I am a fan of blockchain technologies, though I am skeptical of the crypto-currencies that are so far the best-known uses of blockchain. Despite a history that is closely tied to crypto-currencies, blockchain technologies are finding their way into other industries. Now, the Wall Street Journal reports, blockchain has the chance to bring speed, efficiency and much-needed competition to the business of stock transaction settlements. Alexander Osipovich reports:
Last week, the Securities and Exchange Commission gave the green light to a pilot project in which blockchain—the technology behind cryptocurrencies—will be used to settle trades in stocks like General Electric Co. and AT&T Inc. Paxos, the blockchain startup leading the project, hopes to construct a faster and cheaper way to process stock trades, ultimately reducing costs for Wall Street banks and investors alike.
The project will be limited to a tiny slice of the U.S. stock market and there is no guarantee that it will succeed. Still, it could eventually bring change to the world of clearing and settlement, which has evolved slowly since the current system was created in the 1970s.
Settlement is the delivery of securities from sellers to buyers, while clearing is the process of handling trades from when they are initially agreed upon to when they are settled. Today, the standard time it takes to settle a stock trade is two business days—which is why investors must typically wait several days to get cash from their brokers when they sell shares. Paxos’s initiative is aimed at settling trades at the end of the day in which they are agreed upon, or even sooner.
For decades, an organization called the Depository Trust & Clearing Corp. has had a monopoly on the clearing and settling of equities trades in the U.S. Owned by a financial-industry consortium, DTCC traces its roots to a 1970s effort to eliminate paper stock certificates and replace them with electronic records. Last year, it cleared an average of $1.3 trillion in stock trades each day.
Now, DTCC is about to face something new: competition. On Oct. 28, the SEC issued a letter that lets Paxos set up an experimental settlement service for stock trades. Paxos, whose other businesses include a cryptocurrency exchange, expects to launch the service by the end of the year. Credit Suisse Group AG and Société Générale SA have said they would use it and Paxos hopes to bring more banks on board.
Stock trade settlement is stuck in the past, and if blockchain can pull it into the future, all investors will benefit. I asked last year if blockchain could survive crypto-mania, and now, as then, I believe the answer is yes.
There are many areas of business that can benefit from blockchain’s ability to record and disseminate transaction information. That technology could change the world.
