Blockchain could be the future of investing. Blockchain and the distributed ledger technology it’s based on has the potential to revolutionize investing, and cryptocurrencies like bitcoin are just the tip of the iceberg. “Distributed ledger…
Blockchain could be the future of investing.
Blockchain and the distributed ledger technology it’s based on has the potential to revolutionize investing, and cryptocurrencies like bitcoin are just the tip of the iceberg. “Distributed ledger technology is like a spreadsheet: You can configure it any way you want,” says Antony Jenkins, founder and executive chair of 10x Banking and board member of Blockchain. The technology is being adopted in supply chain management where stores like Walmart (ticker: WMT) are using blockchain to track food products to tamp down contamination. Jenkins says in five to 15 years, investors could see significant uses in the financial markets. Here are 11 ways blockchain can change the future of investing.
There will be near-instantaneous settlements.
In the currently cumbersome world of trading, post-trade settlement takes upwards of three days. This is largely due to the number of intermediaries involved in the process. If registered on a distributed ledger instead, “trades and settlements could be fully automated and instantaneous,” says Matt Higginson, a Boston-based partner at McKinsey & Co. “In peer-to-peer decentralized exchanges, settlement happens between counterparties immediately.” This could take post-trade settlement times from days to a matter of minutes.
Trading costs should fall.
Fewer intermediaries means fewer parties needing to be compensated during the trading process. Following that to its logical conclusion suggests lower trading costs for investors. A report by Oliver Wyman found that IT and operations currently cost the capital markets close to $100 to $150 billion per year in banking expenses and an additional $100 billion in post-trade and securities servicing fees. With blockchain, we could theoretically have a much faster, lower-cost banking system, Jenkins says.
Global trading would be 24/7.
Open 24/7 may just become the future tag line of stock exchanges. Distributed ledger technology could enable exchanges to be globally active 24 hours a day, seven days a week, Higginson says. Say goodbye to after-hours trading woes and geographic boundaries. Major exchanges like Nasdaq are already making headway in this direction. It recently partnered with ABN AMRO Clearing, EuroCCP, and Euroclear to make after-hours margin calls easier to cover. With a collateral dashboard, parties were able to handle the margin call and securities collateral transfers within minutes.
There should be greater transparency and trust.
With distributed ledgers like blockchain, every user can see the full record of all transactions. Tracking trades would be like doing a title search on your car: “Every new trade would be another block on the chain so you could see who owned the security every step of the way,” Jenkins says. The blockchain could also be designed with rules and regulations built in via smart contracts to regulate each trade and block illegitimate activity automatically, thus increasing not only the transparency of the capital markets but also the trustworthiness.
There should be better communication.
This heightened transparency and trust can trickle through to investors’ relationships with their portfolio and investment managers. According to EY, with blockchain, account transactions and trades could be shared more easily. Managers could monitor portfolios’ real-time performance and risk data. Blockchain could also streamline the onboarding process by granting trusted parties access to profile information through a cryptographic key. Likewise, the transfer of assets between institutions could become nearly instantaneous.
Crowdfunding would be easier.
Initial coin offerings (ICOs) are making capital fundraising simpler and available to investors of all sizes. With an ICO, companies give investors coins in exchange for capital. There are currently two types of ICOs in the private equity space, Jenkins says: tokens that grant holders the right to a future service, such as access to the company’s future cloud platform; or tokens that provide a share of the company’s equity similar to that given to stockholders. Note, however, that the SEC has issued a warning to investors: While some ICOs may be honest investment opportunities, others “present substantial risks for loss or manipulation” with substantially less investor protection and regulation. Questions also remain how and if these offerings will fall under the SEC’s securities laws.
Real estate trading could be tokenized.
Tokenized trading could have a particularly big impact on real estate investments, says Roger Smith, chief technology officer of Platform Ventures, a Kansas City-based real estate investment firm. With tokenized crowdfunding, investors could choose to allocate their funds across multiple real estate investments, he says. What’s more, receiving distributions could become a lot easier. Managers have a legal requirement to invest and distribute funds as quickly as possible, Smith says. To abide by this, distributions are often held in a trust for investors or sent directly to investors’ bank accounts. With blockchain, managers could instead provide tokens for investors to cash out or reinvest as they see fit.
There would be streamlined private equity trading.
Trading private equity shares is traditionally a trying process, but with blockchain, it doesn’t need to be. Rather than having to match buyers and sellers for every transaction, private equity coins or tokens could change hands much like bitcoin does today. “Anybody who’s willing to accept ABC coin could theoretically trade it instantaneously,” without needing an exchange or intermediary to facilitate, Jenkins says.
Investors would see greater liquidity.
Blockchain could eliminate the administrative headache of transferring share ownership in complex assets like real estate, making illiquidity largely a trial of the past. “The holy grail in the real estate world is a secondary market where you could get out or back into your real estate offering,” Smith says. With blockchain, this can become a reality. If shares were registered on the blockchain, entry and exit would be as simple as moving them from Person A to Person B with none of the administrative headache currently involved, he says. This could reduce the lock-up time on private investments, enabling investors to control how long they participate in the underlying portfolio.
The untradable becomes tradable.
Speaking of real assets, tokenization is making it possible to trade shares of that Van Gogh your grandmother bequeathed you. Tokenization converts the value of an object like a painting into something that can be moved instantaneously across the blockchain. This could make things from your Van Gogh to an inventor’s patent or creator’s copyright monetizable and tradable. You could parcel the value of your Van Goh into tokens for investors to buy, allowing them to own shares of the painting the same way you own shares of Apple (AAPL).
There could be a better shareholder voting process.
Another area of investing blockchain can streamline is investor voting. Among the distributed ledger-based technologies being built by Nasdaq is an e-voting system to “more efficiently manage voting sessions at corporate annual meetings,” says Johan Toll, the Stockholm-based head of digital assets within the market technology business at Nasdaq. The system uses blockchain technology to check many of the boxes on voters’ wish lists, including enhanced transparency and auditability with online access to real-time voting results that are saved in an immutable ledger. Last year, Nasdaq signed an agreement with its first customer, South Africa’s central securities depository, to bring e-voting to the South African capital markets.