Will the global stock market move onto the blockchain?
Blockchain and the global stock market seem to be a perfect match for each other, and yet the transition from the traditional stock exchanges to a global blockchain stock market has been very slow, especially when you consider the huge potential of blockchain stock.
The global derivatives market alone is huge, extending way into the hundreds of trillions of dollars.
Considering that the total market capitalization of all cryptocurrencies combined has only just surpassed 2 trillion dollars, there is still a long way to go, and a huge amount of potential for projects that manage to work around the legal challenges that stock on the blockchain presents.
But why do we need a blockchain stock exchange, and which companies are already taking advantage of blockchain for stock trading? Read on for the answer to these questions and more.
What is blockchain technology?
First of all a brief description of what blockchain is.
Bitcoin, the first cryptocurrency, was built on a decentralized ledger called a blockchain. This ledger records every transaction that takes place on it, and once this data is stored, it cannot be modified by a third party.
That’s why Bitcoin is so valuable, because it cannot be inflated by central banks or seized by the financial authorities.
It soon became clear though that this technological breakthrough could also be applied to other sectors, not just for digital payment solutions like Bitcoin.
Why do we need a blockchain stock market?
It’s probably true to say that traditional brokerage sites (like Fidelity or Charles Schwab) are still more secure and user friendly than Decentralized Finance (DeFi) products, and that they have a better and more intuitive user interface.
These companies have built up a fortune over the decades, and are able to hire the best UI and web designers in the business. DeFi platforms on the other hand, typically have a smaller team of developers and less funding, as they live on the cutting edge of financial innovation.
There are however many ways in which blockchain-based financial platforms already offer a more convenient user experience than the brokerage and trading platforms of legacy finance.
Buying stocks on traditional platforms takes longer, because everything still has to go through at least one intermediary (for eg. clearing corporations, or the above-mentioned brokerage firms). This means that users are subject to KYC (Know Your Customer ID checks) and additional paperwork, as well as fees and compliance procedures, before they can even begin trading.
The blockchain stock market, on the other hand, will eventually be permissionless - meaning that anybody in the world will be able to use it, no matter their nationality, income level or credit rating.
Millennials already prefer commission-free stock trading platforms like Robinhood, where they’re not forced to pay intermediary fees or to find the initial deposit for opening a brokerage account, which can cost upwards of 1000 dollars.
The reaction to the recent /wallstreetbets incident, in which Robinhood shut down access to Gamestop shares, did show however that internet-literate young adults value decentralization and permissionless trading, and are being increasingly driven into DeFi when inconvenienced by regulatory overreach.
Contrary to the narrative repeated in the corporate media, decentralized platforms (such as a DeFi stock exchange) will actually make the world of finance more transparent, as block explorers, on-chain governance, and open source code will grant regulators greater insight into what is happening on individual blockchains.
Centralized investment banks such as UBS and JP Morgan have frequently criticized Bitcoin and other decentralized cryptocurrencies as being ‘a bubble’ and ‘a fraud’, and HSBC, one the world’s largest banks, has even gone so far as to ban it’s customers from buying cryptocurrency.
But these are the same banks that were accused of ‘turning a blind eye’ to money laundering (HSBC) and the world’s largest ponzi scheme (JP Morgan). And allegations of tax evasion are so common at UBS that there is an entire Wikipedia page dedicated to the topic.
Bernie Madoff, who was once a non-executive chair of the NASDAQ stock exchange, racked up over $64 billion in profit over a period of 17 years before this activity was finally outed as fraudulent. Due to these scandals and more, millennials have little-to-no trust in legacy finance.
Emerging blockchain-based derivatives platforms like Injective Protocol, where the platform is governed by token holders and no one group or body can halt a trading pair, are well-positioned to benefit from this distrust.
Decentralized protocols like this, which allow users to trade blockchain-based stocks around the clock (not only during market hours, which is becoming increasingly absurd in the internet age) are growing in number every day.
Can I buy stock on the blockchain?
Some crypto projects are already offering stocks and equities on the blockchain, but this is still a nascent industry, even when compared to other sectors of DeFi like lending and exchanges.
Derivatives, which are assets that derive their value from something else (for example gold futures contracts which don’t require the purchase of actual physical gold) are a perfect fit for the blockchain and tokenization.
The Binance exchange and crypto ecosystem is the latest to bring derivatives trading to the blockchain - giving users the ability to buy and sell digital ‘stock tokens’, without the need of a physical share certificate.
As well as 24/7 trading and the ability to trade between different types of derivatives, digital stock tokens on the blockchain offer the further convenience of dividend payouts that can be automated and settled instantly.
Also, at the time of writing, a class A share of Warren Buffet’s Berkshire Hathaway holding company (which is not divisible) costs around $400,000, and is out of reach to most. Micro-investing on the blockchain will help those with less capital to participate in equities, as they are able to buy a fraction of a stock token, instead of having to buy one whole company share.
The crypto exchange FTX is another platform that has successfully tokenized stocks, and offers a wide range of mostly tech-industry stock options including Apple, Amazon, Netflix and Facebook.
The Synthetix platform, built on Ethereum, is the most popular trading space on the blockchain for crypto derivatives. Users of Synthetix mint synths: tokens native to the platform which represent company stocks (such as Tesla) commodities (such as gold and silver) forex (fiat currencies such as the pound and the yen) and equity indices (like the FTSE 100 and NIKKEI).
These tokens follow the price of the derivative products that they emulate, and take the name of the asset with an addition of an ‘s’ in the beginning. The Tesla stock, for example, is represented by a token named sTSLA.
The long-term aim of the project is to give users the ability to trade any kind of asset on a completely decentralized blockchain platform. The possibilities here are endless - imagine instantly swapping your Tesla stock for your friend’s Apple stock, without having to cash out through your brokerage and then open an account with the brokerage where your friend’s share certificates are based. This could soon be a reality, as stocks become more liquid, thanks to the blockchain.
Derivatives platforms are also bringing more sophisticated features to the crypto world. The decentralized, Ethereum-based protocol Hegic is bringing options trading and hedging to the blockchain, and allows users who stake the native HEGIC token to earn dividends of the platform’s profits in BTC and ETH.
Security tokens may also be undergoing a blockchain revolution. Polymath is another Ethereum DeFi project built with the goal of making it easier to create and manage blockchain-based securities, an area that has been moving at a painfully slow pace compared to other areas of DeFi, due to complex compliance issues involved.
The ST-20 Polymath token standard is seeking to change this and to pacify regulators like the Security & Exchange Commission (SEC) by allowing users to embed regulatory requirements into the tokens themselves, and restrict trading to verified participants.
Over 215 tokens have so far been created using the Polymath platform, although the majority of these projects have failed to take off and achieve any serious interest from investors, perhaps because of regulatory uncertainty, and the prospect of larger gains to be found elsewhere in the crypto market.
The team hasn't given up though, and Polymath will soon move onto their own purpose-built blockchain called Polymesh, which has been developed in partnership with Charles Hoskinson, the co-founder of Cardano. Polymesh aims to be the world’s first blockchain built especially for security tokens.
Both the POLY token and SNX, the native token of the Synthetix platform, can be stored on the Exodus Crypto Wallet, which hosts over 100 different crypto assets. And speaking of Exodus…
What will stock offerings of the future look like?
On April 8th, Exodus made history by becoming the first crypto company to issue company stock via its own native wallet. The Exodus common stock was available 24/7, and not restricted to exchange opening hours.
The first round of Exodus class A shares were available only to investors in the U.S, but still almost 60 million dollars worth of shares were sold out within the first 5 days.
Exodus is working to extend this sale to areas outside of U.S jurisdiction, and may use alternative trading systems (ATS) such as tZERO and MERJ exchange, both of which are relatively new digital private security marketplaces that are aiming to simplify the regulatory challenges around private assets, such as company shares.
These issues are gradually being ironed out, and crypto pioneers like Exodus and Coinbase are leading the way.
Now, with the Coinbase crypto exchange going public on the NASDAQ, and the first-approved ETF in North America, the question isn’t whether blockchain will be represented on the global stock exchange, but whether the entire global stock exchange will be rebuilt on the blockchain.
The answer to that is - probably.
The London Stock Exchange has already built a platform on the centralized IBM blockchain, whilst the Luxembourg Stock Exchange has elected to use the decentralized Ethereum blockchain as a means of distributing funds in a more efficient manner.
The future of the stock exchange on the blockchain will likely be both centralized and decentralized, but there’s no doubting which of these two camps has the most potential for rampant growth and cutting-edge innovation.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.