Blockchain Clearing And Settlement: Securities & Trades
Shawn uses a simple example to explain the concept of blockchain clearing and settlement. He also explains what is blockchain settlement – and why businesses would opt for a blockchain for clearing and settlement of trades & securities.
Why We Need A Blockchain For Clearing And Settlement
Clearing Daily Transactions
The current process for clearing and settlement is wasteful – and blockchain tech is poised to change that. The results will be a net gain for everyone -- not just for businesses, but for consumers as well.
We tend to take our daily transactions for granted. It’s as simple as swiping your credit card or depositing a cheque, right? Wrong. It only seems that way. In truth, every transaction you make is simply a promise. Once the promise is made, a clearing house steps in to facilitate and settle the promise .
The clearing house consists of a plethora of middlemen. They ensure that the finality & settlement of the promise made. And in return for their good-deed, they charge you hidden fees. Ding!
Clearing Trades And Securities
Businesses have to endure these unnecessary fees as well – but on a grander scale. They trade securities that have various risks managed by the clearinghouse. This leads to higher fees. Businesses are then forced to pass these costs down to their consumers. Ding!
We essentially get Double-Dinged! But wait – it doesn’t end there. Since we’re getting double-dinged, we have less money to buy stuff. And because we have less money to buy stuff, businesses lose profit. Businesses now have to either increase prices or close shop. As you can see, it’s just one never-ending loop of economic waste!
However, eliminating the middlemen like settlement Clearing houses has been all but a fantasy… until the advent of blockchain technology.
Blockchain Clearing And Settlement: Efficient & Fast!
Our current models of eCommerce are facing a hasty demise. Enterprises have been swift to leverage blockchain clearing and settlement solutions. The efficiency and cost savings that the technology delivers has been far too enticing to ignore.
A blockchain allows a network of businesses to use a shared ledger upon which they can conduct their transactions. This shared ledger provides all parties with security, speed and transparency – while removing middlemen and reducing friction.
Traditional methods of clearing and settlement rely on middlemen to facilitate trust & security. But the friction is so severe that it can take weeks to settle a single transaction.
However, blockchain and distributed ledger technology provide trust & security without a middle man. This reduces friction and costs for all parties. Furthermore, transaction settlement is conducted within seconds! The resulting cost savings are massive – which are then passed down to consumers.
Blockchain Trade Settlement: The Adoption Has Begun
Across the globe, big name firms and established players have been experimenting with blockchain and distributed ledger technology. The list extends from one end of the world to the other
USA based Broadridge Financial Solutions will be using blockchain trade settlement in the repo market. Broadridge believes that blockchain technology can
Reduce counterparty risk
Eliminate wasteful manual intervention
Streamline current processes for confirmation
Increase audibility, and transparency
London based SETL already utilizes a blockchain platform for settlement of payments. They empower participants to deploy their own blockchain within minutes.
In 2016, India based uTrade was the first Indian company to employ a blockchain technology for trade settlement. Their “uClear” blockchain platform allows for real time clearing and settlement of securities. Fast forward to 2018, and we have the Security and Exchange Board of India (SEBI) have begun exploring blockchain technology for trading the stock market.
The Australian Securities Exchanges (ASX) isn’t interested in falling behind either. ASX will be launching their blockchain based financial services by 2021. The goal is to allow stockbrokers & fund managers to use the blockchain for real-time settlement and tracking.
Challenges in Blockchain Clearing And Settlement
Established processes and policies have firm roots in modern day operations. Uprooting these policies and redistributing resources will be the biggest challenge firms will face. Change is not easy – and will face strong resistance and certain junctions. Furthermore, the technology itself requires to be battle-tested some more. The complexity combined with the shift in mindset may cause onboarding issues.
Conclusion: Advantages Too Good To Ignore
Even with the political and regulatory resistance, the adoption of the technology has been moving forward. As understanding increases, decision makers will be coaxed into action by the following advantages:
Drastically reduced transaction costs
Near instant settlement and clearing
Easier Risk management
Blockchain technology is paving the way for a financial revolution that eliminate a lot of economic waste.
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