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On Thursday, January 28, Robinhood received a $ 3 billion collateral application from the Depository Trust & Clearing Corporation (DTCC). This caused the broker to stop buying GameStop stock on its trading platform in order to reduce the collateral desired by the DTCC. After this incident, Robinhood advocates a move away from the current T + 2 standard for the settlement of commercial transactions to an immediate settlement. This is because the DTCC safety requirement results from the current T + 2 standard. In essence, the DTCC needs to seek collateral from participating brokers like Robinhood to insure against the event that the broker goes bankrupt between the time the trade is closed and the two days it takes to settle the trade.
While switching to immediate settlement may not be the panacea Robinhood is hoping for, these recent events draw attention to the tremendous benefits that would come from moving financial infrastructure to blockchain – the technology that ultimately enables instant settlement of stocks could enable.
When I was in San Francisco a few years ago, I met with private equity expert and technologist Ankit Kumar, who taught me blockchain technology as a mentor. He was essentially telling me that blockchain technology and smart contracts are a new paradigm in computing. This allows a software program to make trustworthy commitments – something that was not possible before. This in turn enables the immediate settlement of contracts with no counterparty risk and an unchangeable, verifiable path of the transaction – all at practically zero cost. The use cases are endless, especially in the financial world. Projects like Maker, Compound and Uniswap are now building the basic infrastructure for a stable digital currency, a money market and an exchange. You are likely to see an explosion of use cases across all financial segments such as payments, real estate, and insurance.
Let's look at some of the key benefits of blockchain technology and some of its potential impact on the financial ecosystem.
1. Elimination of counterparty risk
By the 1960s, the US exchanges were on a T + 5 settlement standard. The NYSE closed every Wednesday to make sure the settlement backlog could be closed. Share certificates were recorded in physical form and the settlement process required couriers, so-called runners, to transport these certificates from one brokerage office to another.
The establishment of the DTCC in 1973, followed by the process of first immobilizing and then dematerializing stock certificates, made today's T + 2 standard and electronic trading systems possible.
However, distributed ledger technology can take us further into an era of instant billing. This would ensure that stocks and money are exchanged at the same time, completely eliminating the risk of money not being delivered after the exchange and vice versa. This, in turn, can eliminate the need for intermediaries in a transaction and open up participation in the financial markets to people who would otherwise have been excluded because they did not “know” the right intermediary or were not judged to be a “reliable” counterparty by bias intermediaries.
Related: 15 Crazy And Surprising Ways People Are Using Blockchain
2. Increased ownership transparency and fewer litigation
In the current system, the DTCC only tracks ownership of stocks at the broker level. Each broker, in turn, maintains internal records of actual investors, known as beneficial owners, who buy shares through them. However, there is no root register of actual stock ownership. As a result, situations can arise where there are duplicate claims to ownership of the same stock.
In contrast, a blockchain-based system would keep a record of the entire chain of securities lending, lending and selling, and would keep an accurate record of the actual owner of stocks at all times.
In the current system, these conflicting claims create situations where it is impossible to properly distribute the proceeds to the right people. This is easy to see in cases where trades go unresolved prior to a take-private transaction, or in situations where the stock is heavily shorted. A classic example of this is the Dole Foods case. A blockchain-based system would ensure that the rightful owners receive accurate revenues in every situation, thus making the financial system fairer and reducing litigation.
Related: What Is Blockchain? We explain the technology of blockchains
3. Pay key contributors for the value they create on a network
The inexpensive, instantly transferred and permanent ownership record made possible by the blockchain also enables the transfer of “values” on a large scale. As a result, key contributors who help build a network and make it valuable can benefit economically from the added value of the network. Imagine if the top early users and contributors on Facebook, Twitter, and LinkedIn could benefit economically from the value they bring to these networks.
A great example of this concept is the compound token that distributes the value of this lending platform to the key suppliers and borrowers who help build this platform.
Blockchain technology can offer immensely powerful benefits, such as: B. reduced counterparty risk, accurate ownership records and fair distribution of value to key network participants. It is imperative that all parties come together to convert the backbone of our financial infrastructure to this technology.
Similar: How 2020 became the year of DeFi and what is coming in 2021