Bank of America is testing blockchain technology for the liquidation of shares; this initiative aims to “avoid” market collapses caused by requests in short periods of time, especially when they are affected by external news, as happened for example with the GameStop case, a situation that upset many investors and the public.
Time reduction from “days” to “minutes”
Bank of America disclosed its plans to Bloomberg and mentioned that it has been using the Paxos blockchain to offset insider stock transactions. Banks’ foray into blockchain for stock clearing is relevant since blockchain technology allows reducing the time of “two days” to settle a stock trade down to a time of just minutes.
Why does trading take so long?
These days, trading takes so long because market participants must rely on an institution called Depository Trust & Clearing Corp (DTCC) that is close to 50 years old and acts as a “back-up and clearing” service for everyone involved in the stock market; currently, this institution offers a “T + 2” settlement process through “legacy” software, which means that it takes two days to settle a transaction and complete all procedures.
These transaction delays are what led to the “collapse” of GameStop shares, the delay prompting the DTCC to ask Robinhood and other partners to offer an “additional guarantee” if the shares (which are very volatile) fell in price during the time that the operation took place and the settlement was carried out. Such a demand would have been unnecessary if the process had taken only “minutes” using blockchain technology.
Traditional infrastructure under pressure
The Bank of America initiative shows how the traditional equity trading infrastructure is under pressure from users and investors, especially when the services provided by the current system are not efficient or simply do not adapt to the current environment; if this is done by we add other more competitive products and services in the market (currently offered by many Fintech companies that rely on blockchain technology), we can see how the financial system must be restructured to be more competitive and efficient.
While a drastic change is needed in this regard, it is most likely that in the short term, the DTCC will not be affected (despite its internal problems) since the liquidation and compensation of shares is a highly regulated field where the Important changes require the approval of the Securities and Exchange Commission (SEC) or the US Congress, however, in the long term, the blockchain could challenge (and even replace) this institution of more than 50 years.
What do you think about this topic? Did you know about the GameStop case?
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