These days it seems like you can’t pick up a financial publication, go to a party or hang out at the water cooler without seeing or hearing something about blockchain. So what is blockchain, and how might it impact the future of trading?
In simple terms, a blockchain is a shared, distributed, and immutable ledger that facilitates the process of recording transactions and tracking assets. The assets can be tangible, such as automobile parts, or intangible, such as intellectual property like patents or the so called cryptocurrencies like Bitcoin and Ether. It is important to keep in mind that cryptocurrencies are not the same as blockchain. As an analogy, think of blockchain as a type of operating system, like Linux or Unix, that can run various applications. Bitcoin is just one of many applications that use the blockchain framework.
The word ‘blockchain” comes from the way the system stores data. Transactions are stored as “blocks” that are linked together to form a “chain;” the more transactions that are recorded, the longer the chain. Each block contains a “hash,” a time-stamped transaction entry, as well as the hash from the previous block. The hash from the previous block prevents blocks from being altered and transactions from being inserted between two existing blocks. If a transaction is entered in error, a new transaction must be used to reverse the error, and both transactions are then visible.
There are several different categories of blockchain, defined by the participants who use them. The first type is called Public and permissionless: All transactions are public and no permissions are required to join them. Bitcoin is an example. The second type is private and permissioned. As the name suggests, access to the blockchain is limited to designated members. The third type is a hybrid of the previous two and is based on a relatively new concept called a “sidechain” which allows different, public or private blockchains to communicate with each other.
Blockchain technology could impact the future of trading in several ways. Today, many trades go through a settlement process that spans days, due in part to the role of intermediaries, like exchanges and clearinghouses, and regulatory processes. If trades were recorded on a blockchain network, settlement times could drop from days to minutes, improving efficiencies and reducing errors. Because the blockchain would be transparent to all parties, the need for time-consuming reconciliations and audits would be dramatically reduced, potentially lowering the cost of doing business. These savings could be passed on to traders in the form of lower commissions and fees.
Blockchain technology is also facilitating trading in new digital assets. One recent example is RMG®. RMG®, which stands for Royal Mint Gold, is a new cost effective and secure way to hold, transact, and trade physical gold using blockchain technology. RMG® was created by a partnership between the Royal Mint, a company owned by the British government, and CME group, one of the world’s largest derivative marketplaces. RMG® has no storage or management fees to erode the gold’s value, and operates in a transparent market with investors having the ability to trade RMG® with real-time pricing (on a dedicated Digital Asset Trading Platform).
Finally, many commentators are drawing parallels between the emergence of blockchain technology and the emergence of the internet in the late 1990’s. Companies that can figure out how to profitably harness the immense power of blockchain could be the stock market winners of the future.