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Blockchain: The Next Generation of Clearing and Settlements

January 25, 2018

Today the buying and selling of securities happens in nanoseconds thanks to modern trading platforms. Faster, in some cases. But the actual clearing and settlement of those trades - where buyers take asset ownership and sellers get paid for their end - still takes several days to complete. Why?

The lag has to do with the structure of capital markets themselves. Behind the curtain, though the industry has largely been digitized, some of its mechanics still operate in an analog way. In this market, a short-list of third-party intermediaries benefit financially from certifying share ownership and clearing transactions (charges are assessed by a clearing house for completing transactions using its own facilities). Their function helps make the wheels of equity capital turn, sure, but their processes are wholly outdated.

Clearing trades, registration, changing the name on security ownership, moving assets from one account to the other, polling shareholders, resolutions - these equity market requirements can be put on a blockchain, in a system that gets it done faster and in a way that’s completely transparent. (IR pros, you’ll want to read about the benefits of blockchain, share ownership and transparency in another recent post.) We strongly believe in blockchain’s ability to democratize capital in a way we’ve never seen; this includes bettering these back-office functions.

Eliminating of the need for clearing and settlement by putting securities on the blockchain, is the way forward, in a not-so-distant, Charlie Brooker-like future. And like his show, it’s a world that’s just within reach. Decentralization - the principle underpinning blockchain - means the end of fees paid for by investors for the verification of trades, which, on a distributed ledger, are no longer necessary.

Santander Innoventures, a financial technology innovation fund, suggests “distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20BN annually by 2022.” Specific to clearing and settlements, Goldman Sachs Investment Research projects that the implementation of blockchain could streamline and save capital markets $6BN globally on an annual basis. Staying with that research, it’s not improbable to suggest that the modernization of these infrastructural processes would put billions back into the pockets of everyday investors. Longer-term, it would also help facilitate new exchanges that will vastly improve the overall workings of equity capital. (Page 14 and 15 of the Santander report explains how blockchain can make these processes more efficient.)

Banks are quickly trying to embrace blockchain for these reasons, while at the same time, investors are eager to unlock both the lower costs and faster trades associated with it. Instant settlements, unforgeable securities - these are all possible with blockchain. Think about it: once securities are registered, they’re yours. There’s no third-party ownership. And mobility of capital is maximized in a way that traditional brokerages simply can’t deliver.

Command and control of the entire industry, settlements included, is being challenged by the Equibit model, and others like it. Our value proposition far surpasses any of the technologies used in today’s “secure and stable” trading platforms because in reality, most of how transactions are verified currently are nothing more than walled gardens few in the market have access to.

Moreover, despite being “safe,” the “technology” that’s used today is susceptible to hacks. Its’ instability is the main reason why service providers are being forced into reform by government and industry regulators. Blockchain has proven to be less vulnerable in this regard.

If it were a security, blockchain would be the fastest growing in human history, democratizing capital in ways we’re never seen. While established players are experimenting with the technology, Equibit Group is set to introduce a peer-to-peer network for securities that openly and transparently facilitates the exchange of capital; that eliminates intermediaries; that includes a direct and secure registration format with you holding legal title, not your broker or transfer agent.

Equibit coins (EQB) let you register the data of a typical security, containing everything an issuer needs to communicate with a market unrestricted by geography. Issuers will see compliance costs go off a cliff with a global, decentralized network that lessens third-party involvement. The current verification model will be forever changed and brought in line with the mass-digitization that has occurred across financial services.

As we outlined in our White Paper, “The registration, transfer, clearing and settlement of equities represents a significant part of economic activity currently underserved by modern technological innovation.” Equibit Group will change that.