Globalization has made our world a small place, but the technological advancements have made the global market faster and more complex than ever imagined. The stock market has been the backbone of the financial world for centuries. With modern technology, the speed of order executions has been impressive. However, the conceptual root of the stock market can be traced back to the seventeenth century.
The problem in the present stock trading method
The advent of faster computing technologies and the internet have sped up transactions, but the conceptual background of the stock market hasn’t changed. The share ownership for issuers and the stock market is tracked by centralized registrars (stock transfer agents). These intermediaries cancel the share certificate for the investor that sold the shares and substitute the new owner’s name on the official master shareholder listing. Therefore, these centralized depositories and transfer agents act as a single point of failure in the entire stock trading scenario. Due to a large number of intermediaries involved in the stock trading market, the administration costs are too high. The participating investors have to pay a large sum of numerous charges including registration, transfer, distribution, scrutineering, and courier fees.
The centralized and expensive stock trading market completely lacks transparency which directly creates information asymmetry leading to market advantages for some investors. The stock trading industry has always found dealing with forged securities as a critical issue. The current centralized stock market gives no title to the investors as legal ownership of stocks rests with transfer agents in most jurisdictions. Apart from this, the mammoth size of the stock trading industry and systemic counterparty risk adds to the nuisance.
How can Blockchain and Cryptocurrency alter the course of Stock Trading?
The advent of Blockchain Technology into the mainstream economy will ultimately reshape global equity and financial markets. The World Economic Forum predicts that Blockchain platforms will store 10 percent of global gross domestic product, by 2030. Blockchain Technology and cryptocurrencies can act as the backbone of the Stock market. Cryptocurrencies and other Blockchain applications hold the potential to transform the way in which securities are issued, transferred, tracked and regulated.
Giving more power to investors:
The best Blockchain solutions for the stock trading industry include giving more freedom to the investors by bringing in decentralization and transparency into the industry. The platform based on blockchain technology can be used to directly transfer share ownership between investors rather than putting all stock transactions through a centralized hub. The direct share ownership transfer between stock buyer and seller over a trustless platform provided by blockchain hyper ledger promises transparency, customer protection and establishes trust in the stock trading institution. Decentralized Applications can be used to cater to the needs of budget-conscious investors who are either unwilling or unable to purchase entire shares.
Elimination of intermediaries: lower cost of investing
The stock trading industry involves numerous intermediaries between stock buyer and seller including stockbrokers, depositories, banks, and clearing corporations. These intermediaries create inefficiency and a need for trust in the stock trading system. Furthermore, most online brokers require a minimum deposit of around $500 or $1,000, to open an account, along with stock trading fees of about $50 per trade. These brokers illustrate the lack of transparency in the stock trading market as they charge many hidden fees like the IRA closure fee and options fees. Blockchain-driven investing platforms don’t require a minimum deposit to open a trading account and lower the cost of investing by reducing transaction cut for intermediaries.
Security Tokens for safer investment
A promising way of making money has been Security Token Offerings using blockchain technology. Security tokens have emerged as the safest bet in token investment because of easier sales, fewer legal hurdles, and clearer trading practices.
Security tokens made using blockchain hyper ledger can also be used for micro-investments, so investors do not need to have a threshold budget. Since security tokens can be broken into smaller increments, virtually any investor can claim a share.
Cryptocurrency might be recession-proof:
Satoshi Nakamoto presented Bitcoin blockchain to the world during the recession of 2008. Independent of centralized entities and with a value determined by the free market, cryptocurrencies could be suitable hedges against the next economic downturn.