Strate, the body responsible for settling transactions concluded on the Johannesburg Stock Exchange, is to meet with 20 other central securities depositories (CSDs) in Switzerland next month to discuss how blockchain technology can be used across global financial markets.
“We’re looking to form a group of CSDs to share information and knowledge. And then as opposed to each of us going and developing our own technology, we could potentially get a vendor to develop something for all of us or we could develop something ourselves and share it and share in the costs,” Tanya Knowles, executive director of fractal solutions at Strate, told Moneyweb.
She said the group of CSDs would also try to determine an ideal model for putting clearing settlements and the transaction of shares on to a blockchain. “The current environment is relatively efficient, it takes three days for settlement to take place, an issuer can declare a dividend and it is processed electronically through our system and paid via the central bank to all the beneficial owners. So there are no huge challenges that exist but it is almost like a new paradigm has come along… technology that can turn this whole system upside down,” she said.
Blockchain, widely known as the technology upon which digital commodity Bitcoin is built, is a heavily-encrypted public ledger used to verify, manage and record online transactions. In essence, it is an open source code which anyone can download for free, run or view at any time – no central authority or institution is responsible for managing the public network, instead each and every transaction requires network consensus in order to be processed.
It is believed that the use of blockchain technology in financial markets would increase efficiency by cutting out the middleman, eliminating onerous record keeping and the duplication of the same records by various market participants, reducing the amount of time needed to settle transactions and lowering transaction fees.
“It sounds so simple for me to give you shares and you get cash in exchange and then the deal is done. But when you start getting into things like corporate actions, dividend payments, taxes that have to be paid, reporting things, liquidity requirements and securities lending and borrowing, you unpack this whole can of worms that needs to be dealt with,” Knowles said.
She said the effective, lawful use of the technology in financial markets would require the use of a permissioned blockchain and oversight by an independent third party. “To something as high risk as the financial markets, it does need regulation, it does need standards, it does need governance and it does need some sort of overseer of the entire ecosystem,” she said, adding that as the technology evolves, Strate would look to transform its business with a view to taking on such a role.
While blockchain would offer increased transparency to regulators and people in the market, it would also have to be managed so as not to give away the transactions and investment strategies of different brokers.
“If we can get the collective power of all the CSDs around the world to collaborate and say ‘right, let’s put all our brain power together and try and solve this problem on behalf of the market’ maybe we can come up with something much better than we could in isolation here,” she said as to why Strate has chosen to collaborate other CSDs.
She said it should take six to seven years, pending legislative changes, for a significant shift toward blockchain to take place in South African financial markets.
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