Blockchain technology: Securities Investors can save atleast $230 million annually.

Blockchain technology has started making significant impacts on financial and non-financial markets worldwide. Right from managing the supply chain in China to handling complex financial applications in New York, the technology is starting to become universally accepted. 

Nasdaq sees blockchain as a “natural fit” for collateral management having already tested the technology on its private markets platform, Linq.

With the basic structure and framework already in place, it may be time to expand this technology to public stock markets. With trade settlement on a real-time basis, it would substantially reduce settlement and systemic risks besides administrative costs. 

A conservative calculation shows that blockchain can save investors atleast $230 million annually. Presently it takes almost 3 days for securities settlement. Both the buyer and seller of the security stand to lose out on the interest in the intervening period. That is 3 days for the buyer and 3 days for the seller totaling 6 days of foregone interest. From the seller’s perspective, he is receiving the money 3 days after and from the buyer’s perspective he is paying the money 3 days earlier than the security exchange. 

In 2015-16 delivered value of securities amounted to $192 bn on NSE and $45 bn on BSE. Considering a 6% opportunity cost of capital (savings rate offered by banks) and a total of 6 days’ settlement cycle, the interest foregone amounts to approx. $230 million annually. 

Apart from the foregone interest, there are several other costs and risks that the buyers and sellers incur. With real time settlement, these costs and risks can be diminished substantially. 

Recently SEBI concluded from its preliminary investigation that several large brokerage houses indulged in fraudulent practices including trading without authority, non-receipts of payouts by clients etc. Blockchain can put an end to these fraudulent practices and bring in much needed transparency in the financial system. 

With real time processing of banking transactions already in place, it is time to move on to real time trade settlements on public stock exchanges.