News & insights

How Blockchain is going to revolutionize Trading

Article - 28/11/2017

From the scriptwriters of the hit series ‘The Good Wife’ to mainstream news, everyone everywhere seems to be talking about Bitcoin. The real genius however, is not the cryptocurrency but rather the technology behind it – blockchain. Whilst less talked about, less romanticized than Bitcoin, some banks and trading firms are beginning to hedge their bets. Blockchain IS the FUTURE.

So how does blockchain work?

In its simplest form it acts as a public ledger. It is an electronic transaction processing system that allows all parties to track the movement of any asset or documentation in a secure network, without the need for third party verification.

Blockchain is the next step of the Internet, reshaping how things in our world are run, recorded and organised.

This technology, which was left unsuspectingly on a cryptography blog in 2008 by one-time anonymous programmer Satoshi Nakamoto is now seen as a new technological institution that will fundamentally change how we exchange value.

With the current system, all transactions have to go through clearing houses, banks, and exchanges which take days to verify the people who sold the share or bond actually own it. The process of trading is long established and complex involving settlement risk for both parties. There is a lack of trust between the two parties, and it is by eliminating uncertainty that blockchain can add value. Blockchain provides security and invokes trust mechanisms. By providing heightened visibility it WILL change how we carry out trade settlements, and how we manage counterparty risk.

HSBCBarclays and UBS are just a few names of those who have taken steps to integrate this technology into their everyday processes.

 “…over two trillion dollars of trade today depends on the physical exchange of documents and blockchain has the potential to take away paper which could be completely revolutionary if commercialised” –

Vivek Ramachandran – Global Head of Growth & Innovation HSBC

For example, blockchain will be able to lower the risk of uncertainty attached to current transactions through the use of technology. So, transactions which seem to take forever and a day to complete, will, in the future created by blockchain, be completed in minutes. Thus, increasing trade, and providing liquidity by cutting risk – forming a new digitalisation of trading.

Two of the largest market makers Citadel and XTX Markets will also be using a service, which they claim will reduce post-trade cost in currency trading, and speed up the time in which transactions are settled. The thing to note here is that this service is being provided by a company called Cobalt who has also set up a blockchain.

Whilst the optimists of the industry are making positive noises, blockchain’s revolution is still in its infancy. There remains a great number of moral, and technical questions about the organisation and the law to be considered. The next series to this blog will attempt to uncover some of the answers to these questions.