How can blockchain be used to settle securities trades in real time?

Not easy, this would require a complete infrastructure change on the security firms, and real time data synch up that is blockchain and web3 friendly. Lots of issues need to be resolved such as compliance, confidentiality, etc. But it is definitely the future and Wall Street will embrace the blockchain and web3 technology in the near future.

Securities settlement involves transferring ownership of financial securities post-trade. Clearing houses ensure efficient and secure settlement, reducing counterparty risk. DTCC, a key player, facilitates settlement in US markets. Cede and Co., a DTCC subsidiary, holds securities on behalf of beneficial owners, simplifying settlement via electronic records. Broker-dealers execute trades and oversee settlement. Exchanges provide trading platforms and regulate settlement. The process involves confirming availability of securities and funds, netting transactions, and updating ownership records electronically. It ensures trades are settled securely, maintaining market integrity.

Blockchain can enhance securities settlement by offering a decentralized, transparent, and immutable ledger for recording ownership transfers. Smart contracts can automate settlement processes, reducing time and costs. Blockchain enables real-time verification of transactions, reducing counterparty risk and fraud. It enhances transparency and auditability, promoting trust among market participants. By streamlining settlement processes and enhancing security, blockchain can revolutionize securities settlement, making it more efficient and resilient.

A cool example is the Swiss stock exchange, which launched SDX, a new platform that uses the security of blockchain to make trading and managing digital money like cryptocurrencies safer and easier. We at MC² Finance would love to work with SDX to help their customers invest in the growing world of DeFi, ensuring they get the same trust and protection they expect from traditional investments. We also plan to bring the worlds of crypto and traditional investing closer by providing a new kind of fund, DA-Funds, that will increase SDX's presence in the crypto world.

Examples of blockchain-based securities settlement include the BUIDL BlackRock Fund, which tokenizes traditional securities for real-time trading and settlement. Other examples include Digital Asset Holdings, SETL, and Securrency, offering platforms for automated settlement, enhanced transparency, and reduced counterparty risk. These solutions revolutionize securities settlement by leveraging blockchain's efficiency and security benefits.

Some key benefits: • Reduced Settlement Times • Increased Transparency • Enhanced Security • Cost Efficiency • Streamlined Operations • Simplified Regulatory Compliance • Elimination of Intermediaries And many more!

ESMA's findings on a DLT Pilot regime (ESMA70-460-111 2022) reference: – Transparency: due to the public nature of blockchain ledgers allowing for tracing of transactions throughout the life cycle of the security and as a register of ownership. - Data integrity: consensus among participants makes it more difficult to change the truth state of the system – Disintermediation: direct access to secondary markets, peer-to-peer models, disintermediation reducing costs and counterparty risks. – Efficiency: improved efficiency for listing, trading and settlement due to decentralisation, improved access to information, real-time execution of transactions, and ease of exercising contractual rights, processing payments and transferring funds.

Blockchain-based securities settlement offers numerous benefits. Firstly, it enhances efficiency by automating settlement processes through smart contracts, reducing settlement times from days to seconds. This boosts liquidity and reduces operational costs. Secondly, blockchain ensures transparency and immutability, providing a tamper-proof record of ownership transfers, enhancing trust among market participants. Thirdly, by eliminating intermediaries, it reduces counterparty risk and increases security. Overall, blockchain-based securities settlement improves market efficiency, transparency, and security, fostering a more resilient and inclusive financial ecosystem.

Challenges of blockchain-based securities settlement include regulatory uncertainty, as current frameworks may not fully accommodate blockchain technology. Scalability is another concern, as blockchain networks may struggle to handle the volume of transactions in securities markets. Interoperability between different blockchain platforms and legacy systems poses integration challenges. Additionally, security vulnerabilities and potential for cyberattacks require robust risk management measures. Overcoming these challenges will be crucial for widespread adoption of blockchain-based securities settlement.

Besides technical issued and legal regulatory concerns I see the biggest challenge in the time frame and the definition of „real time“ and synchronisation. By definition blockchain technology works with time stamps and is a decentralised system in need of permanent synchronisation. So even with a one kind of authority I there was always the problem of a near real time synchronisation of timestamps and a frequency in nano or at least milliseconds. With todays technology and networking I see a low to now chance to bring that to the end user. Even if there may be better and faster (but not trustless and decentralised!) solution already available.

A blockchain is a database file containing its full history data changes. There is blockchain, which is a fundamentally just file on a hard drive that grows infinitely, and there is distributed-blockchain where there are multiple copies of a blockchain file that are continuously synchronized at specific intervals. Blockchain data changes are broadcast across the network and the results are cryptographically finalized at specific intervals referentially arbitrated by a specified computer node's copy. The distributed blockchain model requires continuous reliable network communication and the fact that the file grows infinitely are the biggest design considerations but the benefit is that a full history of changes is preserved.

The extraordinary complexity of regulation, the size and importance of financial markets, the closeness to regulators and the strength of the vested interests within the financial instruments markets mean that blockchain solutions are likely to primarily be developed by incumbent players for efficiency purposes (e.g. J P Morgan). I am not holding my breath for a decentralised blockchain revolution in this space!