Sebi explores blockchain use for share market

The Securities and Exchange Board of India (Sebi) is exploring how blockchain technology could be used in the stock market.

Blockchain is a digital ledger technology, gaining popularity worldwide in the supply chain industry and for financial transactions. The technology is considered the backbone for use of crypto currencies such as Bitcoin.

According to sources, information technology major IBM, one of the pioneers of blockchain, gave a detailed presentation to Sebi on how the system could be put to use in stock markets. The meeting was attended by top Sebi officials. They were briefed on how blockchain could improve efficiency and transparency in the stock markets, sources add.

"While the market regulator is yet to decide, the meeting suggests Sebi could be open to the idea, in a gradual manner. Sebi is tracking how the technology is being used in markets globally," said a source.

Several global exchanges, including the NYSE and Deutsche Borse, have tested and adopted the technology. Earlier this year, National Stock Exchange (NSE), in collaboration with select banks, had conducted a trial on adoption of blockchain for know-your-customer (KYC) documentation.

Market participants say blockchain could transform the stock exchanges, given its capacity to decentralise market operations. This could put an end to the correlation between distance from the stock exchange and entry price. Currently, brokers who have terminals at brokerages through a co-location facility are said to be at an advantage over traders located far away, in the speed at which they can access servers. This is primarily due to the fact that all trade orders are put through in a centralised form from the exchanges. Blockchain would decentralise the operation, as the transaction architecture would shift toward peer-to-peer settlement.

"Adoption of blockchain could put in place a far more robust trading system. Markets will shift from an order matching system to peer-to-peer trading, making the proximity to exchange servers irrelevant. Controversies like the co-location one will vanish and transparency in the markets wil improve," says Prakash Gagdani, chief executive officer at 5paisa.com.

Technical experts say the technology would make the share settlement process easier. It would also eliminate the need for several market intermediaries, including transfer agents and depositories. Currently, changes in share ownership works in a centralised fashion. While the ledger is held by share registrars or transfer agents, the actual shares reside with depositories. That is why a trader doesn't get possession of shares instantly after executing a trade order. Once a stock exchange implements a trade order, the information goes to a share transfer agent. The latter makes the changes in the ledger and the depository makes the share transfers into the buyers' account.

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If blockchain technology is adopted, the entire operation would become decentralised. Once a trade is put through, the blockchain would automatically make the necessary changes in the ledger and transfer the shares instantly to the buyer's account.

"Clearing is the process of matching and netting trades among counter-parties before settlement, after the trades have been done. Blockchain is meant to do instant clearing and settlement and be more efficient," says Kunal Nandwani, founder, UTrade Solutions. He adds that the transition from the current system to blockchain might not be smooth.

Blockchain is like a digital ledger, used to store information of all transactions pertaining to an asset, which could be a Bitcoin or a cargo or any other good. Every entity being tracked has a unique identity and whenever a transaction is made on the entity, the blockchain ledger registers the transaction. The entries to the ledgers happen only if both parties in the transaction give their approval. For instance, in Bitcoin, the blockchain tracks each and every transfer that the currency underwent since it came into existence.

Several stock exchanges and market regulators have already started testing the technology. US exchange Nasdaq has been using it in trades of privately held companies. Australia's biggest bourse, ASX, has been using blockchain as a platform for e-voting in corporate resolutions.


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