Wired: How blockchain threatens the financial market, and why companies on Wall Street develop this technology

At the end of 2015, on the eve of the New Year holidays, the CEO of online retailer Overstock.com, Patrick Byrne, announced that the US Securities and Exchange Commission approved its plan for issuing shares based on blockchain technology. Patrick Brin's statement was a sensation, and the financial world spoke openly about the possibilities of using blockchains in the industry.

The technology cannot be called innovative: the product for which it was created - Bitcoin cryptocurrency - has been known to the world since the end of 2008. However, experts officially considered the permission to use blockchain mechanisms in the securities markets as a turning point in the history of the global financial market.
')
It is assumed that, through the use of cryptographic algorithms that operate on an extensive network of independent computers, the blockchain will help more accurately and openly control the trading of stocks, bonds and other securities.

Wall Street Blockchain

The largest regulator of securities transactions on Wall Street, the holding company Depository Trust & Clearing Corporation, expressed its desire to unite the financial industry organizations for joint development of blockchain-based software. “Once every few decades, the industry has the opportunity to change: we need to rethink the infrastructure and solve its long-standing problems,” said Michael Bodson, president and CEO of DTCC, “to fully realize the potential of the new data distribution system and avoid confusion, the entire industry should work on this as a coherent mechanism. "

Holding Depository Trust & Clearing Corporation started a big business and became the first financial institution that openly made such a proposal. The co-owners of DTCC are large financial organizations on Wall Street and beyond. “The financial industry has taken possession of us,” says Robert Palatnik, chief IT architect for DTCC, “and all our actions are a response to its challenges.”

In other words, if Depository Trust & Clearing Corporation is able to accept the blockchain, then Wall Street itself will be able to adopt a new technology. The statement of Michael Bodson reflects the intentions of not only his company, but many other financial organizations. And since DTCC controls the actual state of the securities after transactions on the stock exchanges, the corporation is in the best position to start the blockchain revolution.

“DTCC strives to become the organizing center of the financial industry for blockchain supporters,” notes Josh Galper, head of the consulting firm Finadium, whose employees are very concerned about the development of block technologies. DTCC, according to the expert, helps large market players to mobilize and join forces to introduce blockchain technology to the securities market.

This approach is rather ironic. Both DTCC itself and the industry on whose behalf the company speaks are taking a step towards technology that could potentially destroy them. Wall Street players probably learned a good lesson from the failing Silicon Valley companies: “taming” your biggest threat is the only way to prevent a crash.

Additional control of the financial market

Head of online retailer Overstock.com Patrick Byrne can also say that the activities of the holding company DTCC has become one of the main reasons for his company's attention to the blockchain - the only real way to democratize and rationalize the financial market.

For several years, Byrne had complained to the authorities about Wall Street's financiers loophole - " naked short sales ." Part of the responsibility for cases of legal fraud with “non-existent” shares, according to Byrne, lay with the ineffective market regulator, DTCC. In the case of "electronic" securities, the data about which the blockchain reliably stores, there will be no loopholes for fraudsters, the expert is sure.

Of course, the management of Depository Trust & Clearing Corporation refutes Byrne's allegations. However, company employees are realizing that they are opening doors of technology that could ruin their business. It is for this reason that it is impossible to predict in advance how far DTCC will go in its “acceptance” of a technology potentially dangerous for a company. However, given the enormous potential of blockchain and the growing confidence in technology around the world , the holding controller will not be able to accept the innovation “to some level”. DTCC is now one of the sponsors of creating software that will demonstrate the advantages of the blockchain technology to the business world.

Software development

The Linux Foundation, a non-profit organization developing the Linux operating system, became the curator of the work on the creation of an “alternative blockchain.” Software development, by analogy with the already existing online “ledger” created to strengthen bitcoin cryptocurrency, was called “Project Hyperledger”. Such large technology and financial companies as IBM, Intel, Cisco, JP Morgan, Wells Fargo and the London Stock Exchange supported the initiative.

"Immutable Truth"

As stated by Robert Palatnik of the DTCC, collaboration and unification are the most important tasks for this organization. “Many companies have researched the blockchain to see if this technology is suitable for financial markets,” explains Palatnik, “But what is really needed is a combination of efforts to create electronic systems that will work in each of these companies.” Large financial organizations conducted independent research on the blockchain, but DTCC representatives consider this analytical work "contrary to common sense."

If we take into account the “distribution” nature of the blockchain, a joint approach to the development and use of technology seems to be a very sensible idea. For a company that runs a “blockchain-like” operating system within itself, innovation is unlikely to bring much benefit.

The real power of the blockchain as a “distributed ledger” is that it is beyond the control of any organization and retains what Robert Palatnik calls “the only undisputed version of the truth.” For many years, Wall Street relied on DTCC, and one single controlling organization tracked the effects of multiple transactions. Thanks to the blockchain, the truth will be stored by the network of machines and all interested parties will be able to verify the data on the electronic ledger. At least in theory.

Who, how much and when

Patrick Byrne believes that the blockchain will help reform many markets. According to the head of online retailer Overstock, the technology will help to democratize the securities loan market.

In the conditions of the modern world financial market, about $ 1.7 trillion in securities fall on “loans”. By borrowing stocks, traders can carry bare shorts (short sales) or hedge their financial risks. Byrne is extremely dissatisfied with the fact that this market is controlled by a relatively small number of financial institutions (for example, State Street Bank) that are guided solely by personal needs. According to Patrick Brin, the blockchain technology can open up a loan market for securities and will allow you to closely monitor who, how many took, and when.

Many look to the like with skepticism. Perhaps the securities loan market is not so hopeless, and Patrick Byrne’s suspicions are groundless. However, the investment bank State Stree, one of the main regulators in this industry, also joined the Hyperledger project.

Not so simple

However, no one can guarantee that Depository Trust & Clearing Corporation will bring work on the blockchain to a logical conclusion. In the end, the full introduction of technology hi to the fact that the interest of Wall Street in the services of DTCC disappears.

It is worth noting that the DTCC-initiated “Hyperledger Project” reproduces the blockchain not thoroughly, the system that underlies Bitcoin implied network communication of hundreds of independent machines. In the "processed version" financial institutions can use their computers. “One system is really more desirable,” says Robert Palatnik, arguing about the possibilities of creating one public ledger, which will be available to all players in the markets. But, according to the expert, a more realistic option is to establish uniform standards that will allow various financial organizations to connect their private blob bases to each other.

This is somewhat contrary to the idea of finding a "single and undisputed version of the truth." But it is important to understand that the bright blockchain idea also has its limits. Too many market participants are still sitting behind closed doors of large banks. Even if the industry really brings the work on technology to a logical conclusion, the blockchain will still be able to break against the wall of human inertia, mistakes and greed. Wall Street players ultimately follow money, not ideas.

Today, in many cases, the settlement of stock exchange transactions takes three days. Bidding is carried out instantly, but it takes 96 hours to actually close the deal itself, handing over the shares to the buyer. Blokchain, according to Patrick Byrne, can reduce this period to a minimum. Closing the “temporary gap” can save banks billions of dollars as a result of cuts in capital spending. But the financial industry may not want to go that far.

"Too much in the financial world happens regardless of technology." - Josh Galper notices. Machines are able to provide a thoughtful and logical functioning of the market, but people can still complicate things.