By Nick Cowan, Managing Director, Gibraltar Stock Exchange (GSX) Group
Many of the most dynamic technological innovations in the last 25 years have promoted the idea of breaking down barriers, improving accessibility, and bringing the world’s citizens closer together than ever before. During this prolonged phase of globalisation, in which the transfer of information and data became borderless, the stock exchange model remained relatively stagnant. Traditional exchanges have been limited to geographies where they are licensed. This antiquated model, while firmly rooted in the capital markets realm, doesn’t have to be the standard we settle for. The incorporation of blockchain technology has the potential to remove barriers between stock exchanges, enabling stocks that are listed on one exchange to be accessed by traders on another exchange in a different jurisdiction. So how do we reach this new frontier? Well, I’m pleased to say we are already en route, given the steps that have been taken to incorporate Distributed-Ledger-Technology (DLT), specifically blockchain, into the traditional stock exchange model in recent years.
As a long time advocate for the adoption of new technologies in financial services, I have always been convinced of blockchain’s potential to help build an exchange model fit for a new generation of traders and investors. Blockchain has earned its stripes as a mechanism to address the longstanding industry inefficiencies confronting the traditional stock exchange model, such as intermediaries and transaction delays. However, innovation doesn’t stop there. The technology is tailor-made for directing the future of stock exchanges, changing the trading game as we know it, extending the reach of investment opportunities wider than previously imagined possible.
A more inclusive model for emerging markets
Using a decentralised and automated system, blockchain technology can enable instant trading and transform the typical functionality of stock exchanges. The technology facilitates an immutable and transparent record of transactions, significantly simplifying the trading process. The use of smart contracts enables self-executing transactions, without the need for broker oversight. Crucially, blockchain can open the door to new investment opportunities for emerging markets, introducing new trading options to a cohort of previously excluded individuals.
For small exchanges operating outside major jurisdictions, it can be very difficult to gain traction internationally. When it comes to smaller exchanges attempting to license technology, they are often required to pay the l larger, more dominant exchanges to use their technology. This status quo arrangement has worked for a while, but blockchain technology can be a tool of empowerment for smaller exchanges, giving them the platform to operate on the global stage.
Improving accessibility to stock markets can also accelerate economic growth in emerging markets through the mobilization of savings. The intrinsic link between the direct, and indirect functions of stock exchanges and economic development in emerging markets such as Zimbabwe have been detailed previously, promoting both short term and long term benefits. Stock exchanges, by their very nature, increase liquidity and provide an important risk management tool. Additionally, exchanges ensure the existence of a pool of funding crucial to the vitality of investment projects geared towards technological innovation.
Breaking ground, breaking barriers
The fundamental challenge for innovators wishing to successfully adopt blockchain into the stock exchanges of the future will lie in the finer details of scalability, process management and linking these exchanges together (what we call interoperability). Creating a blockchain infrastructure which can process the volume of transactions required by a large stock exchange will need to involve a mechanism for differentiating between small and large size transactions.
A blockchain-powered common protocol, once unthinkable, is well within reach. This kind of initiative would grant smaller exchanges in any jurisdiction access to a global network of partner exchanges. This would enable these exchanges to offer their listings in multiple countries at the same time, while also widening opportunities for local and international investors. However, for this ambition to be realised, the spirit of collaboration that is fueling the rise of blockchain technology must be sustained. It is fundamental to the sustainability and viability of the technology. By breaking down borders between exchanges, we can create a landscape of interoperability, great governance, and institutional best practices, benefiting exchanges and traders alike by removing economic, geographical, and logistical barriers to investment opportunities.