Cryptocurrencies run on a technology called blockchains. A distributed ledger is used to keep and maintain a database of transactions. Its usage in digital currencies is only the beginning, and experts believe that this technology can revolutionise investments. Blockchains are a lot similar to digital spreadsheets in which you can customise them however you want. Even today,the technology is being adopted by large grocery stores like Walmart to make their supply chain management more efficient. They use blockchains to keep track of their food products to help prevent any food contamination or spoilage from happening.
But how exactly can they change how we make investments? There are a lot of different ways that they can do so.
For starters, if blockchain technology were to be applied, then the processing time for post- trade settlements will be nearly instantaneous. The process for post trade settlements averages at about three days due to the numerous intermediaries involved for each transaction. If the transaction was made on a distributed ledger, then the trade can be programmed to be fully automated and instantaneous, taking settlement time from 3 days to just minutes or even seconds.
Trading costs will also be affected. If processes were automated and intermediaries were removed from the picture, trading costs would fall. Consequently, investors would also benefit from lower trading costs. At the moment, it’s believed that the trading market shells out up to $150 billion per year for banking expenses and post-trade security services. These costs can be lowered if blockchain technologies were to be used in the trading market.
Adopting blockchains would also mean that trading could be done 24/7, all days of the week. Using distributed ledgers would enable exchanges all over the world to be open 24 hours every day of the week. Trading will no longer be affected by factors like time zones and geographic boundaries. This could also potentially change how troubleshooting and crises are handled since there will always be an active part of the network at any given time.
What else? Well, distributed ledgers would allow all of its users to view the full record of all transactions. This would give more transparency and grow trust in the trading market. Each trade that would happen will just be added to a block in the chain and anyone will see the records. Not only that but blockchains could also be programmed to monitor and regulate transactions to automatically detect and block any suspicious or illegal activity in the network. This not only increases transparency but increases trust as well.
Communications are also expected to be improved with the adoption of blockchains. Once transparency and trust have grown, this effect can trickle down onto investors and investment managers. Since information on trades and account transactions can be accessed and relayed more easily, investment account managers can monitor their clients’ portfolios in real time. The use of blockchain can also help make the onboarding process easier by granting access to profile information using secure and encrypted keys. Like this, institutions can also have an easier (and faster) time transferring their assets to one another.
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And lastly, blockchains can help investors see more liquidity. Having blockchains in place would save investors from the arduous administrative tasks that come with transferring share ownership for complex assets like real estate. If all of the information on transactions were recorded on the blockchain, that would remove the need for all the headache inducing paperwork and administrative tasks involved. This reduces the lock-in period that comes with a lot of private investments, giving investors the chance to have control over how long they want to participate in those aspects of their portfolios.