Blockchain really may be the future of the markets, after all

For some time now I have believed the global financial markets will be rewired and digitized with the technology and concepts behind bitcoin. It's not really that radical. It sounds all gee-whiz techno outlandish when you hear crypto enthusiasts talk about it, but all we're really talking about is a shared ledger, a better, more cohesive way to record and track transactions.

The concept may be easy but the implementation is difficult. Let's say you wanted to digitize stock trading. You have to upgrade all the systems at exchanges and brokers and banks and custodians and regulators and investors and probably scores of other involved parties I can't think of off the top of my head. You need one system they can all access, that meets all of their needs, and that satisfies all the regulations. There are only a few institutions with the breadth and knowledge to be able to pull that kind of thing off.

The Depository Trust & Clearing Corporation is one of those few institutions, and it is building a new digitized platform for trade processing and custody, as our Penny Crosman reports that will essentially rewire Wall Street. Investors can buy and sell stocks, bonds and other securities via their brokers on or off Wall Street, using any platform that meets the standards and plugs into the DTCC's system. It really is a way to bring the advantages of cryptocurrencies – the speed, transparency, low friction – to the traditional markets. 

And yet, the DTCC and the system it's building is focused on only the post-trade parts of a trade. One of the things that gets lost I think in all the hype over blockchain and stablecoins and whatnot isn't just the idea that the finance industry is going to rewire its rails like the DTCC is doing. It's all the different kinds of products and services that could get built on top of those digitized rails, beyond just custody and post-trade record-keeping.

What am I talking about? There was a crypto exchange called INX. I think it's actually still technically around but it never seemed to build any momentum. But it had a fascinating idea: a company could host its entire lifecycle on their platform. From incorporation to fund raising, to maintaining its cap table, to going public, to even being sold, all the important information about the company could be recorded on INX's database (they had a team that was dedicated to handling all the regulatory and oversight work behind the scenes). Obviously, that was an incredibly ambitious idea. It would be ambitious for the NYSE to do it, forget some little crypto startup. INX's idea was the right one, I think, but to do it well you need to have a critical mass, you need to have the breadth and contacts and experience to make it work.

Imagine being a founder. All the legalese and paperwork would be digitized and automated. When you're ready to fund raise, all you have to do is put out your shingle, so to speak, on the website; no more tramping up and down Sand Hill Road begging VCs for money. When you're ready to go public, all you have to do is flip a switch and your previously private equity is now available to the public. And every security is recorded on a verifiable ledger. The ownership of every share is cleanly recorded  (this is actually, from time to time, an issue).

Like I said, it was super ambitious and way ahead of its time. But I really, really believe that at some point something like that will emerge. It makes too much sense not to. And other things like that will emerge, too. Once money can move seamlessly and without friction across borders, you can start to do all kinds of things you could not before. The borders of "the market" essentially disappear. The market is the world.

And here's where I caution that all this might not work. The Australian Stock Exchange spent seven years building out a  very public, ballyhooed plan to digitize its platforms, and it completely failed. Like I said, the concept is actually pretty easy, the implementation is hard. But if your corner of the banking world is touched by this, keep an eye on what the DTCC is doing, and what comes after that to the rest of the market infrastructure.