We recently delved into the ways that financial assets stand to benefit from blockchain technology so we can now discuss a bit about which markets stand to be affected most by this trend. There has been much talk recently about blockchain technology, usually in the form of security tokens, having a significant impact on private markets, but that it cannot be incorporated into public markets too.
The Public Markets
Despite technological advances made in most industries around the world, public markets continue to use an immensely complex system to record ownership of shares. In a nutshell, if you own public stock in the US, all you really own is an entry in a broker’s database and that broker has an entry in the database of a company called Cede. All stocks are administered this way, and every time there is a change in ownership, somebody has to pay for the changes to be made in both databases. Although stocks are no longer exchanged in paper form, the markets run on a system in which stock owners do not actually own anything. They are just controlled by layers of costly intermediaries. The antiquated system is also saddled with slow settlement times and carries the risk of being inaccurate. Securities that are traded on the blockchain can be traded without friction in a way that is faster, simpler, and cheaper while also offering unprecedented levels of security. This is exactly what public markets need.
The Private Markets
Young startups, real estate properties, fine art, and shares of investment funds are a variety of assets that make up a substantial part of the private marketplace. The problem with these assets is that they are highly illiquid. When investments get tied up in assets that are so challenging to move, it prevents an investor from making other investments and thus decreases the assets’ value. Blockchain, however, allows these markets to become more liquid than ever before. Private markets will be able to be more smoothly regulated and will become more scalable on an international level without the interference of intermediaries.
Blockchain has the potential to unlock a substantial amount of the value that has been trapped in both private and public markets and could be the next major driving force there. Exciting times indeed for investors around the globe!