Addressing Financial Industry’s Biggest Problems with Blockchain
By: Juan M. Hernandez
Tags: Ethereum, Cryptocurrency, Tokenization, Blockchain Technology, Blockchain

Financial trading today is rife with complexities and inefficiencies, many of which surfaced over time as new intermediaries were added to accommodate the demands of a globalized economy. One of the lengthiest processes involved in securities trading is clearing & settlement.

Clearing is the procedure by which the differences between orders are reconciled and a match is made between buyer and seller. Settlement refers to the date when the transaction is completed between buyer and seller. In traditional trading systems, clearing & settlement is executed by a host of intermediaries and involves manual data tracking and verification, all of which adds complications and slows down the entire process. These issues are exacerbated in asset trading, with average settlement taking 6–8 weeks to complete. Blockchain technology is well-suited to address these issues because of its capability for enabling secure and transparent data tracking, as well as the decentralized, network-based verification of transactions.

Why are Existing Systems So Cumbersome?

In the early days of the stock exchange, trades would actually occur directly between people on the floor; if a buyer and seller agreed on the price of an order, they completed the transaction right then and there. This is an example of what we now call a peer-to-peer exchange, or an exchange that takes place between two entities without involvement from a third party intermediary.

As financial markets grew and the economy became more globalized, trading in a peer-to-peer manner became nearly impossible, but as more assets and participating entities joined the global financial system, more third parties were required to facilitate clearing & settlement as well as record and verify transactions. It’s not profound to suggest that the more layers that are added to a system, the more opportunities there will be for inefficiencies and error. It’s estimated that these errors cost the securities industry $80B annually.

A “security” represents “partial ownership” of an asset without actually possessing the asset. There are various types of securities, including equities, bonds, and cash. Alternative assets are those which exist outside of these three common types and include hedge funds, mutual funds, artwork, real estate, and cryptocurrency assets, to name a few. Investment in alternative assets is no less lucrative than more traditional assets, but alternative assets are known to be less liquid (liquidity refers to how easy it is to buy and sell on the market at fair prices). Despite the issue of liquidity, the alternative asset industry totaled $7.7 trillion as of 2017 and interest continues to grow.

Why Are Asset Trading Systems Even More Inefficient?

Unlike traditional securities, the trading protocols and systems for alternative assets, are even less defined, thereby contributing to greater inefficiencies. The lack of standardization across assets often means that investors cannot manage their portfolio in one location and instead must navigate multiple platforms and service providers to execute and track trades. Blockchain, with its secure data tracking capabilities, makes for an obvious choice in terms of a technology to be used in improving these systems. Governor Lael Brainard recently spoke about the potential for blockchain technology to address the greatest inefficiencies in the financial industry in a speech sponsored by the Federal Reserve Bank of San Francisco.

A Blockchain-based Solution

Here at OpenFinance Network, we are harnessing blockchain technology to enable increased operational efficiency, especially in clearing & settlement, and also improve transparency, reporting, and security for alternative asset trading. Having been a trusted player in the alternative asset industry since 2014, we are well-poised to lead development in solutions to address the inefficiencies that plague asset trading. By replacing the need for centralized clearinghouses and manual record keeping, trades conducted on the OFN marketplace are verified in real-time by a decentralized network.

Our platform, launched in July, introduces an “open source” version of our internal clearing & settlement process applied to both traditional and digital alternative assets. The decentralized securities depository enables more efficient and secure transfer of data between intermediaries. Blockchain-based tracking of transactions allows for greater transparency and easier verification. We’re able to ensure compliance with regulatory guidelines by storing sensitive private data on a secure sidechain and utilizing a zero-knowledge proving system to provide an auditable record to the public. Learn more about our underlying technology in our white paper: https://www.openfinance.io/public/whitepaper.pdf

Governor Lael Brainard said in his speech that he, “[remains] optimistic that the financial sector will find valuable ways to employ distributed ledger technology in the area of payments, clearing, and settlement in coming years.” We’re not waiting for the years to come to develop solutions — you can go to our website to join our network today: https://www.openfinance.io/trade.html

As always, be sure to keep up with our developments on social media:

Website: openfinance.io

Telegram: t.me/openfinancenetwork

Twitter: twitter.com/OpenFinanceIO

Join the OpenFinance Network today: www.openfinance.io/

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Juan M. Hernandez is the Founder and CEO of OpenFinance Network, the trading platform for security tokens and other alternative assets. Juan is a serial entrepreneur, technologist, and polymath experienced in financial markets, exchanges, and blockchain technology. He holds a CS degree from Northwestern University and an MBA from the Kellogg Graduate School of Management.

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