Briefing | Blockchain technology can improve the efficiency of the micro stock market
Last year, it was proposed that the Government assist the stock exchange to develop a stock platform for micro, small and medium-size enterprises (MSMEs), which would enable them to source equity funding needed to expand and to benefit from economies of scale. The proposed platform should be a little less stringent than the Junior Stock Exchange and the Main Stock Exchange but should be just as or even more efficient.
BLOCKCHAIN THE SOLUTION
The blockchain technology can help such a market solve and correct some of its inefficiency problems that might arise if the equity funding platform is established. Using it to kick-start the MSME Stock Market platform can also serve as a pilot study to work out any nuances so that the technology can be applied to the main and junior stock markets in the future.
Blockchain technology has been researched and used by stock markets around the world and based on its features, it appears this blockchain technology can be used to develop the ideal platform for the MSMEs.
WHAT IS BLOCK CHAIN TECHNOLOGY?
A blockchain is a distributed, online, digital, public and decentralised database that records, stores, controls and shares information between all the parties involved. The Blockchain is like an electronic leger that records and labels all transactions with interconnected check and balances. These transactions are approved and recorded on a decentralised network. Think about the difference between Microsoft Word and Google Docs.
Using Microsoft Word, you update a document and send it to another party and they update it without you having access at the same time. In Google Docs, you can send the document to a person but both of you have access at the same time. This is the type of openness the blockchain facilitates, as it will only update if the parties agree to a particular transaction.
WHY IS BLOCKCHAIN SIGNIFICANT?
The blockchain technology is ideal for any process that deals with clearing and settling transactions. It significantly reduces the paper work and bureaucracy, it provides security and automates post trade transactions in transfer processes involving contract based agreements, and it is particularly useful in the transfer of a stock or any other asset or commodities.
REDUCE TRANSACTION TIME AND INCREASE EFFICIENCY
Currently, a stock trade is often time-consuming to relay the transaction between traders, brokers, regulators and the stock exchange. A single trade on the regular stock exchange platform can take hours, even days to complete, given all the paperwork and back and forth between transaction participant.
The blockchain technology is the solution, as it can improve the inefficiency of the stock exchanges by increasing automation and derealisation. blockchain technology, coupled with smart contracts, can reduce transaction time as well as the manual back and forth between parties, thereby reducing leakages and commission based payments significantly.
INCREASE TRANSPARENCY AND ACCOUNTABILITY
On a blockchain platform, all parties have a record of all the transactions which has to be approved by everyone on the network before it is recorded. As a result, the process acts like a surveillance system that tracks, approves and legitimises transactions and restricts and reports illegitimate attempts to breach the system.
INCREASE LIQUIDITY AND CONTAIN RISKS
Through increased automa-tion, the blockchain technology reduces transaction time and the number of processes involved in a particular transaction which automatically increases the liquidity of the market. The automated process also allows the blockchain to be more efficient than other manual or computer based systems.
The blockchain technology allows the system to calculate even the most minuscule of margins with increased accuracy in an instant. It therefore allows the system to update more frequently than other platforms, thereby reducing associated risks.
WHAT IS THE WAY FORWARD?
Providing equity funding to MSMEs is important for them to develop and expand over the medium to long term. Designing the platform using the block chain technology can help to solve some of the innate issues associated with such a market structure including insufficient business support, asymmetric information, and lack of documentation, transparency and accountability. The technology is being researched and employed in other markets around the world that can provide a collective of examples for Jamaica to use as a guide to implement and execute properly.
- Dr Andre Haughton is a lecturer in the Department of Economics on the Mona Campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email firstname.lastname@example.org