Bye Bye Brokers, Hello Blockchain Technology

Bye Bye Brokers

What if instead of routing trades through the choke point of a few banks and brokers, we could trade directly with any investor?

In the past, such an idea was not feasible. Banks and brokers historically provided valuable intermediary services. They not only found and matched buyers and sellers to make markets more liquid but they also became buyers and sellers in times of illiquidity. Equally important, they took on any risks associated with the settlement and custodian of assets.

Despite their fees, markups, risks, and other costs, markets ran more efficiently with intermediaries.

Blockchain technology, however, presents a better alternative for tomorrow.

Tokenizing Markets

 

Tokenizing assets is the act of digitally representing securities, commodities, collateral, future deliveries, and almost everything else on to the blockchain database. Transaction details on these assets reside in a public database for all to see.

Tokenized assets do not require intermediaries to trade or settle securities. Banks and brokers can still play a central role in introducing buyers and sellers and making markets when needed. But the system is not beholden to them.

For example, if I want to buy 100 shares of tokenized Ford stock, and you want to sell it, we agree on a price. We then use our unique electronic keys to instantaneously settle our security and cash exchange.

In the example, there is no bid/offer spread or broker fees although we might incur a small fee if an exchange introduced us.  The settlement does not take two days or carry the risk a broker fails. Bids and offers are shown worldwide without being limited to one broker, exchange, or time zone.

Tokenization is not just about better pricing, risk reduction, and trading efficiencies. When intermediaries playing less of a role, systematic risk lessens.

In a tokenized world, the Lehman default might have been avoided with real-time collateral management and pricing. Scams like Madoff are impossible to perpetrate as regulators can more easily see if there are actual “assets.”

Risks to Tokenization

As appealing as this technology is, one should consider its drawbacks. First, how would an investor access their portfolio and execute trading in the event of a power failure, or if they lost their key? Second, hacking is now ubiquitous in the on-line and electronic world. Despite safeguards, we cannot rule it out. Third, who provides regulatory oversight for such a system?

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