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Bitcoin, blockchain and the individual investor

Glenn Freeman  |  01 Jun 2016Text size  Decrease  Increase  |  

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Terms such as blockchain and crypto-currency have received extensive media coverage in the last 12 months--but what do they mean, and how could these concepts affect you and your investment portfolio?

It's all about the ongoing evolution of the stock-broking business model; of new ways to receive cash, shares and dividends significantly faster.

Blockchain is merely a fancy buzzword for "distributed ledger technology". It presents a potential solution to structural problems including increasing costs, higher capital and collateral requirements, and reduced investment revenue.

The terms "blockchain" and "distributed ledger technology" are largely interchangeable in referring to a combination of technologies, many which have been around for decades, and which provide a more efficient and secure way to store asset information digitally.

A key feature of blockchain is its ability to produce a near-perfect secure audit trail. This "chain of title" cannot be altered, and can be easily distributed to authorised parties.

"This creates a single source of truth upon which everyone can rely," says Peter Hiom, deputy CEO of ASX, who spoke at a recent stock-broking conference in Melbourne.

"For our part, we believe the potential of the technology to improve post-trade efficiency and reduce costs is genuine."

As an individual investor, the application of blockchain to the equity market is a key consideration. It has the potential to reduce the complexity of existing post-trade reconciliation processes and to significantly reduce costs.

Bitcoin is a form of crypto-currency that has also received a lot of media attention in recent years.

As Hiom explains, the public bitcoin-blockchain enables counterparties, who do not know or trust one another, to transact in a coded, secure way, anonymously, through a publicly available network anywhere in the world.

"This public bitcoin-blockchain evolved in a world where counterparties are unknown, where trust and regulation are absent, and in markets that are often colourful and sometimes unlawful," Hiom says.

"When we think of the application of blockchain to Australia's financial markets, we think about a system that operates on a secure private network, where all participants who have rights to access that system are known, and where they all comply with ongoing and enforceable regulatory obligations."

This enables a number of other new developments, even potentially replacing the Clearing House Electronic Subregister System (CHESS) platform--the computer system used by the ASX to record shareholdings and manage the settlement of share transactions.

ASX is currently investigating the requirements for doing this and surveying its customers about developing a blockchain platform. As part of this, it is currently showcasing these activities through the ASX acceler8 exhibit at its Sydney headquarters.


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Glenn Freeman is online editor at Morningstar.

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