It will only take one broker-dealer to usher in the era of distributed securities settlement, according to Overstock's blockchain innovation lead.
Once the technological barriers of connecting the platform to a blockchain are crossed and the regulatory climate has been navigated, Johnathan Johnson expects a floodgate of securities professionals looking to cut out pricey middlemen to open.
Overstock's signature blockchain project, tØ, announced this week it had signed Keystone Capital Corporation to be that partner, and with the move, it believes it's one step closer to that new era.
In new statements, Johnson said that while the technological undertaking of Keystone is actually quite minimal, what separates the firm is its willingness to take on those middlemen.
In this light, Johnson said the potential gain to those who cut out some of the financial system's most important figures is "huge".
Johnson told CoinDesk:
"I think they want to see that an offering has worked and trades have come through and a digital security has settled. Once that's in place, I think if I were a broker dealer I'd be pretty eager to adopt because it potentially means more business with less cost."
Johnson breaks down the work of building a blockchain-based settlement platform into three categories. The first, building the product, is "knocking on the door of being done," he says.
The final two steps, ensuring regulatory compliance and signing up market participants, he contends, will happen simultaneously as the integration is completed.
Plugging into tØ
Technologically speaking, tØ’s settlement platform is designed to be blockchain agnostic, but today it's unconventional in that it uses the bitcoin blockchain for additional security.
But maybe more importantly, the platform is also set up so that most of this technological heavy-lifting (and understanding) is done by the software, not the broker.
Other than the time it takes to plug into the tØ system, Johnson says a broker-dealer's most demanding technological tasks are generating digital wallets to hold the cyrypto-securities and signing the transactions.
What distinguishes Keystone, according to Johnson, isn't that the San Diego-based firm is much more technologically astute that its competitors. Rather, it is willing to work with regulators during the ongoing "rigorous regulatory review."
"One of the reasons this isn’t happening as quickly as it otherwise might is because regulators want to make sure it’s done right," said Johnson. "Keystone is willing to work with them."
Johnson added:
"Plowing fields that have already been plowed is so much easier than plowing a field that's got a bunch of rocks."
What's at stake?
TØ’s parent company Overstock.com has a long, confrontational, history with much of how Wall Street does business.
In a statement yesterday, Overstock’s CEO, Patrick Byrne, went so far as to describe tØ as "working on a blockchain version of Wall Street."
As part of that effort, Keystone's integration with the tØ settlement platform is aimed at the Depository Trust & Clearing Corporation, or DTCC — the US post-trade financial services company that last year processed $1.5qn in securities.
While the DTCC lists the majority of settlement times after those securities are moved at three days — or T+3, tØ wants to settle instantly, hence its name.
Johnson said that stock issuers and broker-dealers stand to benefit the most from saved fees and faster transactions on a blockchain-based post-trade infrastructure, leaving traditional infrastructure providers like the DTCC to work on their own blockchain solutions.
Johnson said:
"They’re basically a middleman that camps out in the middle that goes away when you can trade on blockchain and trade plus zero, when the trade becomes the settlement. That's one of the greatest benefits of blockchain is removing middlemen that extract from inefficiencies."
Floodgates image via Shutterstock