Blockchain Based Capital Market Ecosystem
“Storing and agreeing datasets of financial obligations and ownership forms the basic core of capital markets operations. The current methods are overly complex, utilize fragmented IT and data architectures and suffer from a lack of common standards. This creates the continual need to reconcile data with massive systems and process duplication, leading to high costs and protracted time to execute tasks. Could blockchain be the structural change the market needs?” (Oliver Wyman and Euroclear, February 2016).
The Nigerian Capital Market has different operational departments and activities that interact with each other and plays a role in the Capital Market ecosystem. Not only that, the vision, “To be Africa’s modern efficient, and internationally competitive market that catalyzes Nigeria’s emergence as a top 20 global economy” (SEC Nigeria, 2013), can be an eventuality in the face of Blockchain technology adoption. Blockchain as stated earlier, will rethink the approach to several fundamental process and technology at the core of the Nigerian Capital Market, including ledgers, spreadsheets, and contracts. Transactions in Capital Market can be complex and requires intermediaries for every transaction to be carried out. Deloitte in its report puts it this way that, “These transaction are always managed and hosted by someone else because we had to invent trusted parties to support those services” (FINANCIAL EXECUTIVES INTERNATIONAL, 2018). It asserted further that in the Blockchain world, these individuals would no longer have a job as, “Blockchain completely changed the way we think about trading, the way we think about security lending. We will get better, faster, cheaper service.”(FINANCIAL EXECUTIVES INTERNATIONAL, 2018) as it would be a major disruption in the core operation of the capital market and financial services as a whole. This view was aptly supported in a NASDAQ article that states, “Blockchain technology holds the promise of allowing capital markets to operate more efficiently, while simultaneously providing greater transparency and security” (Friedman, The Potential of Blockchain and Why it Matters to Push the Boundaries, 2016). In a test case, NASDAQ a US based Capital Market Firm, had an issuer successfully able to complete and record a private security transaction in a capital market, the transaction was described thus, “For this transaction, Nasdaq enabled the issuer to digitally represent a record of ownership using Nasdaq LINQ, while significantly reducing settlement time and eliminating the need for paper stock certificates.” (Friedman, The Potential of Blockchain and Why it Matters to Push the Boundaries, 2016).
Performance indices of the Capital Market is crucial for us to know how the market is faring and what the future holds. With the advent of Blockchain technology, it offers a future promise of efficiency and effectiveness yet to be imagined according to researchers and different authors on the trend. How it impacts on the performance is what we are left to dwell on and its ultimate impact on Economic Growth.
To get to the crux of the matter, it must be re-emphasise the objective of this write up;
- To determine how blockchain technology can affect select performance indices of the Nigerian Capital Market.
- To establish how the select performance indices can impact the performance of the Nigerian Capital Market.
Select Performance Indices of the Nigerian Capital Market
Trade volume is defined as a measure of the quantity of shares that change owners for a given security. It can also be defined as the number of trades (total number of transactions) that take for a certain security or for the aggregate market. Others define it as the monetary value of total traded shares. “The amount of daily volume on a security can fluctuate on any given day depending on the amount of new information available about the company, whether options contracts are set to expire soon, whether the trading day is a full or half day, and many other possible factors”.(Gul & Javed, August 2009) This view was also held by (Beaver, 1968), when he stated that, “The volume corresponding to a price change due to new information indicates how much investors differ in the interpretation of the new data. This basically points out that trading volume depends on information, which essentially determines and directs the market on different individual securities. So different companies liaise with the Nigerian Stock Exchange to provide as much as possible real time information about their company to the market, and this information are housed in dedicated servers within the Stock Exchange to ensure validity and safety of the information provided. Here, direct data feeds from the floor of the Stock Exchange is utilized with available technology to stay up to date as much as possible.
But if we recall in earlier posts where we defined Smart Contracts as, “A smart contract is computer code that is written inside a blockchain protocol. Smart contracts are created to facilitate, verify, or enforce the pre-negotiated terms between two or more parties” (Laurence, 2019). If all companies listed in the Nigerian Stock Exchange signed up to a smart contract, they would be obliged to provided real time information that would be uploaded to a decentralized, digital ledger that would be accessible to everyone in the market at once without having to wait for a third party authorization that may cause delay. In other words, since trading volume is dependent on real time information about the companies, Smart Contract simply amplifies that information availability in a 100 fold to would be investors and it allows them to make quick decisions without having to rely on ‘made-up’ financial reports. This ultimately increases the performance of the stock market as investors and traders have reliable information to work with without the fear of being supplied biased information and eliminating insider trading substantially. In summary, blockchain could reduce inefficiencies and costs by allowing multiple parties to rely on the same information rather than duplicating and replicating it and having to reconcile it. (Tapscott & Tapscott, 2016) It has potential of settling millions of such transactions per second saving considerable amount of operational cost to the enterprise. (Bodanapu, 2017).
Table 1 Trading Volume/Value of the Nigerian Stock Exchange for 10 years
Chart 1: Trading Volume/Value of the Nigerian Stock Exchange for 10 Years
So if we have information at the speed of light with all companies operating a smart contract based on block chain technology, that allows a seamless flow of information from one point to the other, then here is what the trading volume and value of the Nigerian Stock Exchange would be like:
Table 2: Table 2: Hypothetical Trading Volume/Value of the Nigerian Stock Exchange for the next 10 Years based on Smart Contracts
Chart 2: Hypothetical Trading Volume/Value of the Nigerian Stock Exchange for the next 10 Years based on Smart Contract.
Based on Blockchain based Smart Contracts, Trade Volume and Value of the NSE is expected to increase by 150x following the benefits of efficiency and effectiveness of Smart Contracts earlier espoused. So, access to and speed of information processing would increase the turnaround time and capacity to process more volumes and inadvertently increasing the values as well.
To be continued.