Abstract
Post-trade securities settlements entered the electronic age between 1980 and 2000. The introduction of technologies such as secure electronic messaging, and improvements in database technology, enabled the inception of central securities depositories (CSDs) as trusted third parties or intermediaries within the securities settlements post-trade landscape. The study reported in this chapter has a focus on CSDs and the application of the blockchain technology to securities settlements. The objective is to develop a model for securities settlements using blockchain technology for a CSD, as currently, globally, no CSD has introduced a production-ready blockchain-based solution for securities settlements. A conceptual model was created from the reported literature that was evaluated by international post-trade securities professionals. The findings have resulted in the acceptance of the main components of the model, with a focus on the cost of the solution, and with the identification of prerequisites to such a solution (e.g., legal/regulatory enablement).
TopProblem Statement And Research Objective
At the time of publication of this research study, no Central Securities Depository (CSD) exists that is settling securities using Blockchain technology globally, although many had issued press releases on planned research and implementations. In addition, the cryptocurrency market has continued to grow in parallel to the existing securities market. Therefore, the research problem investigated in this study is as follows:
No Central Securities Depository (CSD), nor any Capital Markets infrastructure presently utilise the Blockchain technology for securities settlements.
Key Terms in this Chapter
istributed Ledger Technology (DLT): DLT can be considered as ‘Blockchains’ which provide the ability to distribute records across a network as opposed to keeping records with a centralised entity. In effect, the technology combines peer-to-peer networking, cryptography techniques and cryptographic hashing to affect transactions in chronological order.
Securities Settlement Model (SSM): This is a conceptual model to evaluate the use of blockchain related technologies for securities settlements.
Blockchain Technology: Blockchain technology is not a new technology, as it has served as the backbone of the Bitcoin protocol since its inception in 2008. Blockchain technology eliminates the need for a trusted third party to process transactions and provide record-keeping services, which poses threats to the core business functions of some intermediaries, such as CSDs. Blockchain technology is still not a fully mature technology.
Central Securities Depository (CSD): Trusted third parties, such as Exchanges, Brokers, Dealers and Central Securities Depositories (CSDs) that operate in the trade to the post-trade environments. CSDs are a joint market initiative to electronically settle high volumes of dematerialised shares for a national market (country or region) and maintain a central register of ownership. D
Sovereign Distributed Securities (SDS): All securities are held within the ‘sovereign’ distributed securities ledger (depository) (SDSD) distributed across known nodes. The nodes are representative of the custody chain with known entities/intermediaries. In the SSM, the SDSD could use multi-signature technologies to ensure that the investor purchases stock directly from a seller; however, the broker and bank/custodian signs/validates the transaction before it is concluded.