Using Blockchain Technology and Smart Contracts to Create a Distributed Securities Depository

Abstract: In the existing securities market structure, a securities trade between two parties requires the involvement of several financial intermediaries ensuring the safety of the transaction. However, the complexity of today’s market structure in conjunction with the lack of interoperability between financial data infrastructures and the disalignment of business practices, are causing costs, risks and friction—resulting in settlement often taking several days. Blockchain technology is the innovation powering the cryptocurrency Bitcoin, which is a network in which digital tokens can be traded peer-to-peer by the means of cryptography and decentralized consensus. The lack of intermediaries and short settlement period of cryptocurrencies make blockchain technology an inspiring database structure for the securities market. In this paper, we examine the potential of using blockchain technology to create a distributed securities depository. The decentralized consensus algorithm of blockchain technologies allows several entities to maintain a shared record of information without having to trust each other individually, since consensus is formed on a per-network basis. Such a technology could nurture the realignment of the securities market—or, reinvent it altogether. Furthermore, the possibility of leveraging consensus-oriented execution of computer code creates larger opportunities than that of a mere depository; it allows for the creation of new, trustless markets where securities and their contractual clauses are no longer merely legal obligations, rather, they are self-enforcing, autonomous programs. Here, we propose the overarching design choices suitable for a second-generation blockchain platform for securities trading, devised to pursue interoperability within the larger context of the effervescently evolving distributed ledger ecosystem, while attempting to pay the necessary regard to the demands of regulatory compliance within the securities industry.