How to Build a Trading Platform on Blockchain Protocol

A bank could set up a new trading platform (or move across an existing trading platform) on Blockchain protocol. Blockchain technology offers a new medium to exchange assets without centralized trusts or intermediaries — and without the risk of double spending.

In practice, when a high-value item is first created, a corresponding digital token is issued by a trusted central authority which acts to authenticate the product’s point of origin. Then, every time the product is bought and sold the digital token is moved in parallel so that a real-world chain of ownership is created and mirrored by the Blockchain history of that digital token.

The digital token acts as a virtual “certificate of authenticity” which would have the advantage that it is far harder to steal or forge than a piece of paper. Upon receiving the digital token, the final recipient of the product will then be able to verify the chain of custody all the way back to the point of creation.

The Blockchain gives the benefit of distributed and verifiable trust that was not present before. As a non-banking example, Everledger, a permanent ledger for diamond certification, has adopted the use of Bitcoin as a mark of authenticity providing transparency for all parties involved — a clear attempt to prevent diamond fraud.

Similarly, the immutability and digital uniqueness inherent in Blockchain offer the ability to provide a secure transfer of value and delivery of a solution to the trade finance problem of endorsement. The challenge of maintaining data privacy among counterparties to trade transactions is also overcome by utilizing Blockchain technology where tokenization, in the form of cryptography, is used to protect the trade data with parties only allowed to access to permissioned information with the correct security key. This should enable the most confidential of transactions, especially financial transactions, to still take place on such a trading platform.

Clearing and settlement costs billions and, according to Santander’s 2015 report, it is estimated that moving this into a digital record, near real-time and over the internet, will save the industry $20 billion a year or more in overhead costs due to D+3. D+3, or T+3, is the three-day clearing and settlement cycle common to most investment markets today.

Many firms are leading the charge to digitalize the clearing and settlement structures from Blythe Masters’ Digital Asset Holdings with the Hyperledger to Overstock with T0, along with many other key and emerging players such as Epiphyte, Clearmatics and SETL.