WYSIWYG for Clearing & Settlements: Using Blockchain Technology to Revolutionize Trading
Welcome to our second installment of OpenFinance, our recurring commentary on institutional alternative investing, markets, regulation and innovation. As entrepreneurs with decades of collective insights into the capital markets, we’re building new infrastructure that helps stabilize, speed up and lock in the value of transacting around investments. Through OpenFinance, we share some of our thinking around how we work and what we see.
As we discussed in our last post, there is a compelling case to be made for the improvement of the current clearing and settlement process — i.e., how financial transactions are certified, processed, recorded and executed.
Current financial transactions are manually intensive, relying on a mix of internal and external systems, and involve multiple intermediaries and redundant data sets that need to be reconciled on a repeated basis. The details of these transactions are stored independently, with each intermediary totally invisible to all other parties involved and not held to a common quality standard.
The cumbersome nature of this antiquated system is all the more magnified when applied to the growing nontraditional or “alternative” asset markets — managed futures, public non-listed REITs, Tier I and Tier II Regulation A+ crowdfunded offerings, LPs, and liquid alternatives/ETF securities — that can’t be valued and traded in the same fashion as traditional stocks and bonds.
We’re working on changing all this — having learned from our time as securities professionals that the benefits of the traditional clearing and settlement process falls short of what’s possible with a differently designed approach to solving the same problems. We’re working on building what we call OpenFinance Network (OFN) to bring alternative asset market participants and technologists together to streamline and improve both risk and return profiles in this sector by leveraging the benefits of blockchain technology.
If you’re new to us, you may only know blockchain as having something to do with so-called cryptocurrencies like Bitcoin and Ethereum. For our purposes, that’s distracting — and the most important fact about blockchain is that if nothing else it’s software code specifically built and designed to capture, record and process information around transactions in inherently transparent ways.
Through OFN, alternative-assets clearing and settlement can benefit from greater transparency and accurate asset information, a tamper-proof master chain of transactions and increased speed.
We like to call this “tokenized trading.”
Let’s look at how this might actually work. To understand how exciting and disruptive this is, it’s worth looking again at the steps and the many different entities necessary right now to simply allow a buyer to exchange currency for assets in the sidebar above, in the alternatives sector especially. OFN’s approach — by bringing together buyers and sellers around a common transaction platform — streamlines everything by offering new solutions for two key challenges: verifying counterparties’ identities (registration); and verifying ownership as well as availability of funds (simultaneously recording and validating core requirements of a trade).
This means OFN is:
The OFN system contains a fully transparent, public registry of qualified entities and assets on the distributed ledger, the Global Entity and Asset Registry. Qualified entities include broker-dealers, transfer agents, custodians, escrow agents, fund administrators and registered funding portals.
Participants in the global registry can conduct real-time verification of asset ownership and fund availability directly via the distributed ledger. This eliminates the need for a separate central counterparty clearinghouse (CCP) as the risk can be transparently assessed at the outset of the trade.
The distributed ledger acts as the “golden source” to synchronize (and protect) data across multiple stakeholders in standard securities transactions. This provides a tamper-proof clearing and settlement process that is instantly available to all market participants and removes the single points of failure/fraud.
The OFN also further streamlines asset validation by empowering global registry participants to certify individuals, firms and assets on the platform via an Investor Passport. The result is an enhanced, secure and global compliance process that improves investor protections and security, along with increased privacy of sensitive investor data.
Perhaps the biggest improvement on the current clearing and settlements process for alternative assets is the speed with which each transaction can be processed on the OFN. Currently, the lack of a standardized process and interoperability can lead to lengthy settlement processes that average 6–8 weeks to complete. Thanks to the technology we’ve outlined above, and subsequently the elimination of unnecessary middlemen, OFN transactions can be completed in under a day.
Bottom line, our long experience in institutional trading as well as clearing and settlements shows us that there’s a manifestly better way to realize and manage value in the alternative assets sector, via tokenized trading.
Juan M. Hernandez is the Founder and CEO of OpenFinance Network, the trading platform for security tokens and other alternative assets. Juan is a serial entrepreneur, technologist, and polymath experienced in financial markets, exchanges, and blockchain technology. He holds a CS degree from Northwestern University and an MBA from the Kellogg Graduate School of Management.
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