Shanghai Stock Exchange Eyes Blockchain to Improve its Securities Transactions

Jul 13, 2018 at 21:02

The Shanghai Stock Exchange (SSE), the world’s fourth largest securities trading venue by market capitalization, has expressed plans to tap the so-called distributed ledger technology (DLT) in a bid to improve the efficiency of transactions at the securities market.

The SSE revealed the plan in a research paper released Tuesday, according to the CoinTelegraph.

The paper enumerated ways in which DLT can be applied across several areas in a security transaction, including in pre-trading customer registration; securities issuance and trading; and post-trading settlement.

The Chinese stock exchange pointed out that DLT will be especially beneficial in over-the-counter securities issuance and trading order book post-trading settlement while optimizing anti-money laundering and information disclosure processes.

The more proactive approach to adopt blockchain marks a reversal of SSE’s earlier perception of the technology which compelled the exchange to suspend 10 DLT-engaged firms from trading last January. This, as SSE viewed the technology as still hovering in a “development” phase and, as such, calls putting further stability-enabling regulations in place.

However, the research paper suggested that the deployment of DLT at the SSE could raise conflicts with its current centralized and settlement system.

Existing laws mandate the exchange to deploy a third-party intermediary which exercises a custodial function. This mechanism is expected to clear transactions of any problems of misappropriation of client assets as these intermediaries monitor through post-trading settlements.

With the introduction of the DLT, these intermediaries may not be required anymore and, thus, should be eliminated from the process to prevent redundancies. This can only be achieved if regulators and central government agencies issue a new framework that overhauls the current system.

“Regulation should adapt to the evolving technology. We suggest regulators treat the topic of DLT as a crucial study area moving forward … in order to develop a solid regulatory framework for embracing the financial innovation,” the SSE was quoted.

With an estimated market cap of $5.12 trillion by end-2017, the SSE is a non-profit organization directly administered by the China Securities Regulatory Commission.