When the Central Bank of Kenya (CBK) issued a press statement last year warning against use of Bitcoin as a legal tender, the move unintentionally confirmed the virtual currency’s rising power and proof of concept or potential.
Being a form of unregulated digital currency that is not issued or guaranteed by any government or central bank, there was clear reason the CBK issued a cautionary statement.
Sadly, early adopters have to deal with zero government protection in the event the platform that exchanges or holds the virtual currency fails or goes out of business.
Nonetheless, despite the setback, a comeback is inevitable considering that virtual currencies also solve a problem that is central to any central bank, namely the control of issuance which is necessary in preventing counterfeiting.
Anyway, this article is not about Bitcoin but on a related issue that went unnoticed in the whole situation: the transformational technology that runs Bitcoin called blockchain — an electronic ledger of transactions that is continuously maintained and verified in “blocks” of records.
Besides forming the bedrock of most crypto-currencies, this breakthrough technology is now seen as having the potential to reshape the global financial system and possibly other industries.
In fact, interest in it is slowly surpassing that of Bitcoin. To my interest, blockchain’s use is being experimented in the capital markets. Its potential to revolutionise how financial markets work is something that local market participants should be keen to follow.
One clear benefit being tested is the ability for blockchain to slice costs through streamlining the backroom processes of payments and settlements.
Clearing and settlement fees cost investors north of Sh250 million at the Nairobi Securities Exchange (NSE) every year.
For this reason, it’s easy to see how a secure and decentralised transaction ledger, distributed and verified across a whole networks of stockbrokers, could shave an easy 70 per cent off these costs.
The potential to disintermediate the Central Depositary and Settlement Corporation (CDSC) by removing the need for a central reconciliation authority is quite something. The Australian Securities Exchange (ASX) is experimenting on this front.
To avoid disruption, CDSC can choose to implement its own blockchain system in a similar way that Euroclear, the largest central securities depositary house in the world, is trying out for the London gold market. If all this works out, change will be inevitable in the post-trading space.
A network of stockbrokers would naturally choose to maintain a distributed ledger that all authorised participants can tap into without needing to go through an intermediary. This will save time and money.
Another benefit could come into how shareholders vote. Trials to eliminate proxy voting are being carried out. For instance, in a pilot project, NASDAQ, is using blockchain to allow people who have established “digital residency” in Estonia to cast absentee shareholder votes in publicly traded companies there without a proxy.
Essentially, the technology seeks to empower shareholders and improve their engagement. If such a move were to be adopted at the NSE today, it’s possible that some of the companies would rethink some of their strategies.
Another potential benefit through this technology is the attainment of the long held industry’s goal of real-time settlement that is shifting the current “T+3” structure—in which the final transfer of funds and securities occurs three days after each trade—to “T+0”.
All in all, blockchain holds the promise of substantially revolutionising the capital markets.
Mr Mwanyasi is MD, Canaan Capital Limited.