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LSE carries out study to explore use of blockchain technology for making securities transactions secure

The London School of Economics has released a new report that analyses the current system of holding and transferring securities and argues that blockchain technology would make it possible to create a system that has the same level of transactional safety as the current system, while also eliminating custody risk at the same time.

Authored by Eva Micheler of the LSE’s Law Department and Luke von der Heyde of South Africa-based law firm ENSafrica, the paper explains that blockchain technology eliminates the need for separate trading, clearing and settlement venues, essentially merging these into one real time process that does not involve relationships with multiple intermediaries.

It further added that the implementation of the technology would not entail much change for the investor, who will be able to access their portfolio as they do now – through a computer or some electronic device. The only difference will be that while the interface they currently see is a record keep by an intermediary, connected to another intermediary and so forth, what they see in a distributed ledger/blockchain environment would be the master record.

“It [blockchain] would reduce complexity and remove intermediary risk from financial markets for both assets and cash. There would still be counter-party risk but with only one (shared and distributed) master record, the risk of double-spending reduce to almost zero by way of blockchain technology, and payment linked to delivery, this appears to be very low”, the paper said. “It looks like blockchain technology could create a world where transaction risk is minimised and intermediary risk is eliminated.”

It further added that while there is a risk that the computers break down or will be hacked into, the risk is considerably small as every node has an identical copy of the ledger.

Pointing out the various efforts made in the blockchain space globally, the report noted the significant focus on “permissioned” systems.

In the concluding remarks, the authors state that currently asset owners only receive statements showing that securities are held for them, without any information on outsourced custody. This limits the ability of the investors to evaluate the associated risks.

The paper says, “The regulator should enable investors to form a view on the risk associated with and the price offered by the current infrastructure... Custodians should be required to disclose to investors that they have outsourced custody.”

The paper recommends regulators to actively engage with custodians, as well as involve asset owners in their work on blockchain technology.

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