Can Blockchain Save the Market?

2022 was a year of devastation both in the traditional and cryptocurrency markets. The stock market tumbled and the IPO and SPAC markets ground to a halt. The crypto winter became an all-out crypto freeze. Billions were lost or locked in bankruptcy actions as TerraUSD, Celsius Network, 3AC, Voyager, BlockFi and FTX imploded.

What is important to differentiate is that blockchain is the technology that underpins cryptography but is not cryptocurrency or token trading itself. Decentralized blockchains work. Bad actors, Ponzi schemes, and fake tokenized collateral in centralized institutions do not. 

Ethereum blockchain technologies are a subset of the more general distributed ledger technology (DLT) and combines three concepts: cryptography, smart contracts, and distributed ledgers. A blockchain forms a ledger containing a record of transactions (digital or monetary) that are shared among network participants. A blockchain ledger works as a record book: it records and stores all transactions between users in a chronological and immutable order. Instead of one authority controlling the ledger (like a bank), an identical copy is held by all participants, called nodes, who verify each new block as it is appended to a chain. This allows for safe, secure transactions that are decentralized and transparent.

The components, and related elements, of blockchain technology make it conducive for application in a range of economic and financial processes beyond traditional payments, transfers, and transaction services. These include financial instruments such as loans and mortgages, securities trading, bond trading, futures, and other derivatives, as well as legal instruments such as titles, contracts and other alternative asset classes that can be monetized.

So, what does blockchain and cryptography have to do with the Stock Market?

The stock market is supposed to be a marketplace with fair commerce, allowing speculators and investors to bet on investments going up or down without the fear of manipulation. It is supposed to be a fair and orderly marketplace where market participants follow legally binding rules that are supposed to be enforced by the regulators. A marketplace where issuers can raise money for their companies and, when a company performs well with its revenue and earnings, sees an increase in the value of their stock that reflects that growth; and where, conversely, if a company is underperforming fundamentally then its stock price will decrease. A place where bullish investors could buy a share they wish to own or bearish speculators sell short a share they have borrowed. Alas, this is not how the stock market operates today.

Unfortunately, professional traders have realized that they have the freedom to not play by the rules, selling shares short they did not borrow (naked shorting) and, in many instances, selling shares that aren't confirmed to even exist, thereby selling millions more shares that are even in the company’s capitalization. Small cap. issuers have been victims of naked short selling for years, a practice which artificially drives stock price down and impacts both a stocks liquidity and a company’s ability to raise new capital at a fair valuation. This is because the unchecked ability to nakedly sell shares short, without the remotest possibility of delivering the shares, introduces illegal price manipulation and artificially increases a stock's liquidity to the downside.

The United States and Europe made naked short selling illegal for everyone except for market makers after the 2008 financial crisis. Yet, there are several loopholes and enforcement has been lackluster at best which is causing the practice to continue.

In 2020 we saw the little guy stand up to the professionals with rally cries from WallStreetBets with the assault on the hedge funds in Game Stop, AMC and others. But that was short lived and eventually new shorts were created and ultimately the manipulation continues unabated to this day.

Blockchain transparency has the potential to level the playing field for all participants, where there can be no centralized backroom deals, where decentralized code is law which, in turn, creates efficiencies in the market allowing:

• Transparency: Blockchain offers public order books with transparency. All orders are immutable and display true volume, not trades that print sometimes 3 times over giving a false view of total volume;
• Market Manipulation: Blockchain prevents manipulation like layering, spoofing, iceberg orders and wash trading all enforced by Ethereum smart contract technology. In addition, no naked short selling, since only actual shares are displayed and maintained on a blockchain;
• Security: One of the greatest benefits of blockchain is the absence of any single point of failure. When transactions are approved, they are encrypted using proven cryptography algorithms and linked to previous transactions. Every transaction is recorded and is shown to the public, in real-time. This information is stored across multiple computer nodes, instead of a centralized single server, which makes it difficult for hackers to attack;
• Reduction in Settlement Periods: The time it takes between the execution of a trade and delivery of the shares and monetary consideration, i.e., the settlement period, in traditional finance is currently T+2 (trade date plus 2 days). Blockchain smart contracts drastically reduce this period to be instantaneous, this is performed using a smart contract atomic swap;
• Faster Payments: Since trades are settled immediately, global payments that require multiple regulatory checks and lengthy settlement cycles are reduced using blockchain which relies on cryptographic public keys to identify the transacting parties. In addition to settling stablecoin backed by fiat, payments may also be made using various cryptocurrencies;
• Shareholder Actions: The current shareholder proxy system is expensive and inefficient, requiring a manual mailing process. Blockchain smart contracts allow instantaneous voting for shareholder actions electronically saving tens of thousands of dollars for Issuers.

Market participants have begun exploring the idea of utilizing blockchain for securities trading. NASDAQ OMX, the company behind the NASDAQ stock exchange, is testing a system that uses blockchain technology to oversee stock trades on a separate market solely for private companies. In 2022, the Boston Security Token Exchange (BSTX), a national exchange, obtained regulatory approval from the Securities and Exchange Commission to use blockchain technology to offer faster trade settlement. Compared to a traditional exchange where it typically takes two days to settle a trade, BSTX will offer same-day and next-day settlements. It will also use its private blockchain to offer a market feed to allow members to see their own trades, as well as those of others, on an anonymous basis. Also, the Depository Trust & Clearing Corporation (DTCC), an industry-owned and governed financial market utility, believes blockchain technology represents a generational opportunity to re-imagine the post-trade infrastructure and have been building a settlement system using blockchain. Having DTCC buy into blockchain will pave the way for the capital markets to utilize blockchain for traditional exchanges.

Several US broker dealers have become ATSs (alternative trading systems) to allow the trading of digital securities. Unfortunately, the SEC and FINRA have not allowed the real-time secondary trading of digital securities. The current approvals only allow for the ATS to act as a matching engine with transactions settling “away” which can take hours, days or even weeks to settle. Trading cannot occur efficiently with the current ATS rules for digital securities.

However, a fully regulated marketplace already exists called Upstream. Upstream, a MERJ Exchange Market. Powered by Horizon's Ethereum layer-2 blockchain technology suite, Upstream offers primary and dual listing capability to NASDAQ, NYSE and over the counter (OTC Markets) issuers, as well as international stock exchanges including EuroNext, ASX, NSX, TSX, and CSE.

Upstream/MERJ is an affiliate of the World Federation of Exchanges (WFE), recognized by HM Revenue and Customs UK, a full member of the Association of National Numbering Agencies (ANNA) and a Qualifying Foreign Exchange for OTC Markets in the U.S. MERJ is also a member of the Sustainable Stock Exchanges Initiative.

Upstream actively prevents short-selling, and its public orderbook transparently displays all bids and offers. Trading pairs are quoted, traded, and immediately settled exclusively against the exchanges’ 100% collateralized U.S. dollar stablecoin, backed 1-for-1 with users’ deposits of U.S. Dollar fiat currency. Notably, Upstream does not sell its client order flow.

Listing on Upstream grants issuers access to a global, digital-first, investor base which can now trade U.S. and international equities on the Upstream smartphone app using USDC digital currency, credit card, debit card, PayPal, or USD. The Upstream platform aims to unlock liquidity and enhance price discovery for issuers while giving global investors the opportunity to access and invest in U.S., Canadian, and European companies. 

Upstream has also designed a program that rewards shareholders for their loyalty and support of their public company. They have created ‘Redeemable NFTs’ as part of their suite of unique NFT (non-fungible token) integrations that work to usher in the next generation of shareholder, customer, and fan engagement. All shareholders of record will receive a reward in the form of a digital coupon (NFT) that allows the holder to redeem the coupon for the issuers’ products, services, experiences, or events.

The digital coupons are awarded to all shareholders and deposited in the shareholders account on Upstream. The holder is free to redeem the coupon or trade the coupons with other Upstream traders who ultimately will redeem the coupon.

The benefits of the digital coupons are:

1. Increase corporate revenue potential by driving shareholders and other traders back to your locations
2. Fans can trade digital coupons with other fans globally
3. Increase fan engagement and revenue-driving shareholders  

Conclusion

We have a long way to go before regulators and marketplaces adopt blockchain and all of its transparency and code is law enforcement. However, the recent issues with FTX and other centralized and opaque cryptocurrency trading platforms have confused and clouded the understanding of blockchain is, but it’s clear that blockchain will be a critical part of today’s global capital markets, finally leveling the playing field for traders and allowing safe, orderly and transparent markets that the world desperately needs.

Interested parties can learn more at https://upstream.exchange/GetListed or reach the team at hello@upstream.exchange.

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