(BlockBar) A recent security token event in London, a small gathering of entrepreneurs, investors and traditional finance representatives debated what form security tokens will take. But it is to be understood that it is not the speed that is the priority. It should be the faster transactions that would be desirable. The main reason of faster transaction is risk reduction. It is to be noted that the longer a trade takes to settle, the greater the risk that the buyer will default on its payment commitment. It is very known and almost inevitable that in capital markets, things can happen fast, and an asset in demand on Tuesday could be out of funds by Wednesday.
Traditional markets usually get around these kinds of problems with a Central Clearing Party (CCP). The steps to follow are: to buy and sell from each participant in the trade in its own name and with its own funds. But not to foget that this adds costs and middlemen to the system. With that comes the risk that the CCP will disappear and leaving trades half complete. Security token markets do not yet have a CCP figure and in crypto assets, lack of a fast trade cycle adds risk.
It might be thought that faster transactions would also be desirable because cash could be used more efficiently but this is only partially true. One would need to have funds deposited at the relevant exchange or broker for the instant settlement that blockchain tech promises. There is also a misconception that a blockchain-based transaction would be faster than one on traditional rails. But in reality blockchains are much slower than centralized databases. The technology involves validation of a transfer by the entire network could take somewhere between a few seconds and a few minutes which depends on the relevant blockchain’s consensus algorithm.
Besides this the trades on traditional markets take nanoseconds. Even private blockchains have some degree of latency. But blockchain-based settlement must be faster than traditional settlement. Moving to a blockchain-based transfer and settlement system will not necessarily solve these problems. As we saw earlier, instant settlement is not always desirable. So, expecting a new type of asset to “solve” a problem that isn’t really there, with technology that isn’t faster, is placing unrealistic expectations on an emerging concept.
Mayan MV is a passionate writer and cryptocurrency enthusiast. He currently serves as marketing strategist and contributor at BlockBar, based in Singapore. Mayan has started his career in blockchain technology about five years ago, and he has also written over a hundred articles that span across various fields.