The stock market is a significant part of today’s global economy, most companies in developed countries raise capital through equity and debt securities. According to the latest analysis by the Federal Reserve, 41.9% of the U.S household wealth is directly or indirectly held through various stocks. This figure has more than doubled compared to three decades ago.
That said, it has not been a bed of roses for all investors; the current structure of the stock market is designed to favour institutions, leaving retailers with peanuts or nothing to show from their investments. For instance, the 2009 financial crisis affected individual households at a larger magnitude while ‘too big to fail’ institutions were bailed out by the government.
A Flawed Market Ecosystem
With over a decade since the U.S housing market bubble, the stock market is still facing major challenges. Financial institutions that pledged to be regulatory compliant are yet to uphold their end of the bargain. Most notably, Wall Street players are still manipulating the market, an issue that has landed big boys like JP Morgan into trouble with the authorities.
According to a report by Reuters back in 2020, this leading U.S bank was forced to pay a total of $920 million in fines and restitution after admitting to market manipulation. The bank had engaged in what is known as ‘spoofing’ (creating false buy and sell walls) in the precious metals and futures market between 2008 and 2016.
Following this saga, CFTC Chairman at the time, Heath Tarbert, was keen to reiterate that such actions would not go unpunished,
This record-setting enforcement action demonstrates the CFTC’s commitment to being tough on those who intentionally break our rules, no matter who they are. Attempts to manipulate our markets won’t be tolerated,
But are those words enough to guarantee that financial institutions will play within the rules? To some extent yes, and to some extent no. This brings us to the role of upcoming technologies such as blockchain in solving the fundamental shortcomings of the stock market ecosystem.
Blockchain Levels the Playing Field
By now, most people have come across the concept of blockchain and cryptocurrencies. However, the knowledge on how they work and the value proposition in traditional finance is still limited. At the core, blockchain and crypto have pioneered decentralized and transparent market structures where anyone can participate.
How does the stock market benefit from these nascent innovations? Unlike today’s centralized stock market where investors have to go through a third-party, blockchain tech has introduced tokenization. Simply put, tokenization enables stocks to be integrated with on-chain economies hence eliminating the need to go through a broker to purchase a particular security.
To this end, we have globally compliant decentralized exchanges (DEXs) such as SOMA Finance which features several tokenized assets, including equities, ETFs and crypto-affiliated products. This peer-to-peer (p2p) multi-asset DEX has partnered with Tritaurian Capital, a U.S licensed broker dealer, to provide a seamless access to over 25 tokenized equities.
More importantly, the SOMA Finance blockchain infrastructure provides an opportunity to combat market manipulation. This is because there is a tamper-proof record of all the tokenized assets, not to mention that anyone can verify the legitimacy of on-chain transactions. As such, It is hard for institutions to spoof orders unnoticed or manipulate market data.
While blockchain technology has risen to the occasion, a lot still needs to be done when it comes to regulatory compliance. In the past, prominent exchanges such as Binance have had to delist tokenized stocks after warnings from different regulators. Given such uncertainties, it is advisable for tokenized stock investors to only operate on KYC/AML compliant platforms.
As mentioned earlier, the stock market is an integral part of the global market structure. This being the case, it is important for stakeholders to adopt technological solutions like blockchain to address the existing pain points. Above all, blockchain tech stakeholders need to iron out the current issues with regulatory bodies such as the SEC and Finra. It is the only way that such a nascent area of innovation can be ultimately accepted as a primary investment channel in the stock market.