Have you ever wondered how your children will buy a car? Recently, I found myself needing to purchase a new car in a hurry. I was also looking to exit a position I held in a certain stock and a thought crossed my mind: What if I could trade the stock for a car? We have all the pieces to do this today.
Now, forget for a moment the debate about carless communities. Let’s discuss the complicated process of making a major stock purchase. Blockchain will eliminate the shadow markets in our financial systems and, combined with Apple Pay, will allow your children to walk into a dealership with stock and walk out with a car. Have I piqued your interest? Let me explain how.
How Stocks Are Bought And Sold Today
On the surface, the idea seems intuitive: We see our assets represented digitally, but there is huge machinery behind making such a transaction. Currently, when you buy a stock, you’re actually triggering a chain of financial activity, even though you likely only work with your broker.
After asking your broker to acquire a stock, he or she will go out to look for people who are willing the sell that stock. This could be another client of your broker. Usually, the broker will have to get in touch with other brokers to find the stock available for trade. This is typically done through a public exchange, like the New York Stock Exchange, where trades and prices are published. Once a buyer and seller are found, they are matched and the trade is executed. At this point, the stocks haven’t been transferred — they’ve only been confirmed for trade.
After the confirmation process is complete, then the settlement process begins. This is where the stocks you bought get “delivered.” Most first-world countries operate on a paperless system, recording ownership in digital books of involved parties. Vital to the record-keeping process are institutions like the Depository Trust & Clearing Corporation (DTCC). The DTCC maintains accounts for registered brokers, recording ownership transfers after trades occur. Only after brokers notify the DTCC does ownership officially transfer. After the trade, the DTCC also notifies the company whose stock was traded of the new owners for voting and dividend purposes.
Even at this point, the stocks aren’t recorded in the name of everyday people. They are held in street name since the brokers technically own the stock. Brokers keep records of their clients, who are beneficial owners. So even after you buy a stock, you are not the legal owner of that stock, and it could take multiple days to access the value of the stock in a more liquid form. The law does offer some protection against immoral brokers, but actually getting stocks in your name means another step, several extra days of processing and additional fees.
The process, while effective for the past 50 years, has resisted innovation, thus ripening it for disruption.
The question at hand is: How do we eliminate this nonsense? Blockchain is a hot topic these days, and even retail companies like Amazon and Overstock have made investments in the technology. Despite the word becoming more commonplace, the application remains an elusive idea for businesses to solve. It shouldn’t. The idea is a simple one, at least once you get around the jargon surrounding the architecture and theory of basic crypto economics. You can read a more detailed explanation here.
With blockchain’s secure record-keeping technology, there is no reason you can’t own your own stock and have it available to swap instantaneously. With only a slight variation in Apple Pay, the platform could be used to exchange far more than credit card credit.
Currently, Apple Pay is built on Near Field Communication (NFC) technology, similar to door badges. When a payment is requested, Apple does a series of values exchanges using keys and tokens across that NFC, including generating a temporary credit card number. This number is only good for a very limited time and space in order to prevent fraud. More importantly, the actual credit card number is never actually used to pay for the transaction, protecting you from any unscrupulous vendors. That is the reason iPhone users need to “set up” Apple Pay in advance. This setup permission is what allows Apple to charge your card. Even though the company has your card stored on your phone, it is important to note that Apple’s architecture prevents it from seeing your card or handling money — rather, it is simply a pass-through. Likewise, this could be extended to other financial accounts in a world driven by blockchain.
In this new world, one could potentially link Apple Pay directly to a bank account or even to other assets like a brokerage account. Using a routing number and account number, Apple will be able to funnel money in and out of accounts as easily as checks could 20 years ago, except nearly instantaneously. This means that if implemented, our children could take their Apple stock and, based on the previously mentioned blockchain method, purchase their first car.
I was not raised in a family of means. In fact, growing up, I didn’t understand what stocks or 401ks were. Using Apple or a similar medium to use financial assets such as stocks to purchase items in effect makes them another currency. Only 52% of Americans own stock. It is a complicated process that very nearly takes a top-tier MBA to figure out. Eliminating shadow markets will break down the educational barriers to entry, and using Apple Pay to purchase items will bring stock ownership into the mainstream, encouraging more people to invest and giving more people access to the wealth creation benefits. When the middle class has more spending power, everyone does better. If implemented correctly, blockchain will kick off an era of growth and prosperity America has not seen for several decades.