The cryptocurrency industry isn’t replacing Wall Street just yet. But inventors and entrepreneurs are working on it, with some initial success, albeit modest.
In this case, an option premium of 0.0202 bitcoin ($217 at the time) paid via a smart contract may have just become the proof of concept.
The latest target for blockchain disruption is options trading tied to the Standard & Poor’s 500 Index, the main benchmark for U.S. stocks. It’s a massive market, with roughly $400 billion of the options changing hands every day last year, on average.
Under the current setup, Wall Street firms typically execute the trades and handle the settlement afterward – essentially making sure the securities end up in the buyer’s account, and that the cash ends up with the seller. But for investors, the process can be expensive, due to the middlemen fees being charged, and slow, with settlement typically taking a day or two.
In July, Emmanuel Goh, CEO of London-based firm skew., a startup specializing in analytical tools for the crypto industry, says he came up with the idea of using the bitcoin blockchain – the decentralized computer network underpinning the decade-old cryptocurrency – to trade S&P 500 options.
Goh was previously a trader in London for JPMorgan Chase, the largest U.S. bank, where he slung options on auto, chemical, consumer and industrial stocks. In other words, the options market is an arena he knows well, at least in the traditional sense. Earlier this month, skew. (which spells its name with a period) announced $2 million in seed funding from several venture capital firms, including the Silicon Valley icon Kleiner Perkins.
The S&P options project was entirely experimental, Goh told CoinDesk – the challenge was mainly to see if it could be done. (The publicity probably doesn’t hurt, either.) Since the trade would essentially be automated via computer programming, it would be less expensive to conduct and settle a lot faster, maybe in just 10 or 15 minutes, according to Goh.
Goh said the technology that made it possible comes from Crypto Garage, a subsidiary of the publicly traded, Tokyo-based tech firm Digital Garage. Crypto Garage has developed an expertise in smart contracts, small strings of programming that can be encoded into the bitcoin blockchain to run when activated.
The transaction needed to cross on the bitcoin blockchain, Goh said, because it’s the most secure in the industry, even though smart contracts are generally considered easier to program on the ethereum network.