History shows that technological innovations have brought great advances to our nation’s financial system, but only after disruption, opposition and regulatory reform.
For over a century, Wall Street ran on paper, phones and people racing across hectic exchange floors. The “Canyon” was ruled by institutional giants whose power extended through the halls of government.
In the late 1960s, new technology challenged the status quo, with computers offering electronic pricing and trading. In 1969, a company called Instinet pioneered electronic stock trading. This major disruption threatened the Wall Street establishment and was met with skepticism, hostility and warnings about the perils of electronic systems. But while vested interests were opposed, the broader market was beginning to see the benefits.
In 1971, Nasdaq was formed to use an electronic platform to distribute quotes, but most trades were still executed over the telephone through existing brokerage firms. Following the national debacle of the 1987 market crash, when Wall Street was under tremendous public pressure, participation in an electronic execution system became mandatory for market makers. In the mid-1990s, emerging electronic trading networks, including Island and Archipelago, joined Instinet in posing a viable challenge to traditional trading.
In 1996, SEC Chairman Arthur Levitt, a seasoned and courageous official, adopted landmark regulations increasing transparency and facilitating competition from electronic communication networks (ECNs). The SEC then adopted electronic trading regulations creating a more comprehensive regulatory framework for alternative trading systems (ATS).
Once unleashed, the benefits of electronic trading became undeniable, and the Wall Street establishment had a choice: either accept and incorporate the new technology or be replaced by it.
They are survivors. Today, electronic trading is simply trading, and the rest is history.
And history does repeat itself!
Now blockchain technology presents the same kind of moment, offering a new foundation for issuing securities, recording ownership and trading. Like electronic trading before it, blockchain has arrived, challenging the status quo, prompting vocal critics and forcing regulators to examine changing circumstances.
Blockchain technology is built on cryptography. Cryptography uses mathematics to protect information, verify authenticity and secure transactions. Blockchain uses these techniques to create verifiable, tamper-resistant records of transactions. Early applications of blockchain became widely known through cryptocurrencies and digital tokens, which could be exchanged for traditional currencies. But the underlying technology has applications far beyond cryptocurrency trading, including the issuance, transfer and recording of ownership of traditional financial assets.
In 2011, as governor of New York, my technology advisers and financial professionals introduced me to cryptography and blockchain as technological innovations that could streamline our financial system and help New York maintain its position as the global financial capital.
Our interest was piqued by the potential of cryptography and blockchain technology rather than simply by companies trading digital tokens. New York was the first state to license these companies. That underlying technology is what presents the great opportunity today.
Electronic trading ultimately earned its place because it delivered faster, better execution, greater transparency and lower friction. Blockchain presents the potential for the next step forward, offering faster settlement, a more direct connection between issuers and investors, greater transparency and, importantly, the possibility of a 24/7 global marketplace that could attract additional investment to American securities markets.
The days of nine-to-five hours and “closed for the weekend” signs are long gone for almost every economic enterprise, except Wall Street!
It is progress long overdue.
The SEC recently established an innovation exemption to facilitate the trading of certain U.S. stocks using blockchain technology. Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange, and OKX, a leading financial technology and blockchain company, have formed a joint venture, OKXICE, which has submitted notice of its intent to operate a securities venue under that framework.
While there are regulatory hurdles, the SEC exemption is a groundbreaking first step toward using blockchain technology to trade actual securities, with the potential for around-the-clock access and faster settlement.
Is it disruptive? Yes!
Adoption of new technology is disrupting businesses around the world. In finance, some intermediary functions may become less necessary or be fundamentally redesigned.
And 24/7 trading means investors can react in real time to information and developments in the public arena.
We already know blockchain technology can be successfully utilized in financial markets. Europe and other jurisdictions have already established frameworks to authorize its use. And we have seen explosive consumer growth in digital platforms offering 24/7 trading.
We also know that much of the financial establishment is changing its position. Initial opposition has increasingly given way to competition to adopt this new technology.
Once again, like electronic trading, companies face a choice: incorporate the new technology or risk being overtaken by competitors that do.
They are survivors.
The next step in this evolution is for government regulators to adjust to the new reality. Congress’s failure to advance the CLARITY Act in September was a lost opportunity to establish a durable regulatory framework for digital assets.
With the midterms behind us, this should be a moment to put politics aside and focus on the economic stakes. The administration and incoming Congress must find consensus on developing a system that adopts this proven technology, protects consumers, ensures ethical behavior by our government officials and opens our markets for a new generation of growth.
America has always turned breakthrough ideas into lasting advances. Wall Street’s next electronic revolution is underway.
Congress should make sure America leads rather than follows.
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