Blockchain Could Have Assisted in Preventing GameStop-Robinhood Issue January 30, 2021 January 30, 2021 Kelly Cromley http://1AZFjzw2#Nwf63pYaMWq#xIY
Market NewsJanuary 30, 2021 by Kelly Cromley

Blockchain Could Have Assisted in Preventing GameStop-Robinhood Issue

robinhoodThe GameStop (GME) share rally, led by retail investors, has caught the attention of investors and traders across the globe. The price of GME stock rose from a mere $17 in the first week of January to over $330 yesterday following the collective activity of WallStreetBets forum on social media platform Reddit.

Following the steep surge in price, many brokers, including commission free mobile based stock trading platform provider Robinhood, have resorted to blocking of trading facility by retail investors. The issue has brought to limelight the deficiencies of traditional market settlement process.

The major rationale for suspending trades on GameStop counter by Robinhood and other brokers is the SEC (securities and Exchange Commission) rule on “net capital obligations and clearinghouse deposits.” Settlement of any stocks traded on exchange takes two days in general.

So, the rules have been created by the SEC to avoid any malpractice. Therefore, a surge in purchase volume necessitates Robinhood to hold additional capital, which it arranged on Friday. Furthermore, Robinhood does not receive money instantaneously even though a retail trades makes payment at the time of buying a stock.

If the mode of payment is digital currency and settlement is done via a blockchain platform, with stocks in tokenized form, the settlement process could be done instantly (delivery versus payment process).

That would resolve the issue. One of the main reasons for the issue is the long-standing enmity between retail investors and hedge funds, including large volume financially strong speculators.

As it can be understood, Robinhood gains from short-sellers. Even though Robinhood does not charge a penny for basic trading account, the company has a profitable and transparent business model in place. Robinhood also generates income from rebates offered by market makers.

The platform lends the stock owned by its customers to short-sellers for a considerable profit. In this regard, Mark Cuban has highlighted that the prevailing lending rate for the stock of GME is 30% per annum.

With the advent of blockchain technology, the investor could have better control over their stock holdngs. They could avoid lending the stock and do not take part in any kind of short-selling directly or indirectly.

AuthorKelly Cromley

Kelly is our in house crytpto researcher, delving into the stories which matter from blockchains being used in the real world to new ico coming out.