Blockchain Technology and Stock Markets: The case of Uganda Securities Exchange

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Last updated on January 16th, 2023 at 08:00 am

A stock exchange is an exchange where stock brokers and traders can buy and sell shares of stock, bonds, and other securities. Many large companies have their stocks listed on a stock exchange. Listing on the stock exchange is one way of raising money from the public. In order to protect shareholders, the law puts measures as to which company can raise money from the public and how this money can be raised. This is regulated by the Capital Markets Authority.

The word company has no strict legal meaning. Paul L. Davies in his book: Principles of Company Law defines a company as, “an association of a number of people for some common object or objects”. A company is defined under Section 2 of the Companies Act as a company formed and registered under the Act or an existing company or a re-registered company under the Act.

The form and nature of a company is so unique compared to other associations that are identical to a company. This was also enunciated in the locus classicus case of Salomon V. Salomon in which Lord McNaughten at Page 52 stated that the company is at law a different person and it has a separate legal entity from its owners.

There are two types of companies: public companies and private companies. It should be noted from the outset that only public companies are permitted to raise capital publicly. The attributes of a private company as provided for in section 5 of the Companies Act include a prohibition on any invitation to the public to subscribe for any shares or debentures of the company.


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Uganda Securities Exchange and a progressive Ugandan economy

The Uganda Securities Exchange (USE) is the principal stock exchange of Uganda. It was founded in June 1997. The Uganda Securities Exchange is operated under the jurisdiction of Uganda’s Capital Markets Authority.

During the first quarter of 2010, the USE adopted the Settlement and Clearing Depository electronic trading system. In 2010, the USE was the best performing stock exchange in Sub-Saharan Africa, with an All-Shares Index return of 74 percent between January and November 2010. On 20 July 2015, the USE initiated its electronic trading platform, backed by three independent data servers, cutting to three days (previously five days) the time it takes to settle trades.

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The Chief Executive Officer attributed the growth to the introduction of electronic trading system Settlement and Clearing Depository(SCD). SCD makes trading much easier and faster than the manual trading system, which was characterized by inefficiencies and high risk. The SCD system is linked with an e-mail notification system that alerts the investor when there is trading activity in the respective account.

For a stock exchange to be vibrant, the economy must be progressive meaning that that the liquidity level should be high, the investment environment must be secure meaning it should be predictable and the stability of the currency against other countries’ currencies must be guaranteed.

Most importantly, investors must be able to invest conveniently through a trusted medium. The travel of information must be fast to enable investors communicate and make transfer of securities very easy. This is done through a Central Securities Depository (CSD), a specialist financial organization holding securities such as shares either in certificated or uncertificated form so that ownership can be easily transferred through a book entry rather than the transfer of physical certificates. This is usually done electronically, making it much faster and easier than was traditionally the case where physical certificates had to be exchanged after a trade had been completed.

Once the company’s shares are listed on a stock exchange and trading in it commences, the price of these shares will fluctuate as investors and traders assess and reassess their intrinsic value. There are many different ratios and metrics that can be used to value stocks, of which the single-most popular measure is probably the Price/Earnings (or PE) ratio. This is through a method known as Algorithmic trading.

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Block chain – shaking brokers

The term “blockchain technology” typically refers to the transparent, trustworthy, publicly accessible ledger that allows us to securely transfer the ownership of units of value using public key encryption and proof of work methods.

The technology uses decentralized consensus to maintain the network, which means it is not centrally controlled by a bank, corporation, or government. In fact, the larger the network grows and becomes increasingly decentralized, the more secure it becomes.

The information recorded on a blockchain can take on any form, whether it be denoting a transfer of money, ownership, a transaction, someone’s identity, an agreement between two parties, or even how much electricity a light bulb has used. However, to do so requires a confirmation from several devices such as computers on the network. Once an agreement, otherwise known as a consensus, is reached between these devices to store something on a blockchain it is unquestionably there, it cannot be disputed, removed or altered, without the knowledge and permission of those who made that record, as well as the wider community.

Section 1 of Capital Markets (Amendment) Act defines a stockbroker as a person who carries on the business of buying or selling of securities as an agent for an investor in return for a commission. In exchange for executing the trade and offering advice, a stockbroker gets a commission in the form of a flat fee or percentage of the value of the transaction. With block chain, stoke brokers will be automatically wiped out hence saving the investor from paying brokage fees.

With block chain technology, only investment houses would be relevant. According to Section 1 of Capital Markets Authority Act, an investment house means a non-deposit taking institution licensed by the Authority to advise on offers of securities to the public. Their role would now be to offer professional advice to investors before purchase of securities.

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Blockchain technology has already significantly changed the future of money, finance, supply chain management, record keeping, and more. Not only does blockchain technology support crypto-currencies such as Bitcoin and Ethereum, it also has the potential to revolutionize both stock trading marketplaces and the way financial data is stored and transmitted around the globe.

Nasdaq, ASX, the New York Stock Exchange, the Tokyo Stock Exchange, the Deutsche Bourse, and India’s Securities Exchange Board, among others, have already either started to use blockchain technology for some of their transactions, or have appointed commissions to study the feasibility of using blockchain in the future.

We have at least seen how technology has the capacity to make stock markets more liquid, during the first quarter of 2010, when USE adopted the Settlement and Clearing Depository electronic trading system. In 2010, the USE was the best performing stock exchange in Sub-Saharan Africa, with an All-Shares Index return of 74 percent between January and November 2010. This was after it integrated technology in its operations.

Stock market traders, brokers, and regulators are required to go through a cumbersome, and expensive process which typically takes three days or more to complete transactions— mainly due to the role of intermediaries, operational trade clearance, and regulatory processes. Blockchain technology could make stock exchanges much more efficient through automation and decentralization.

Blockchain offers huge potential for tracing securities lending, margin financing and monitoring systemic risk. Japan’s Financial Services Agency has allowed the Japan Exchange Group, which operates the Tokyo Stock Exchange, to use blockchain as its core trading infrastructure.

In 2015, Nasdaq unveiled the use of its Nasdaq Linq blockchain ledger technology to successfully complete and record private securities transactions.

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