Why the Blockchain Represents a Natural Evolution for Traditional Equity Management

Why the Blockchain Represents a Natural Evolution for Traditional Equity Management

There are a number of industries that are now seen as a natural fit for blockchain technology and which feature as likely candidates for major disruption from DLT in the near future: international payments, data privacy, logistics and intellectual property management are prime among them. 

However, the foremost candidate is arguably the least discussed: traditional equity management. The trading of stocks is a cornerstone of finance. Much of it, however, remains inefficient: fees associated with the simple act of buying and selling stocks remain stubbornly high in comparative terms ($25 on average); clearing such transactions generally takes no less than two days; and stock splits – a mechanism that is regularly leveraged within the industry to increase market liquidity – represent organisational friction for companies which require them.

Tens of thousands of back-office operations – as well as many, many more middle-men – have emerged the world over to facilitate global stock transactions, to meet with regulatory compliancy in doing so and to provide general reporting and transparency on the outcomes. 

Friction Eliminated by DLT

On the other hand, pretty much of all of this can now simply be delegated to blockchain-secured smart contracts which, in turn, can provide a more stream-lined service. By endowing a token with the right to represent a share in the equity of a company, transaction fees can essentially be suppressed, clearing can be rendered more or less instantaneous if smart contracts are delegated with the task of managing and guaranteeing the signatures associated with a sale, and stock splits simply become redundant – because a token is, in practical terms, infinitely divisible. 

According to CDRX, an ICO that is setting out to create a platform that facilitates the tokenisation of securities as well as their trading, the benefits go much further again: tokens can be assigned voting rights, adding transparency and fluidity to management decisions; dividends can be paid out over the blockchain in a much more smoothly and at a higher frequency; and equity investments become much more accessible to smaller investors.   

“We expect crypto-securities to become the ‘killer app’ in a combined financial services market worth more than $600 trillion,” the CDRX team state, outlining their vision in a white-paper  that describes the project’s wider vision of creating what it terms “Crytpo Depository Receipts”. The idea is that, much like their non-crypto counterparts, American Depositary Receipts – certificates which allow non-US companies to be traded on US exchanges – CDRs will become the new norm for international equity investment in the near future. 

There are, as CDRX point out themselves, a number of obstacles before we can get there: private key storage will need to step up to the task – the number of platform hacks in the first half of 2018 alone approached $1 billion – in a market worth just under $250 billion. Trust will need to be earned by building more robust solutions to resist the crypto world’s most resourceful hackers. 

Legal ambiguity represents yet another obstacle: to date, the SEC has been playing it by ear as the token model has increased in profile. Whilst many analysts have lauded the approach, the absence of a clear regulatory framework for crypto in the US may mean that such tokenising projects will likely face some unknowns in their overall development plans. 

However, what appears to be clear now is that security tokenisation is no longer a question of if but simply of when