Jan. 2, 2017
How blockchain technology disrupts securities registration

Source: iStock.com

By Chris Horlacher

As the world of finance moves further into the depths of digitization, new technologies are looking to overhaul long-existing, often analog, systems.

Registration of securities, for example, was handled with paper-based systems until recently when U.S. securities regulators began requiring new companies to list securities digitally using technologies like the Direct Registration System (DRS) provided by Computershare.

Computershare states that digital methods of securities registration offer more reliability than their analog predecessors.

"DRS simplifies and streamlines share ownership and investor relations," the company said in its marketing material, adding, the technology "eliminates the risk of loss, theft or destruction of certificates."

However, while technologies like DRS may offer advantages over traditional methods of securities registration, it isn’t disruptive enough.

What's needed: decentralization

The DRS system, like all the other current digital share registration systems, is centralized, creating a security vulnerability.

Established transfer agents providing registration and transfer services for shares have the expensive task of investing in IT infrastructure and security to make their products viable, while still failing to eliminate another weakness: the single point of failure inherent in centralized services. All these weaknesses contribute to the transaction costs borne by investors.

Equibit Development Corporation will add decentralization to digital share register technology by integrating the blockchain, thereby creating a distributed method of equity registration and information tracking, which itself has a number of use cases.

A company holding an initial public offering, for instance, could register its shares on the Equibit network, decentralizing their management and securing it with the blockchain, just as it otherwise would with a system like DRS.

Secure trading and settlements would then be conducted in real time, on a global peer-to-peer network. Further, transaction costs would be significantly reduced compared to a centralized system, which can also delay settlements by as much as three business days.

Security and infrastructure are built into the technology, as it uses money-like tokens to incentivize users to contribute their computing power to the security and growth of a network.

Blockchains: decentralization and security

Blockchains solve both centralization and security problems by distributing the computing resources over many independent machines and using advanced cryptography in order to prove ownership and execute transactions.

Blockchain-based asset registers have become a point of focus for financial firms as of late, with groups like R3 and Hyperledger looking to the technology to improve or overhaul existing legacy systems.

However, the focus has been on permissioned and tokenless blockchains, which is an implementation of blockchain technology that eliminates the value proposition entirely – its decentralized nature – exposing them to the same risks faced by systems already in place.

Mainstream firms looking to improve their digital share registers will eventually turn to decentralized products. The Ontario Securities Commission reportedly had no objection to EDC’s blockchain product.

Over the next five years, interest in decentralized blockchains like bitcoin and Equibit will grow exponentially as the realization sinks in that they are far more efficient, secure, and attract far more users than current products and permissioned blockchains.

Chris Horlacher is the CEO of Equibit Development Corporation, a Toronto-based company which offers software products aimed at decentralizing securities registration and management.



Topics: Blockchain, Software

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