A Block for a Square Hole
• 1 2 min
• 1 2 min
Welcome WBS’ers and get ready for a wild (and informative) ride (more like a road trip)! We’re hijacking the next two adventures to explore something uncharted and dear to our hearts--why Prometheum is building a blockchain securities market in the first place. We’ll bring together many concepts of prior WBS’s to explain why a market built from scratch is really the only way to issue, trade, and settle blockchain-based securities. Don’t get us wrong, the U.S. markets, like the NYSE and NASDAQ aren’t broken - but they were created for something entirely different, stocks, which started as paper certificates! Attempting to fit blockchain securities into the traditional securities model is counterproductive, like trying to fit a square peg (or a block perhaps!) into a round hole by sanding the corners - it’s possible (with a lot of time and effort) but may not be perfect.
First things first, let’s talk about why blockchain technology is “better” for certain applications - specifically, the capital markets. Apologies if this is a bit of a re-hash for some folks reading this.
The U.S. equities securities life cycle takes two days to reach settlement finality--when cash or securities end up in an account as a result of a trade. It also involves numerous independent entities using both automated and manual processes resulting from nearly a hundred years of regulatory and technological evolution via forced adaptation to changing market conditions. Most of these changing market conditions result from new technology adoption due to legacy technology constraints, or clear cost and/or time benefits. Today, blockchain technology is that “new” technology, and it presents cost and time benefits, at scale, specifically when servicing securities that are also network tokens. But it also requires some updating to securities laws (more on that later).
Blockchain has advantages over cloud storage, data centers, and database-driven processes, but only in certain industries and with certain applications (supply chain is a great example). The most well known and touted advantage of blockchain is its inherent suitability for transactional record-keeping due to data or blocks (the ledger), once written to the chain, being immutable, traceable, reviewable, and distributed among many nodes (decentralized). However, in many use cases, traditional centralized databases or more advanced distributed databases with an application layer (like the ones used by exchanges, post trade systems, and the DTC) can provide many of the same advantages as a blockchain and sometimes with even higher efficiency, ease, and throughput. But, their systems can’t handle blockchain native tokens - specifically tokens that are securities, better known as “blockchain securities.”
Blockchain securities are utility tokens that also function as securities (capital raising, trading, clearing, settlement, etc.) - and need to be compliant with federal securities laws and are regulated by the SEC and FINRA in the US. Unfortunately, the securities model used by US Exchanges over the last 50 years would require a major overhaul to technical infrastructure, regulation, and clearing and settlement processes to support blockchain-based tokens natively. So it has to be built from the ground up, and that’s exactly what Prometheum is doing. Let’s segue into the details and get a bit personal by using real world examples from our very own ecosystem!
Accurate Recordkeeping and Data Transparency
The Prometheum blockchain consists of distinct, sequential, and time-stamped records of asset ownership (blocks) resulting from the settlement of blockchain securities transactions “post trade.” The underlying distributed ledger technology enforces each new block’s accuracy in relation to both the new transaction information and the previous block. This technologically enforced sequential recordkeeping provides certainty that settlements recorded on the Prometheum blockchain are immutable, accurate, and independently confirmed in real-time by the validating nodes on the Prometheum network.
Prometheum is responsible for updating the Prometheum blockchain through the addition of new blocks to the chain, the contents of which can be reviewed in real-time by participants (pretty much anyone with a read-only node). Nodes provide anonymous data regarding the settlement status of transactions and resulting securities and cash positions. Over time, this will allow each participant (think broker-dealer, clearing firm, bank, regulator) to use the Prometheum blockchain in lieu of maintaining a separate internal ledger, which has the potential to eliminate the need to reconcile differences in settlement records, either with trading counterparties or with the omnibus position in its account at the central securities depository.
Additionally, each Participant could allow its customers (including the end investors) to have direct and individually permissioned access to the Prometheum blockchain, providing the potential for enhanced investor protection as it would allow investors to independently confirm their ownership and possession of assets recorded to the Prometheum blockchain. This data visibility and accuracy could also be extended to regulators for the fair and consistent enforcement of market rules and regulations, and as a transfer agent service for blockchain securities issuing companies.
System and Data Security
Blockchain technology, due to its distributed nature, governance models, and consensus mechanisms, can be more secure than market infrastructure supported by centralized databases. Additionally, because most of the traditional securities model’s independent components and manual processes can be recreated as participants or functions on a blockchain, a consistent level of defense can be maintained across the whole ecosystem.
**Operational Efficiency **
In a world where payments can be processed and debits/credits applied within seconds cross border, the two day settlement cycle of traditional securities cannot be considered timely or efficient. We recognize that even using current (non-blockchain) technology, markets can provide near instantaneous settlement finality, but not without a nearly impossible tear down and rebuild of every component of the current market model, and how they connect to one another. With blockchain securities, we have a relatively clean slate to create a model for same day settlement by capitalizing on efficiencies related to smart contracts/automation, interoperability, digital wallets, and tokenization.
Ok...this is as good a time as any to break and leave everyone in suspense for part two. Join us next week for a dive into the regulatory side of (blockchain) technology as well as a look from the perspective of blockchain-based companies wanting to raise capital by issuing blockchain securities. Have a positive and productive week everyone.
P.S. If you have time for a detour, Google “SOES bandits” - it will explain why we believe there are parallels between the advance of blockchain technology into the capital markets today and the rise of the ECN’s (ATS’s), DMA platforms, and algo’s that resulted in significant changes to securities laws and market structure over the last thirty years as a result of computers and electronic systems becoming ubiquitous. And if you’re on a permanent vacation - read “Flash Boys” by Michael Lewis.