A Complete Perspective
• 12 min
• 12 min
Welcome back, WBS’ers—glad to see you stuck around for part two—now let’s finish this adventure! Today, we move away from technology and, instead, drop some legal knowledge on you. And of course, no post related to the markets would be complete without understanding the issuers’ perspective. In this case, blockchain-based companies looking to raise capital by selling securities (you already know what kind!).
It feels a bit early for a bold font...but we’re jumping right in:
Direct Regulatory Reporting and Auditing Functionality
In the traditional securities model, exchanges/ATS’s, broker-dealers, custodians, and other market participants must provide daily reports, requested information, and real-time drop copies to regulators/SRO’s (Self Regulatory Organizations) and among themselves as required by regulation. These participants are also required to provide access to regulators for auditing purposes. By using a read-only node on the Prometheum blockchain, and a blockchain explorer, we can provide direct, uneditable transparency to regulators at any time and in real-time. This may seem unimportant or not super significant, but regulatory oversight supports fair markets and they simply cannot function without it (by LAW). So while it has been a long time coming, once the regulators get comfortable with this new technology - one of its key advantages will ultimately benefit them and, by extension, the markets as a whole.
We promised some legal knowledge, but it may not be what you expect - we’ll skip the typical summary of the whole Exchange Act and other securities related laws (we think highly of our readers!) to focus on a lesser-known, but equally important part, of the Exchange Act actually related to technological progress in the markets:
More bold font coming up...
Improved Reconciliation, Clearing, Settlement and Custody Finality
Congress mandates the SEC (the SEC enforces Congressional laws related to securities) to keep the US markets competitive from a technology perspective. We believe that blockchain technology represents what is referred to as “new data processing and communication techniques” - that are consistent with the Exchange Act Section 17A(a)(1)(C), specifically related to the clearing and settlement of Securities. Let’s take a gander at the actual legislation shall we:
(a)Congressional findings; facilitating establishment of a system
- The Congress finds that:
- The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.
- Inefficient procedures for clearance and settlement impose unnecessary costs on investors and persons facilitating transactions by and acting on behalf of investors.
- New data processing and communications techniques create the opportunity for more efficient, effective, and safe procedures for clearance and settlement.
- The linking of all clearance and settlement facilities and the development of uniform standards and procedures for clearance and settlement will reduce unnecessary costs and increase the protection of investors and persons facilitating transactions by and acting on behalf of investors.
To summarize, as it relates to the post trade settlement process, a blockchain will streamline the current model even with some level of manual oversight. Multi-signature digital wallets are almost “too good” at settlement finality, and hot and cold storage provides an extremely secure means of protecting custody records. Smart contracts allow for “intelligent” algorithms to automate clearing level reconciliation between exchanges and BD’s. Lastly, public and private keys are generated for each transaction, thereby providing accurate and secure record keeping while protecting the privacy of the investors during clearance and settlement. And that’s why Prometheum is building a blockchain-based securities ecosystem!
Time to walk a mile in someone else's shoes and talk about what blockchain-based companies need from the capital markets. These companies are the very reason we believe there is demand for a blockchain securities market (if we build it, they will come!)
As you probably know, there are a growing number of companies that can lower their costs, increase revenues, and/or out-compete others as a result of their utilization of a blockchain. Some call them “blockchain companies,” but you can call them the “future” of their respective industries. For example, as an alternative to cloud-based storage, at scale, blockchain offers cost savings to data-heavy and analysis-dependent companies by offsetting hardware and energy costs to node operators with token incentivization. Blockchain technology has a unique innate structure that can connect varied parts of a company, so while any application can be programmed to automate business functions, smart contracts can automate complete processes across even normally manual channels within a company. There are also Blockchain as a Service (BaaS) companies paving the way for blockchain native companies by advancing the actual underlying technology and providing blockchain products and services to companies who may not have the resources to develop their own. Examples of these include companies that offer enterprise blockchain solutions built to handle very high numbers of transactions per second (TPS), and interoperability across different blockchain networks giving different companies the ability to “connect” their businesses with other businesses. Industries where blockchain offers real advantages are evolving rapidly and new ones are being created as a result of cost savings and/or higher efficiency, meaning there is an increasing number of companies that use a blockchain as a legitimately better technology to power their business model.
Blockchain native companies aren’t all that different from other types of companies, and many of them need to raise capital to be successful. One of the fundamental features built into a blockchain network is a unit of value - a token. Tokens are referred to as cryptocurrency when used as a means of payment or method of saving or storing value on a blockchain network. Those same tokens can and often are used by blockchain companies to raise capital - unfortunately, during the early years of blockchain technology, many unreputable companies took advantage of investors by selling tokens with no potential for liquidity (no existing fair and orderly markets), no recourse for misinformation and even blatant fraud - these were known as ICO’s. Fortunately, the U.S. already has the strongest regulatory infrastructure for securities in the world - and by leveraging those same laws, tokens can be registered and used to raise capital as blockchain securities.
Now for a bit of well earned self promotion (these WBS’s don’t write themselves!)...Prometheum is a blockchain native company, and we have built a market singularly focused on supporting blockchain securities. When approved by FINRA and SEC, our ATS will give investors liquidity and security, operate efficiently and fairly, and enable blockchain native companies to raise capital in a logical and compliant way by using our blockchain security framework for their tokens. We’ll also clear and settle transactions the same day! (BOOM).
That’s it for this week, folks; you made it through a two-parter! We’ll now retreat to our little cave and come up with next week's topic in solitude (that’s a joke to pull on your heartstrings). If you have any suggestions or if there’s a topic you want to learn about, PLEASE (we’re practically begging here…) let us know by shooting an email to email@example.com.
Have an awesome week everyone.