The quick answer is “yes, absolutely, and in ways which we can only begin to imagine.”
This past week I was honored to speak to the National Investor Relations Industry. Darren Marble (CEO of Crowdfundx) and I lead a “blockchain 101” session for several hundred securities-industry professionals who represent public companies. We devoted half of the hour-long session to audience Q&A, a couple of which were the catalyst for this blog…
Q. What do I think about DTC and do they have a role in this next-generation of securities-trading?
My answer was that DTC in its current form is a dinosaur and its monopolistic, innovation-throttling days are numbered. With tokens ( aka “coins”) as securities, there’s no need for a centralized repository of certificates or clearing transactions. DTC is, in essence, the stone age predecessor of blockchain.
Q. Okay, what about NASDAQ and NYSE then?
I think that this is a “Barnes & Noble meets Amazon” situation. If they stick their heads in the sand and hope this whole blockchain-thing goes away, are prevented by corporate inertia, budget considerations and bureaucracy from moving quickly to seize opportunity, or are too scared to pivot their business for fear of cannibalizing their current operations, a la B&N, then they will die a slow death.
Incomprehensible? That’s what the 1,000+ store chains of Barnes & Noble and Borders said about Amazon. It’s what the yellow pages industry said about Yahoo and Google. Blockbuster about Netflix. The entrenched ways of doing business were about to change seismically, but the then-dominant players just couldn’t (or wouldn’t) adapt quickly.
We’ve come a long way from meeting under the Buttonwood tree, but transferring securities between a buyer and a seller is still a hassle. When going public, a company deposits a master stock certificate with DTC and files for a CUSIP number. This then enables DTC-member transfer agents and broker-dealers to effect and record ownership changes between buyers and sellers. How modern is DTC? I understand that their software is mostly written in Fortran, and continues to be, so that kind of says it all.
The traditional (non-blockchain) issuer also needs to register its shares with the SEC, and then list its securities on an exchange. This is an expensive, cumbersome process that takes a lot of time, money and ongoing resources to service. NASDAQ and the NYSE don’t accept businesses whose securities aren’t registered with the SEC. They don’t accept businesses who can’t meet (or maintain) their stringent listing requirements. Which means they don’t enable trading of securities of 99.9999% of the businesses in the United States. This is a huge problem. And one that blockchain technology is about to solve.
Token exchanges are pure democratic capitalism. Any securities can be “traded” (bought and sold), regardless of whether or not they are registered with the SEC, and regardless of the exemption they were issued under (Reg A, D, CF, S, etc). Getting listed on a token exchange is easy and anyone can directly offer their securities for sale, issuers don’t have to file with the SEC or meet the onerous listing and continuation standards of NASDAQ or the NYSE, and buyers can invest in things they are interested in without having to pay a broker-dealer or other DTC-member firm.
Soon you will be able to buy equity or debt securities of a real estate project, a crowdfunded start-up, or a fast-moving private (not NASDAQ/NYSE traded) company just as easily as you can buy shares of Google or Overstock. Easier, in fact.
The tokenization of securities is poised to disrupt the securities industry as we know it. With companies abandoning the use of traditional certificates for their stocks and bonds in favor of blockchain-based digital ownership interests (“tokens”, aka “coins”). Anyone will be able to buy or sell any securities they want, frictionlessly in a transparent and orderly digital marketplace.
Sure, raising capital by selling (“issuing”) securities tokens will still have to comply with SEC regulations, which is straightforward and generally inexpensive, as does subsequent (secondary) trading of those securities. AML & KYC has to be done. Transfer restrictions (e.g. Rule 144, Reg CF, etc) have to be enforced. Funds have to be processed. Tokens need to be minted. Buyers and sellers need to be protected in their transactions.
There are a lot of moving pieces in this nascent, rapidly evolving industry. Firms are heads-down building soon-to-launch technology for creating digital contracts which include KYC and AML, as well as an immutable ledger of the chain of ownership. Almost no financial institutions are taking custody of digital assets. We are far from clarity on infrastructure and regulatory issues. But the SEC is thus-far taking a proactive, relatively light-handed approach and is considering regulation changes to better address shareholder caps (for 12g) and state blue sky issues, among other things.
Just as in 1995 with the internet revolution, so today there are a number of smart, well-funded, tech-driven entrepreneurs starting what will become the dominant companies of the future. Binance, Coinbase, tZero, TrustToken, Polymath, StartEngine and Republic are in my opinion just a few of these. And, naturally, I intend for Prime Trust to be as well.
We are in for an incredible ride.