The Inevitable Disruption: Issuing Stock on the Blockchain
Innovation has a history of paving the way for regulation in the long term. In the shorter term there is a common theme of regulators pushing back in opposition of innovation. This is not due to them wanting to prevent innovation (for the most part) but as a way to slow down trends so they have the proper time to be tested and prove they function as planned.
A prime example of this occurring presently is the issuance of securities on the #Blockchain. In the majority of circumstances this would be in violation of several security laws. However, it is one of the most disruptive use cases of Blockchain #technology that has a high probability of being achieved within the next decade and is applicable to both private and public company stock. While some innovators are afraid to enter this realm due to lack of clear regulation, many are not slowing their aggressive pace. The Nasdaq has already began experimenting with this concept through a $20+ million combined investment in Linq along with countless start-ups working towards a similar common goal.
If the current world markets are slowly transformed into running on Blockchain networks it changes the landscape to be less focused on monetizing through the intermediaries. It is estimated that current back-office inefficiencies cost financial service companies a minimum of $20 billion per year so there is definitely a financial incentive for the implementation of a more efficient technology core such as Blockchain. It would enable true peer to peer trading in a fast and secured environment thus eliminating the need for brokers, except in rare situations. It also enables the instant verification of ownership and transfer making settlements t+0 and post-trade data available much quicker. Once a company migrates or issues shares on a Blockchain network it also makes the implementation of smart contract technology a possibility which has the potential to increase efficiencies through the automated posting of margin (capital) requirements in real-time and automatic distribution of dividends and other mandatory market events. Not to mention shareholder voting can easily be completed on a Blockchain network and trigger the automatic execution of a smart contract. While all of this seems great and many want to see it happen tomorrow, something this disruptive is not going to happen overnight, it will slowly be phased in over years.
While this implementation has process efficiency benefits for publicly issued stock, it completely changes the financial environment of start-up and private companies which as a whole typically have illiquid shares. For those unaware of how start-ups typically work from a financial point of view, they issue shares to the founders when registering the company, then issue more shares for each investment round (take convertible notes out of the picture here for simplicity), and are often restricted to only accepting funds from accredited investors (individuals worth over $1 million or exceed annual salary requirements). These shares are rarely every liquid and often restricted which means that investors cannot sell shares to someone else like they can with shares of a public company. The investors do not normally receive any real return until a cash event occurs such as an acquisition, merger, or IPO. Another aspect to take into account is that many start-ups structure their employee compensation to be a mixture of stock and salary.
The conversion of private company stock to a Blockchain network is truly game changing to the entire process. Start-ups would be able to issue shares to public investors (similar to an IPO) from the time of registration (new crowdfunding legislation is already shaping the path for this), these shares would be more easily transferrable thus creating liquidity in the market, and employees receiving compensation in a mixture of equity and salary would have the option to sell their shares prior to a standard cash event occurring. There are several critical factors that would need to be addressed prior to this implementation being feasible such as: How would stock options work? What would happen to shares in the event of an acquisition? What auditing regulations need to be put into place? Can shares be revoked, etc.?
So what is the downside to the conversion of stock to a Blockchain network? Much of this technology is still largely untested in production environments so that will take time to ensure security and functionality. Another major barrier is performance. Current trading networks handle millions upon millions of transactions a day and need to be executed in milliseconds so latency is a concern. Put aside the smaller concerns such as proper user/key management, and the final barrier is regulation that must be put into effect to even make this a possibility, but as stated previously, regulatory changes will happen with enough support of a Blockchain transformation, it is just a matter of time.
[linkedinbadge URL=”https://www.linkedin.com/in/ian-m-worrall-1b599a59″ connections=”off” mode=”icon” liname=”Ian M. Worrall“] is Chief Executive Officer at Encrypted Labs | Blockchain Technology
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