At the very end of last year, a major milestone was reached in the bitcoin world. Or it wasn’t, depending on who you listen to. And what your definition of “stock” is. Either way, what happened was a big step forward, and a harbinger of important changes coming to securities trading and business finance.
What happened is this: Chain, which specializes in enterprise blockchain platforms, issued shares on Nasdaq. Only they weren’t traditional shares, they were digital. And not on the “regular” Nasdaq, but on a subsidiary newly created to handle this kind of transaction.
But how does that work?
Nasdaq Linq, part of Nasdaq Private Markets, was set up to facilitate the issuance, transfer and settlement of shares of privately-held companies on The NASDAQ Private Market using a digital ledger technology similar to that which powers bitcoin. (For more on the difference between bitcoin and the blockchain, see here.) Rather than a stock exchange mirror, Linq is more a shareholding management tool, especially useful for de-mystifying the chaotic structures thought up in the early days of a business. The ledger allows settlement time to be slashed (minutes rather than days), issued shares to be easily tracked, and related documents to be dealt with and executed online.
The mechanism was developed by Chain, so it is appropriate (or symbiotic, if you prefer) that its own securities be the first to try it out. Chain creates Nasdaq’s Linq platform, Nasdaq owns part of Chain, Chain is the first to issue shares using this technology… You get the picture.
Yet Chain won’t be the last to use this technology. Nasdaq has hinted that further digital share offerings are in the pipeline from ChangeTip, PeerNova and other blockchain startups. NXT, Ripple and Digital Assets Holdings, among others, are working on similar technologies, and we will definitely see several more transactions of this type over the next few months.
And depending on your definition of “security”, it wasn’t even the first. In August of last year, smart contracts platform Symbiont sold its own digitized private equity on the blockchain to an investor, and registered its founders’ stakes as well as stock options and shares granted to employees. Symbiont’s innovation is the creation of “Smart Securities”, which not only settles and records transfers, but can also pay dividends and convert stock options automatically.
Broadening the definition a bit, in June of last year US-based retailer Overstock sold a $5m “cryptobond” on its tØ blockchain-based security trading platform. In December it got regulatory approval for the issue of company shares on the bitcoin blockchain.
Whoever came first, all three innovations stand to make a big impact: Overstock because its tØ platform and upcoming digital share offering “proves that cryptotechnology can facilitate transparent and secure access to capital by emerging companies”, according to founder Patrick Byrne; Symbiont because it is leveraging the decentralized power of the bitcoin blockchain to make trades cheaper, faster and “smarter”, which will expand the use cases for bitcoin and open up trading to non-market players; Nasdaq because it is a globally recognized name with exchanges around the world. All of them increase efficiency by reducing settlement time, increasing transparency and removing middlemen.
This is exciting, but at the same time fraught with significant obstacles.
One is the inherent conservatism of investors. New technologies can be scary, especially ones that are not easy to understand. Institutions are used to the delayed settlement systems currently in place, and could well prefer to bear the steep economic cost of that inefficiency rather than risk not only losing their investment due to a tech malfunction, but also of looking foolish.
Another is the lack of understanding of the mechanism on the part of the private companies, and the fear of attracting the attention of the regulators. Especially in the US, where each state has different securities legislation, a non-physical security residing in “cyberspace” is too much of a conceptual leap for most funds and investors to feel comfortable with.
Another is the need to balance the open nature of the blockchain with investors’ need for privacy. What some might see as an advantage – the ability to track the ownership history of a share or bond – others might see as an encroachment on their desire for anonymity.
Yet these obstacles can be overcome with time, just as other technology adoption obstacles have been overcome in the past (remember the “no-one will use the Internet” prediction?). The advantages of blockchain-based securities settlement are clear: faster, cheaper and global. The need for simpler financing is also clear: initial cap tables and shareholding structures are usually a mess, scribbled on napkins and promised in meeting rooms. A secure and inexpensive method of issuing shares will make setting up a business easier, which could help to foster entrepreneurial activity. And as more and more high-growth startups avoid regulation-heavy IPOs, a reliable and liquid alternative will empower businesses of all sizes and make them less beholden to Wall Street and its international counterparts.
Who will be the winner here? Which business model will triumph? Will shares be on private ledgers or the public blockchain? I expect we will see a combination of forms and formats, with various platforms offering different advantages, with smaller businesses benefitting from enhanced control and transparency, and with an explosive growth in creative instruments backed by cryptography and maths.
It won’t be a smooth transition, and it won’t be quick. Nor should it. When it comes to investors’ money and companies’ financing, care needs to be taken. But the shift will happen, and as it does, it will lead to a more accessible and fair financial system.