Crypto Faithful Say Blockchain Can Remake Securities Market Machinery (#GotBitcoin?)
States, regulators and lawmakers lay the legal groundwork for the creation of ‘digital securities’. Crypto Faithful Say Blockchain Can Remake Securities Market Machinery (#GotBitcoin?)
The brutal bitcoin selloff continues. But cryptocurrency supporters are plugging away with plans to use its underlying blockchain technology to reshape Wall Street’s machinery.
These blockchain-based networks have been in development for several years without much to show for the effort. But now states, regulators and lawmakers are laying the legal groundwork for the creation of “digital securities,”—assets resembling bitcoin and other cryptocurrencies—that could represent stocks, debt or other financial instruments.
Wyoming recently passed laws that would give legal recognition to these securities, following a similar effort in Delaware. The Securities and Exchange Commission continues to refine its definition of what constitutes a digital security and a bill was introduced in Congress last week with a similar goal.
Startups, meanwhile, are developing platforms for creating and trading these new kinds of securities. Prominent among them is Circle Internet Financial Ltd., a Boston-based crypto company backed by Goldman Sachs Group Inc. Circle recently acquired SeedInvest, an online platform for startups and investors.
Capital markets handle trillions of dollars worth of trades daily but employ numerous middlemen to make it work. Investment banks, custodial services, transfer agents, brokers and exchanges all stand between the companies issuing securities and the investors buying them.
Clearinghouses, which make sure trades get settled, need to set aside money to protect against extreme losses. Transfer agents keep track of securities and ensure trades are accurately recorded.
Under a blockchain-based system, creating a new security would be like filling out an online form, supporters say. Trades would clear in minutes. All of it would be tracked and instantly verifiable, so traders wouldn’t have to post collateral and the information would be available on a shared database visible to market participants.
“There’s no need for that big, clunky middle layer,” said Mark Smith, the chief executive of New York-based Symbiont, which is building platforms that would trade these digital securities.
Circle Chief Executive Jeremy Allaire said companies will eventually be able to raise capital, maintain shareholder lists and go public on systems based on the technology that underlies bitcoin.
“It’s very difficult for people who start companies to find capital, and for investors to invest in them,” Mr. Allaire said. “If you could really digitize this, it makes the market more open, and less friction-filled.”
Banks and startups have been exploring this technology for years, with little success. Also called distributed ledger technologies, the software would create one central database accessible by any number of parties that is potentially faster, cheaper and more reliable.
JPMorgan Chase & Co. Chief Executive James Dimon, who has criticized cryptocurrencies, talked about the benefits of distributing the bank’s own digital coin on a blockchain-based platform at a congressional hearing last week.
“Instead of us having to call each other’s bank up and saying what happened to that shipment from Singapore, we just go to the same screen and see it right away,” Mr. Dimon said.
But the logistics of using the technology have been thorny. Among the issues: the legal status of the “tokens” that would represent assets, custody of the tokens and what information would be visible in the ledger. Some people question whether the technology offers any real improvements over existing systems.
Despite recent moves at the state and federal level, regulatory hurdles remain.
Rep. Warren Davidson (R., Ohio) sponsored the Token Taxonomy Act, a bill that would define digital tokens at the federal level. He said defining digital securities and making laws that will protect them is as important today as overseeing the internet was in the early 1990s.
“It really is, at every level, from capital formation to law enforcement to consumer protection, to our advantage to provide regulatory certainty,” Mr. Davidson said. “Every day we tarry we’re losing market share.”
The regulatory thaw follows a boom and bust in the market for so-called initial coin offerings.
ICOs allow companies to bypass traditional funding sources to raise money by giving investors a bitcoin-like digital token related to a product or service the company plans to offer. ICOs raised billions of dollars in 2018 but they have cratered since then, in part because many offerings showed signs of fraud. The goal now is to create a regulated, stable version of the ICO.
The new frameworks in development would allow regulators to monitor activity in real time, said Andrea Tinianow, a consultant who worked with both the state of Delaware and Symbiont.
“The SEC will be a node on the blockchain,” she said.
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