Issuance of securities today is at a brink of a unique revolution. In the modern-day trading and investment activities, security participants are often fragmented whereas bookkeeping, reconciliation and payments are still performed by human accountants. There does not exist any universal bookkeeping and clearance centre that disregards jurisdictional boundaries. This is a major reason for inefficient markets, since lack of automation results in the absence of real-time trading and incompatible participant systems. Time and money are wasted due to these barriers. However, financial trading platforms over blockchain offer the participants simplicity, privacy under their control and provide the convenience of listing, apart from many other efficiencies.
Let us delve deeper and look at these platforms in more detail.
Current State of Securities Practice: Where exactly the problem lies?
The present procedure for issuing financial instruments suffers from a major defect – institutions often use their own heterogeneous IT systems which are incompatible with each other. Further, there is no dominant system to link parties together for securities not traded on exchanges (such as securities traded over-the-counter). These parties – which include securities issuer, the subscriber, the funds, fund of funds (FOF), or other types of financial intermediary and the final investors are therefore often at loss. In most countries, we have exchanges or other types of information centres performing the task of bookkeeping and clearance. In practice, those central servers do not cover all securities businesses. Only part of standard commodities is allowed to trade, excluding non-standardized securities or other types of financial instruments or fundraising activities (e.g. trust, unlisted bonds). We also have multiple exchanges or trading centres within one country, which is a fractioned marketplace. In fact, there was no good way to synchronize trading information among multiple centres, until Mining For Cryptocurrency technology came in.
In the conventional issuing procedure, the issuer passes on all debt, for example to the subscriber or an investment bank. The subscriber then sells the debt to several buyers. The buyers can be funds, trusts or other types of financial intermediaries, who may need to find a secondary buyer to buy. The secondary buyer may repeat this process until it reaches the final buyer. There is always the risk that the secondary buyer cannot fulfil their purchase promise. Therefore, a confirmation period is needed, and marketing for a little surplus so that the full amount of fundraising at its required level can be met. The purchase and subscribing or payment information cannot pass through the nodes of financial intermediaries since the information between the nodes is heterogeneous data. This is the fundamental reason for the need for a long fundraising period, confirmation period and redundant accountancy.
What is Blockchain Issuance and Distribution?
Blockchain Development Company issuance refers to the creation of tokens through the process of crypto asset mining and its distribution through a public token sale – in a similar way an initial public offer (or IPOs) work. Since tokens on the blockchain system can be created by an entity or an association having access to the blockchain (permissioned or non-permissioned) but no legal personality, there may be additional legal changes for the regulators, primary being identifying who can be held liable in cases of breach of securities laws and any other disclosure obligations.
Blockchain issuance and distribution can be done in the following ways:
· Pre-mine: Where an entity creates all token units as a one-time event
· Continuous mining: The units are created according to a transparent, pre-specified procedure that governs the network or application rule set on a continuous or regular basis.
· Hybrid: A combination of the above two processes where a specific proportion is pre-mined and remaining token units are minted through continuous mining.
Issuance and Distribution Process on Blockchain and DLT systems
With blockchain development company, no central instance for information consistency is required. Instead, the primary subscription and secondary transactions can be largely optimized. It is a universal and democratic way to synchronize all parties. On a blockchain-based platform, the issuer, subscriber and all other types of financial intermediaries are connected.
A typical issuance procedure on the blockchain works like this – in the fundraising/issuing process, every seller creates a security entry in the blockchain, specifying the amount to be raised. The information of a subscription or purchase order of any buyer and secondary buyer is immediately published and synchronized with the whole network. As a result, the issuer and subscriber know the status of the fundraising process throughout the participant network. Therefore, the time span of the fundraising and confirmation period can be reduced significantly.
Further, in a traditional repayment process, the work of a fund accountant causes the settlement time to be T+n (usually T+2 in India and other developing countries). The buyer must wait for repayment from the chain of subsequent sellers. The cash flow must go from the issuer through multiple financial intermediaries. In contrast, in both the fundraising/ issuing and repayment process of a blockchain structure, information can flow in real time.
It is important to note that in the case of portfolio/distributed investments with unlisted financial assets, the process of investment and repayment may become extremely sophisticated and the accounting becomes very complex. This may result in compliance issues in certain jurisdictions. Further, in case of a fund or trust, the money is initially pooled in a fund account and invested into assets. Through blockchain, and smart contracts, the money can flow directly from the investor to the asset, bypassing the intermediate fund, and the money is not required to be pooled in the fund's account.
There are multiple benefits for issuance through blockchain and DLT systems:
- Wider diversification: Blockchain enables participants to get connected to a wider range of counterparties if everyone is in the same chain. It becomes easier to move funds across boundaries without jurisdictional barriers.
- Asset seeking and sales: An investment intermediary is always seeking financial assets. Due to information silos, a financial institute reaches a limited group of clients around it, so it knows only a small fraction of the whole market, especially in unlisted non-standard assets. Since on the blockchain platform, all assets are listed under the permission of the issuer and broadcasted to the network, investors can find an asset in every corner of the world and vice versa – a fund can promote its products easily by broadcasting the asset to the whole network. This removes the requirement for the agent intermediaries and prevents information silos where an investor may be limited in his reach to a limited group of participants, especially in cases of unlisted non-standard assets.
In some cases where financial instruments are issued worldwide, foreign investors can invest directly or through a financial intermediary arrangement, subject to meeting stringent requirements. In many such cases, since participants are from different sovereign countries, stock exchanges or centralized marketplaces are beyond their reach. The use of a blockchain platform overcomes these barriers since trading information is not restricted by any country or bound by centralized marketplaces. In a minimal case, the blockchain record is just bookkeeping that encounters no regulatory restriction – at least currently.
Blockchain Development Company provides a wealth of opportunities for the investment and asset offering sector since all types of participants are connected globally in a democratic way without a rating and OTC trading can be optimized, where the assets listed are broadcast to the whole network, so that asset seeking and sales promotion become global rather than local. Purchase and payment information can penetrate layers of institutions and all participating stakeholders within minutes rather than days of human operation. The fundraising, confirmation and settlement periods can largely be optimized based on real-time information.