Tokenizing Registered Securities Within European Law

Transcript

[Applause] [Music] hi everyone can you hear me okay great so my name is miles i'm ceo and co-founder of a company called globalcap we are well you probably haven't heard of us so let me give you a very quick background started the company in fact i'm going to talk to you today about tokenization with in european law of registered securities and i'll talk about why what registered securities are and why that's important and ultimately what the implications of that are for capital markets worldwide so first off

the start started the company four years ago with the view that private capital markets are broken and in the technological dark ages using blockchain we changed that and the way that we changed that was by building out a digital ecosystem right across the full spectrum of private capital markets from register management where we digitized the security itself the share or debt instrument right across the full workflow of private placement and investing funds into companies and projects and through to secondary liquidity which is really where that that piece of technological dark ages really exists in private capital markets before that

to date we have seven billion dollars of private shares and debt instruments managed in our ecosystem for 3 000 investors companies have run 45 placements using our automated workflow and we have spun up four white labels for institutions such as the johannesburg stock exchange we are an fca regulated entity in the uk as a securities arranger and custodian of cash and securities we have 56 employees we've raised 60 million dollars of our own funding to date and we founded the company four years ago so first off some definition points let's just bring everyone up to speed before we get into the really good stuff what do we mean by securities

so it turns out there's a very clear european definition of what securities are under a piece of regulation called mifid and i'm simplifying a little bit but that comes down to shares in companies debt instruments so corporate bonds for example depository receipts and derivatives you don't need to know necessarily what all that is but collectively we're talking about a 700 trillion dollar market worldwide for all of those instruments second bit of background information how do public markets currently function at a logistical level when a trade happens so if you have two parties a buyer and a seller and they want to transact in a public market they want to trade some shares on

on the swiss exchange or on the lse or on nasdaq they go to their broker usually on their online trading account could be a person or an entity that's doing this those brokers have accounts at the trading venue at the lse at nasdaq for example when a match happens when a trade is matched it gets novated to what's known as a clearing counterparty a ccp that clearing counterparty is responsible for reducing risk in the system and they do that by ensuring that both of those parties those two brokers acting on behalf of the investors have the relevant amount of cash and shares to be able to transact once that ccp is happy

the trade then gets transferred over to the central securities depository there um there's the dtcc in the u.s one central central securities depository there's crest in the uk there's euro clear for bonds in europe um in uh in switzerland six the exchange actually has a separate cst that's all part of the six group but it operates independently and what a csd is is essentially like a bank that has accounts but it doesn't lend anything out it basically has safe deposit boxes digitally for securities and for cash and those

are operated by big custodians such as state street and bank of new york mellon two of the biggest in the world and the csd then does what's known as delivery versus payment or dvp and it essentially takes the the securities out from one custody account and puts it in the other and takes the cash out from the other securities account for the custody account and puts it into the other and so what ends up happening is you now have state street in this example holding the shares that investor a bought and bank of new york mellon holding the cash that investor b received for selling those shares and that dvd that dvp process is one of the most heavily regulated processes in

capital markets today okay so now that all sounds kind of complicated and there are lots and lots of moving parts and hundreds of thousands of employees that work in that clearing and settlement space but the reality is it's actually very efficient transaction costs for that whole process of clearing and settlement are less than one basis point per transaction on average in other words less than point zero one percent it's incredibly efficient and that's gotten that way over many many many decades of process refinement and improvement that's public markets today private markets on the other hand are catastrophic so what normally happens in private markets people go out they need to find they want to try and sell their shares in a

private company that's not trading on an exchange anywhere so they go to their local broker and they say hey can you find me a counterparty to buy these shares those brokers normally talk to each other and then they it's very opaque and they charge ridiculous fees in the process that's what happens today now in the last 10 years there have been a few private markets exchanges for shares that have sprung up two biggest in the world are in the united states and they are nasdaq private market and a group called forge which itself incidentally weirdly has just become a private company through an s pack acquisition so they now transact several billions of dollars a year in private share transactions but there is a problem

so all of that what is actually an efficient process even though it involves hundreds of thousands of people of clearing and settlement in public markets does not exist in private markets so when a transaction happens on one of these exchanges right now the two investors have to themselves between them with no exchange helping them figure out a contract to agree terms of that actual transaction that's going to happen obviously the buyer doesn't just want to hand over cash until they're sure they're going to get the shares transferred in their name so they need some sort of cash custody somewhere and they pay someone to do that they need the actual legal title transfer which involves several steps

depending on the country you're in what those steps are there needs to be a new share certificate issued or in the case of for example germany a notary to notarize a transaction a stamp duty paid etc etc etc so these normally these transactions take at best a few weeks usually a couple of months it's a bit ridiculous it's kind of madness we all have many people here probably involved in security tokenization in some form or have been exposed to it and the big promise of security tokenization is as we may know is basically that you can tokenize the cash and tokenize the shares have a smart contract sitting in the middle put the cash the digital cash into the smart contract put the shares into the

smart contract and when the smart contract is happy that it's there it reverses it out and sends it back to the to the other participants right great actually not so great and i'm going to tell you why there is a concept of a bearer versus a register instrument all security tokenization to date has been done as a bearer process and at first glance you might think that's a good thing let me tell you what a bearer instrument versus a registered security actually is so if this clicker for the powerpoint slides had value and it has some value and it were a better instrument than me holding it

right now as the bearer of it i am the owner and if i handed it to someone else then they would be the bearer so a coin a banknote these are bearer instruments a crypto token is absolutely a bearer instrument you send it to someone they're the new owner done a registered instrument on the other hand is where there is a registered list somewhere a centralized yes shock horror centralization but there are some reasons why this is good sometimes take for example your home ownership there is a land registry in every country that contains a list of home and land owners now if your home were a bearer

instrument let's think through that a little bit let's say you spend a lot of money on a brand new amazing house and you're in your house and you go out for a walk one day and on the way you drop your key your house key someone else comes along a bad actor as it were picks up your house key and goes into your house your house is a bear instrument they are now the owner of your house probably not too happy does that make sense if if you wouldn't want your house as a bearer instrument why would you want your company as a bear instrument

or the shares in your company that you've built over time and spent all of your hard work and dedication building turns out that this thought process is not new the first shares that were created on the amsterdam exchange to trade publicly a couple of hundred years ago were bearer instruments a lot of securities created a couple of hundred years ago and traded publicly and over the last couple of hundred years the world actually realized through a lot of trial and error that bear instruments actually have a lot of downfall they have some not so good sides to them as shown above and that's why today most of the securities the 700 trillion

odd securities in the world including derivatives are registered instruments and all of the regulation that's been built up around the world are based around right right um registered instruments it's not because people want to have centralized entities it's because it's actually better in some cases with all of that in mind when we started the company we entered the regulatory sandbox in the uk and we set out to create a truly digital shareholding that conformed within existing law unlike a security token where in the us for example they've been trying to create new law to fit this new category of security tokenization actually we

already have a very well-defined securities framework and so we set out to create a truly digital version of that so let's start off by defining what that actually means if you were to turn up to court of law i'm going to use the uk as an example because that's where we started even though we we progressively moved outwards to different countries and it turns out most countries are broadly similar so if we were to turn up at a court of law and the judge were presented with two persons one of which is saying i own these shares and the other person is saying no you don't then what would the judge look at and it turns out in the uk they look at four distinct things number one there's a share register of the company that share register is that list like

the land registry that contains specific information and every country has in its own legislation a very prescribed set of data that needs to be included in that share register second there are filings most countries have these in some variety in germany as an example it's actually just the case of a notary stamping a document in the uk there is a central authority called company's house and every company must do an annual filing of the share list of oh the shareholder list of that company second or third rather there needs to be a provable transfer of funds so in other words the person is claiming that they own the shares has to have shown that

they've bought them at some point and has to show a transaction record of that of that transfer and lastly this depends on the country in the uk there is a legal requirement to have a share certificate we took that first component share register and we created a distributed ledger which encompassed all of the legal requirements that went in to constitute that share and that included certain functionality that otherwise required a human to do such as a minimum holding period check something really simple so if someone were saying that today on the 29th of october they wanted to sell their shareholding that's recorded in that share register

but it turns out there's a minimum holding period until july next year then the share register itself in its technological digital form declines that transaction at a future date when the share register deems that it's that it approves a transaction then it also initiates the filings that are required and the regeneration of share certificates to conform with existing regulations so a truly end-to-end digital process the cache is okay to track tokens are obviously better and if we get to see you know central bank digital currency well that's even better because then it's truly stable and we can have everything completely tracked on chain this is where it gets really oh just

before that just to highlight this is not theoretical we've got over seven billion dollars of securities in this form already to date um for 80 companies and 3000 investors this is where it gets really cool because let's add in a tokenization layer now so with tezos we built out a public tokenization overlay which essentially creates public tokens that are linked directly to the underlying distributed ledger and that means that that token can be transferred between two parties because this is a registered instrument

that public token itself has a white list that ensures its own kyc compliance it checks that with the underlying registered list in distributed ledger and when a party is deemed safe they're added to that public token that white list and when that transaction happens it automatically updates the distributed ledger behind the scenes the private chain which in turn regenerates share certificates does any filings pays any stamp duty in the uk that's required and so on to ensure that legal settlement finality has occurred that token can also be transferred to any number of digital exchanges now just to be clear there are no truly functioning digital exchanges in europe yet there are a number which are in

progress obviously the sdx is a big project in switzerland there's one called architects in europe which is smaller but in the process of getting regulatory authorization i think in the next 12 months we'll start to see these up and running they've been in the works for quite a while so what does all of this mean for private markets and public markets worldwide there are an enormous amount of funds traded in securities traded in public markets globally that are fairly centralized public markets tends to be the pinnacle of mature companies that have already innovated and have come to market and listed their shares or debt instruments

between shares and corporate debt excluding government bonds excluding derivatives there's 110 trillion dollars worth of securities and public markets globally if you add in government bonds that's another 100 trillion or so if you add in derivatives that's another 500 trillion or so private markets on the other hand are nine trillion dollars today approximately and they for they operate in a very decentralized manner because of everything i've said earlier however private markets is where the true innovation happens when companies are smaller when they're mid-sized or in their small size that's where the real innovation happens and that actually

forms the greater portion of employment in our world in smaller companies not public companies what we're actually going to see as a result of the technological innovation that we've done but also the technological innovation that's happening across tokenization world and across security tokenization world is a very significant shift from public markets to private markets because the limiting factor in private markets to date has been the access to liquidity and so with that route to simple liquidity highly efficient liquidity it reduces the risk premium that's associated with private markets for institutional investors

therefore they're able to allocate a greater portion of their portfolio from public to private markets this is a monumental shift and it's going to change quite dramatically the way that our our world truly operates thank you very much