Why Not a Database? How Distributed Ledgers Can Change Securities & How they Move
(Part 4 of 4: The Future of Blockchains and securities)
How the movement and record keeping for digital assets works differently than previous models and how this can help solve custody and settlement issues.
In the first three articles of this series we covered an overview of blockchains and distributed ledger technology, how publicly traded securities and markets were created, how they have evolved and how they work in modern times. Now we will cover how blockchains and distributed ledger technology can potentially solve some of these problems and create improvements in the way that markets work.
The current global stock markets, as discussed, are now run with distributed ledgers. However, these ledgers, while distributed among many parties, still rely on a centralized trusted third party to manage a master ledger. A blockchain can power that ledger. In this model the trusted third-party can either rely on a blockchain rather than their own internal database or issuers and the marketplace can eliminate the trusted third-party entirely using a blockchain as the main settlement ledger to indicate who owns what.
You can use the power of a trustless distributed ledger whether the blockchain knows your token exists or not.
This also works on any strong chain. For most purposes I use Bitcoin to illustrate.
Think of a blockchain like the weather: it could be referenced in a contract which could be legal but, like the weather it does not need to know that the contract exists and does not need to interact with contract for the contract to be valid.o
Many crypto users intuitively know how digital items with value should move because they know how they can move and they have used Bitcoin and other instruments without needing to rely on trusted third parties.
This allows people to move items which have value over great distances and through jurisdictions in an easier way than ever before possible.
We know Bitcoin can do this technically and we know that the world of contracts and agreements can see it enforced.
To demonstste this concept, this video, I created a real security using Bitcoin, Open Dime & a pen.
This has been done in larger scale as well. Overstock created a real security using a blockchain for the ledger and others have followed. Delaware and Wyoming have laws which recognize a blockchain as the ledger keeper for securities.
This tech works. It has been employed, tested and proven. Securities tokens have been issued on Bitcoin and other chains. I believe this will continue and increase.
The technology and benefits are clear. The main questions surround regulatory issues. While some have said that the regulatory environment is unclear, I believe that, at least in the US, it is been quite clear and consistent all along. Definitions of what a security is have been in existence in the United States since 1933 these rules are clear, they are federally enforced and they are unlikely to change. The definition of a security is very broad and many cases where money is raised using token which offer share ownership or other similar terms will be considered securities. Certainly this is the case in the United States and other similar jurisdictions.
We will still need to do some work on the logistics of how many of these issues work: how regulators view assets will with properties similar to bearer assets and how more complex and unusual structures surrounding smart contracts and instruments which may not be securities are handled.
What could this mean for the future? Aside from a much more efficient, global and quicker settlement system we could see a sea change in how capital is raised and how risk is allocated. This could unlock trillions in illiquid capital and we could see a million businesses publicly traded. It will shake and transform the foundations of all we know about how capital formation and the global economy works.
Right now there is a high barrier to entry for a company to be publicly traded. There is also a high barrier to entry for companies to even simply issue stock and have a large number of shareholders. Some of the challenges come from various regulations, but many of the challenges come from logistics: it is simply very difficult for small business to maintain a ledger and expect any kind of robust secondary market trading.
The ability for businesses, not just small but midsized and large businesses, to issue shares and not have to directly maintain the ledger of who owns what is very significant, likely just a significant as when the Dutch East India Company offered shares which were able to trade on the secondary market.
What does the world look like when it’s much easier to issue shares? Why couldn’t your local sandwich shop or small business have shares which trade on a distributed ledger? This has massive potential for the way that value is unlocked and how the world works.
500,000 Public Companies in Your Global Portfolio
Imagine if we had 500,000 publicly traded companies, businesses with over $1 million in sales or so would commonly have wide raised shareholders. This would give them new means of raising money, new rate means of gaining financing it would place a real value on the enterprise, increase the chances of business exits, successful transitions and expansion and allows a robust community of shareholders — the ownership structure of companies become much more fluid and changing. From an investor standpoint it’s appealing as well: we could have portfolios with 2000 companies, some holdings as little as $100 or so — I could invest in small businesses in Syria which I think will take advantage of the recovery while also having my portfolio rounded out by Korean tech stocks and South African medical supply companies.
There is a lot of work to do but this technology is real, has new capabilities, it changes the way ledgers work and it’s here to stay.
I think it will be massive.
Imho the best way to do build this future is with trustless, open source systems.
If you want to work on this let’s do it.
We are setting up a series of workshops in the NH countryside (or Seacoast) an hour from Boston http://BlockchainNH.com is one conference, there will be others.