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A shareholder registry for blockchain securities

A registry is a list of shareholders with a real name and address, rather than just a blockchain address. Almost all countries require a stock issuer to keep a registry of shareholders. There are two reasons for this:

1) The issuer needs to communicate with shareholders to send disclosures (information), send distributions (dividends and liquidation), and do voting and governance.

2) Regulators want to know that shareholders have been through a KYC/AML process, and they want to be able to find the shareholders if necessary.

A real name, real-time registry also protects us from many problems that come up inside the blockchain technology itself. If there are problems with the token or chain, we can port the registry to a new token or chain. We can upgrade our technology. We can communicate with shareholders to fulfill our responsibilities.

We can even protect shareholders by giving them a way to appeal fraudulent trades and replace lost tokens. In the crypto world, if you someone takes your private key, or you lose your private key, you lose your coins. In the securities world, that is not acceptable. If you sell shares to grandma, and grandma dies and does not leave a key, you still owe the shares to her heirs. Professional investors need a reliable way to hold shares without taking a huge risk of getting hacked. We can solve these problems by adding an arbitration process that requires multiple signatures to cancel and replace lost tokens. The arbitrators would use the registry to figure out what to do.

Exchanges have an obligation to know their customers. A registry system is the magic ingredient that allows any qualifying exchange to work with any customer.

So, we have a legal requirement to keep a registry, and we have good business and technical reasons to want it.

The Aboveboard Registry

Aboveboard is building a registry system that connects qualifiers (brokers and KYC providers) with issuers. We put aside information about buyers when we qualify them for a whitelist. We send some of that information to the issuer when a buyer acquires a token and becomes a shareholder. We can also allow brokers to hold stock in “street name”, and we make it easy for them to fulfill their obligations to communicate with shareholders. We build this into an API for the broker, and an application for the issuer to interact with shareholders and capital markets.

The software wraps around a whitelist token like R-token or Polymath.

The issuer gets a control panel for compliance, transfer services, investor relations, and trading control.

But, Privacy

In its most direct form, we will record the real name and address of the “beneficial owner” in the issuer’s registry. The laws in most issuer jurisdictions are written to require that. However, this conflicts with the desire of some shareholders and traders to maintain their privacy, and with the laws in many countries that discourage distribution of personal data (such as a name and address) outside of the home country.

We can record some other owner, if we know that owner will be able to communicate with the beneficial owners (requirement 1) and report back to regulators (requirement 2).

The simple “KYC” provider

Some sell-side portals qualify investors through “KYC providers”. The KYC provider examines personal information and only provides summary qualifications (such as country of residence) to the issuer’s registry. This preserves privacy, and it can tap into an expanding network of “identity” providers and apps. However, it does not actually satisfy our two requirements. The simple KYC role does not cover the responsibilities of communicating with beneficial owners (requirement 1). And, issuers and regulators don’t select the KYC providers, so they can’t be sure that any given KYC provider will qualify accurately and report additional details promptly if requested (requirement 2).

In a mature system, reliable providers of these services are brokers, funds, “special purpose vehicles”, and custodians.

Brokers holding shares in “in street name”

Brokers can hold shares “in street name” for their clients. This is convenient for both traders, and for casual clients. In this setup, we would record the broker name in our issuer registry, and the broker would have to track their customer accounts internally, or by separate blockchain addresses. The broker would be responsible for communicating with the shareholders.

Funds and special purpose vehicles (SPVs)

Many investors will want to give their money to a fund manager. They delegate securities research and wallet security. There is a demand for both cryptocurrency and security funds. In this case, the fund is the real shareholder, and communications and shareholder rights go to the fund.

An SPV is a sort of fund that may hold only one stock. These are widely used to list foreign stocks on US exchanges as ADRs.

Custody

A big investor may use more than one broker, and ask a custody specialist to hold their wallet and manage the security. Custody for professional investors is an important emerging business. In that case, we can record the custodian as the owner, and we will trust the custodian to communicate with the shareholder.

In our design, most of the information about a buyer is kept locally in the qualifier database. If the qualifier is a broker, they do not need to share their customer list. We call it the “broker portal”. We automate delivery of information to the issuer registry and venue. We can also make it easy to create “street name” accounts, or custody accounts, for a list of existing customers.

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Blockchain-based securities: Regulations, news, opinions, and new issues

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Andy Singleton

Andy Singleton

Software entrepreneur/engineer. Building dollar DeFi at Maxos. Previous startups include Assembla, PowerSteering Software, SNL Financial.

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