tZERO Launches its Blockchain-backed Securities Trading Platform
On January 10, 2019, after extensive rounds of design, development, and testing, tZERO launched the technology necessary for its, wholly owned, broker-dealer subsidiary, PRO Securities, LLC (PRO) to operate its revolutionary security token trading platform. The platform which is now active and currently accessible only to accredited investors, enables trading and settlement of security tokens on the Ethereum blockchain.
In developing the trading ecosystem, tZERO and PRO took into account applicable laws and rules of the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and other regulatory authorities, and participated in discussions with certain regulators, in order to develop a trading platform that complies with all regulatory requirements.
Although this approach was time consuming and demanded extra attention and resources, tZERO believed it was necessary to ensure a high level of confidence in the regulatory compliance of its platform. tZERO believes this approach, to fully consider and factor in the compliance aspects, is a key factor for excellence in the rapidly developing and legally complex field of blockchain-backed services.
Through a broker dealer of tZERO, accredited investors can open a brokerage account. Once the identity and status of the investors are verified and cleared through a KYC/AML process (designed to fully comply with all applicable laws and regulations) investors are free to trade on the platform.
Once an account is funded with either currency or security tokens, trades can be initiated and completed though the platform. The platform’s design currently supports ERC-20 compatible security tokens, but in the future other token types, as well as cyrptocurrencies may be supported.
The platform, with its blockchain-backed design and process, introduces additional utility to both investors and the capital markets. The platform benefits the investors by reducing the trade settlement waiting period and it benefits the capital markets by increasing asset and fund availabilities.
Benefiting the Investors
In the 2015–2017 period, the securities markets community in the United States undertook a significant effort and initiated a coordinated market-wide project to reduce the equity securities trade settlement time from three days (T+3) to two days (T+2) after trade. The size of this effort and the difficulty in coordinating this market-wide change was partly due to the multitude of parties that are involved in a securities transaction, beginning from the act of trade itself, all the way, to the act of trade settlement.
Despite this enormous endeavor and the resulting settlement time reduction, investors’ orders still needed to pass through a number of securities intermediaries in the two days before trade settlement. Still, the need for shorter trade to settlement time persisted.
Applying the blockchain technology to the financial markets, introduces another leap of growth in reducing trade to settlement time for the securities industry. By designing and building its trade and settlement processes on a public blockchain, tZERO’s platform reduces the trade settlement cycle from T+2 to same day settlement (T+0 or simply T0). This is because the trade and settlement, both of which happen on a blockchain, are part of the same event. As a token is transferred from a seller to a buyer, the trade is concurrently settled. In other words, “The Trade is the Settlement,” ™ and there is no additional waiting period required.
As a trade is conducted, sellers will receive funds on the day of trade and buyers in turn will receive securities on the day of trade. The seller can now use the funds available two days earlier than in the past. The buyer, who now owns the securities two days earlier, can also benefit from the earlier possession of the securities and can more readily meet the corporate “ex-date” and “date of record” cut-offs for dividend distribution.
Benefiting the Capital Markets
By eliminating the trade settlement’s two-day lag, sellers and buyers will have same-day access to the cash and securities expected, allowing them to move on to their next investment opportunities. Elimination of the time lag allows cash and securities to quickly re-enter the trading markets, thereby permitting faster trade iterations and more liquidity in the markets. This increased liquidity and the possibility of faster trade enables a more dynamic and responsive securities market.
Furthermore, having a publicly accessible and verifiable record of transaction on the blockchain provides for greater transparency and auditability in the capital markets. While maintaining privacy of the investors and confidentiality of the trades, the public records on the blockchain takes openness and transparency to a new level.
Toward its mission of advancing the capital markets, tZERO has planned out an ambitious product development and introduction roadmap while continuing to enhance its existing products and services. In the coming months, tZERO aims to expand its platform functionalities, increase its exchange liquidity, list additional tokens to trade, list new asset types, and participate in more diverse markets. Stay tuned!
