Blockchain Technology and the Capital Markets Explained by Laura Anthony, Esq.

I’m attorney Laura Anthony founding partner of Legal & Compliance, a full service corporate, securities, and business transactions law firm Today is the continuation in a LawCast series talking about distributed ledger technology, also known as DLT, or blockchain

As discussed in this LawCast series DLT applications have already impacted the securities industry Many financial institutions have already established in-house or third party research teams to build and test DLT networks and applications Related to governance a basis of DLT technology is that it is an open network with no centralized governing power or operator FINRA notes that although there are benefits to this system, there are also issues, such as how to handle a large volume of transactions effectively As a result, some closed networks have started

Where participants are pre-vetted trusted parties In the capital markets, questions will need to be answered related to the operations of the network, and who has responsibility for what aspects For example, who would decide governance and internal controls and procedures? Who would enforce these governance rules? Who would be responsible for day-to-day operations, including addressing system failures or technical issues How will errors be rectified, and how will conflicts of interest be addressed? Related to operational structure, any DLT network will need to consider its operational structure, including a framework for Network participants access and related on-boarding and off-boarding procedures, transaction validation, asset representation, such as shares of stock and data and transparency requirements A network will need to establish its criteria and procedures for establishing and maintaining participating members and determining their level of access

Controls and procedures will need to address, criteria for participants to gain access to the network at all Vetting and onboarding process, including identity verification and user agreements, and off-boarding process for both industry off-boarding as a result of non-compliance and voluntary off-boarding Monitoring and enforcement procedures for compliance and rules of conduct, establishing various levels of access and access for regulators Networks will need to determine a method for transaction validation In the short history of blockchain there have already been different methodologies

Validation can be consensus based, single node verifier or multiple node verifier Each method has pros and cons And the specific algorithms and processes would need to be ferreted out On the topic of asset verification, networks will need to determine if the actual asset will be directly issued digitally, which only works for certain assets, such as intangibles, stock or agreements representing ownership interest for example, or issue traditionally and be tokenized on the network If tokenized, further thought must be given to security handling loss or theft of the underlying asset, fractionalization issues, handling changes such as reverse or forward stock splits or conversions and new issuances as just some examples

Likewise, thought must be given to the handling of cash on the network, including the settlement of transactions In that regard, could tokens become a form of cash and if so, how would they ultimately be converted into established government currencies, known as fiat currencies Ownership and almost any asset could also be tokenized, such as diamonds, gold, precious metals, art, etc, creating issues of custodianship and security for the underlying asset Intangible assets would be relatively easy to tokenize Fungible assets would be easier than non-fungible assets, with unique assets being the most difficult

And network will need controls and processes related to data transparency, including public or shared information versus private information I’m securities attorney Laura Anthony, founding partner of Legal & Compliance, and producer of LawCast Should you have any questions about today’s topic, please visit SecuritiesLawBlogcom and LawCastcom, or contact me directly

Inquiries of a technical nature are always encouraged

Source: Youtube


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