It is not surprising that the advent of blockchain technology, with its extraordinary and unique properties, has begun to precipitate a global paradigm shift in the ways in which traditional technology is utilised in the current financial system. As players in the FinTech space become more aware of this technology and the advantages to be had from its application, it has taken up position as the wave of the future; the new Internet.
Fundamentally, Blockchain technology is a new way of recording – both documenting and authenticating – data, on the internet. What makes the technology attractive is its uniquely transparent, unchangeable and distributed, decentralised structure. The contents of each block can be viewed publicly. They are timestamped, and each block is cryptographically linked to the previous, creating a chronological chain. This makes them virtually incorruptible, with multiple copies of each block stored in several locations, in a decentralised framework. To effectively hack the blockchain, every block, within a string of blocks, and in multiple locations, would all have to be compromised. This exercise would require a great deal of computing power, time and effort.
The aforementioned features of the Blockchain have caught the attention of several software developers, who have utilised the technology to create applications for social networking, games, storage platforms and even online shopping; the possibilities are almost limitless. However, while the technology has the potential for a vast number of applications, one of the most recent has been that of the listing, clearing and settlement of digital assets.
There are several definitions of digital assets, however, irrespective of the definition, all share three key elements. Firstly, they exist in a digital format, i.e. they exist as 1’s and 0’s, in binary format. Secondly, they have value and can generate future value, and finally, they are both searchable and discoverable. In broad terms, a digital asset is anything owned, licensed and controlled that exists as an electronic record. Traditionally, the term referred to things like emails, documents, images, audiovisual content and the like. In the investment space, however, the term digital asset is constantly evolving to accommodate the inclusion of new and novel asset classes, such as tokens – including payment tokens, utility tokens and, crucially, asset-backed tokens.
Tokenisation: the conversion of the value stored in an object – tangible or intangible – into a token that can be manipulated along a blockchain system.
Asset-backed tokens, more specifically securities tokens, are more likely to be adopted earlier than other token variants because of their close similarity to traditional securities. They derive their value from real world assets and are tradeable, thus satisfying the Howey Test’s definition of a security and subject to securities regulations. What differentiates them from traditional securities, as previously stated, is the fact that they exist in the blockchain space. They are essentially a bridge between the present and the future, and the transition to securitised token trading is currently looked upon as simply the next step in an evolutionary process.
The main shortcoming of securities tokens – and digital assets in general – is the absence of proper regulation to assist in legitimising their existence. While many view regulations as being prohibitive, the fact remains that sound regulation promotes transparency, accountability and generally instills confidence in a marketplace. In a nutshell, securities tokens traded on a blockchain platform, operating within the confines of an established Stock Exchange that is regulated by high-quality, flexible regulation, could unlock large amounts of liquidity – not just within the jurisdiction, but across the globe.
This shortcoming of securities tokens has not gone unnoticed however, and many jurisdictions across the globe have begun work on establishing regulations that allow for their inclusion with traditional financial instruments. In the Caribbean, several jurisdictions from as far north as the Bahamas, to Barbados in the south, have expressed interest in exploring the listing, trading, clearing and settlement of securities tokens and other digital assets. This has become a priority in most jurisdictions, as they vie to retain their economic allure, especially to the growing number of financial visionaries who are all seeking a quality jurisdiction to call their ‘home’.
Having recognised the growing global shift from Initial Coin Offerings (ICOs) to Security Token Offerings (STOs); the principals of the Barbados Stock Exchange Inc. (BSE), the Financial Services Commission (FSC), the Central Bank of Barbados (CBB), and members of Barbados’ International Business and Financial Services Sector (IBFS), made the collective decision to investigate further. The aim was to explore the potential opportunities and benefits that could be derived from the application of blockchain powered technology, to facilitate the listing, trading, clearing and settlement of securities tokens. Research conducted by the BSE revealed that while there were many service providers in the blockchain space with working solutions, what was lacking was the provision of a transparent, efficient and well-regulated jurisdiction in which these securitised tokens could operate. To this end, the BSE commenced work on a body of rules that would be added to the existing rules of its International Securities Market (ISM). These rules would allow for the addition of digital assets as an asset class that could be listed and traded on the board of the ISM.
On December 19, 2018, the BSE submitted its ISM Special Listing Facility – Digital Assets – Series 9000 Rules to the FSC for review and approval. The BSE simultaneously issued the ISM Guidance Note – Application of Special Listing Facility for Digital Financial Assets to further explain the application and interpretation of the submitted Series 9000 Rules. The Guidance Note outlines the purpose of the Special Listing Facility; ‘to incorporate a flexible and responsible framework for the listing of Digital Assets, to be applied in a manner which is responsive to the development of the emerging sector of Digital Assets, the provision of listing facilities therefor and the facilitation in trading thereof’. It is also intended ‘to provide a mechanism for the listing of Digital Assets on a Recognised Platform…’ as well as to ‘ensure that the trading in Digital Assets on a Recognised Platform is conducted in a transparent manner, consistent with the regulatory approach adopted by the Financial Services Commission and applicable ‘Rules of Law’ in Barbados or elsewhere, and the appropriate industry standards as applied from time to time’. While there are many definitions for digital assets, the Special Listing Facility of the ISM broadly defines a digital asset as ‘a cryptographically secured digital representation of a set of rights provided on a digital platform issued or created (or to be issued or created), for commercial exploitation or reward, and which are exchanged and traded or cleared on a network of inter-linked and secured decentralised digital records (blockchain)’. It must be noted, however, that the Exchange reserves the right reject any application for listing should it be deemed unfit.
As with any other listing on the board of the ISM, Issuers of digital assets will be required to procure the services of a BSE approved Listing Sponsor. The Listing Sponsor is familiar with the Rules of the ISM and the Special Listing Facility for Digital Assets and is required to conduct the necessary due diligence to ensure the Issuer meets the requirements as outlined in the rules. The Listing Sponsor must also maintain all information related to each promoter, dealer and participant in any trade or exchange of Digital Assets and must be prepared to make this information available for review, at any time, by the appropriate regulatory authorities. The BSE firmly believes that the ISM Special Listing Facility – Digital Assets – Series 9000 establishes the appropriate regulatory framework that would allow for the transparent listing, trading, clearing, custody and settlement of digital assets on an efficient stock exchange.
Although the Rules are still pending approval, the BSE has been working with various vendors to supply a blockchain based solution to facilitate the trading of digital assets. After reviewing several solutions, the BSE commissioned a pilot project involving staff members of the BSE, members of the local brokerage community and the Regulators – FSC – and a software developer to test whether their application was capable of meeting and/or exceeding the needs of all parties involved. The project was deemed a success and, on February 26, 2019 in a joint press release, the BSE and software developer – Blockstation – announced the signing of a Memorandum of understanding (MoU) between the two companies.
Blockstation is a Canadian FinTech company founded in 2014 that;
‘provides one of the first end-to-end digital asset trading solutions for stock exchanges. It offers turn-key, compliant listing, trading, clearing and settlement of digital assets and security tokens, used by the exchange’s ecosystem of broker-dealers, investors, issuers, depository and regulators.’
Their software solution is touted to allow stock exchanges to ‘quickly meet growing investor demand for digital currencies and security tokens and leverage new global listing and trading revenues’. It is also ‘built to be institutional-grade, the technology platform and product suite are built to fit with existing infrastructure, trading processes, risk management and regulatory frameworks’. Managing Director of the BSE, Marlon Yarde noted;
“We are pleased to sign this agreement with Blockstation to accelerate our go-to-market strategy for security token offerings. We want to provide access to capital and liquidity for both local and international businesses through our International Securities Market (ISM). Blockstation’s built-in compliance tools were absolutely pivotal in securing the support of our regulator. We believe that a partnership with Blockstation, and their technology solution, will strategically position us to grow our digital asset business going forward.”
In late September of 2018, Bitt Inc. – a financial technology company in Barbados – held its annual blockchain conference under the theme: Central Bank Meets Blockchain: From the Ground Up. At the conference, Barbados’ first female Prime Minister, Mia Amor Mottley, informed attendees of a new digital currency pilot project between Bitt, the CBB and the FSC to be commissioned. The mMoney pilot program would facilitate electronic and digital payments for Barbadians. One month later, Prime Minister Mottley announced, at a media conference, that businesses and consumers alike were signing up to the program, and noted that the Government intended to attract FinTech companies – both local and international – to a Regulatory Sandbox formed earlier that same month. “We must embrace new technologies to be cutting edge,” Prime Minister Mottley remarked.
The introduction and application of blockchain technology – the new internet – to list and trade securities tokens – the next proposed iteration of traditional securities – is both new and cutting edge. The partnership between the BSE and Blockstation further solidifies the BSE’s commitment to supporting the Government of Barbados as it strives to transform the country, leading the charge into a new digital economy.
Barry Blenman Barry Blenman is the Operations Supervisor of Business Development at Barbados Stock Exchange Inc.
Marlon E. Yarde Marlon E. Yarde is the Managing Director at Barbados Stock Exchange Inc. and the Barbados Central Securities Depository Inc.