What does Estonia and Canada have in common?
Both have regulator-engaged equity-linked token experiments.
Unimpressed
Reddit was not impressed when a Trustnode’s piece hit the top of r/Ethereum. The article reported on large cap, American, single issue stocks being linked to ERC-20 tokens by a firm in Estonia, DX.Exchange. While the majority of American investors might struggle to see the point, or not trust Estonia, there are investors who might look forward to this form of financial liberalisation and be willing to trust the 1.3M person republic. For instance, anybody maintaining businesses in the black or grey market, hedge funds operating in the programmable capital space, or citizens of countries with oppressive regimes.
Many Questions
The ERC-20 forms of linked equity brings up many questions.
- Will these trade on decentralized exchanges?
- Can they be used as collateral, for CDPs?
- Will the price stay coupled to the regulated, centralized, and non-programmable markets?
- Will US regulators attempt to shut it down?
- Will the firms with their equity linked (Tesla, Apple, Google, etc.) firms notice? Or care?
- What happens to corporate actions?
With the emergence of an “AAPLT-ETH” pair, micro-structure for actual equity trading could emerge along-side the same interfaces wherever these tokens trade. Could this be the first part of a transition or priming, where the next phase involves listing a firm’s equity both in New York and on the Ethereum mainnet? Could a form of Norbert’s gambit, eventually, be orchestrated between a centralized and decentralized market?
Jasper
Up in Canada, they are a little more conservative, and way more centralised. The Jasper III project completed, with the report released in late October 2018. The outcomes from the proof of concept, where the Bank of Canada (BoC), and the Canadian Depository for Securities (CDS), used a “Non-Enterprise Version” of R3’s Corda to “tokenize” both equity and cash. They created tokens linked to the legacy forms of equity which is traded on the TSX. They used a ledger to effectively trade intraday, which settled inside the PoC instantly in an atomic way, but then used the legacy financial market infrastructure to run the legacy 3-day settlement process.
The most encouraging foreshadowing came from part of the key outcomes.
Overall, a more ambitious re-imagining of clearing and settlement in a decentralized form, guided by market pain points in the settlement life cycle, would also create a more informed premise for benefits assessment.
SECURITIES SETTLEMENT USING DISTRIBUTED LEDGER TECHNOLOGY – 1.4 KEY OBSERVATIONS (pg 9)
A Rose By Any Other Name
The act and implementation of tokenization in Canada, is wildly different than in Estonia.
Tokenization by the regulated startup in Estonia, involves creating a transparent registry of pseudo-anonymous owners with associated quantity on the Ethereum blockchain using a smart contract, where the tokens represent a claim on shares held on deposit by the broker. Trust that the claim is legally binding is necessary. In a sense, even if the claim came with some observable non-zero counter-party risk, the claim itself likely meets the definition of programmable capital.
Tokenization by the regulated agency in Canada, involves using inputs and outputs representing quantities, on a distributed ledger to track provenance across single-use confidential identities on a private installation of Corda, where the tokens represent a claim on shares held on deposit by CDS. Trust that the claim is tracked by the notary is necessary, but should be near-zero given the open-source nature and implied policy support. With an increase of scope in future ambitions, to support more interoperable control, the claim itself could meet the definition of programmable capital.
The one thing both implementations have in common is that for these forms of equity, neither would meet the current working definition of programmable capital. This is because the explicit ownership, of the equity (as opposed to just the claim), could be considered ambiguous and require governance of third-parties to enforce.