As tokenized securities are starting to get more recognition and development of the necessary infrastructure is being finalized, we are starting to see the first companies actually making use of it. On June 11 the inevitable happened, Aboveboard, a delaware corporation, became the first company to issue and distribute stock on a public blockchain. why this is important.
How does it work?
Aboveboard “minted” all of its issued shares to a company wallet, and then distributed stock to the Ethereum wallets of employees. The stock is represented as ERC20 tokens, and the shareholders are tracked using own Aboveboard’s registry software.
What are the benefits?
Issuing a security comes with many heavily sought after benefits for both investors, issuers and regulators. As Andy Singleton, CEO of Aboveboard, wrote in a blog post: “With paper shares, you get really great fonts. With blockchain format shares, you get features for distribution, liquidity, control, and investor relations”.
Investors from many different countries can purchase the stock after qualifying to be on local blockchain “whitelists”. This makes a truly global distribution possible and hassle-free. Furthermore, approved investors can immediately trade a particular security on exchanges for private and public tokenized securities, this has the potential to significantly increase the liquidity of these assets, and hence also its valuation according to the liquidity premium theory. Finally, unlike cryptocurrencies, investors of tokenized securities also do not need to worry about theft or hacks since shares can easily be replaced.
Security token issuers strongly benefit from being able to remain compliant without a subscription agreement. The token itself can be programmed with the rules for handling private stock. Additionally, the issuer can not only easily add and remove approved investors, but also view a real time list of shareholders and turn trading off with a single switch if necessary.
How can other companies handle compliance?
The are currently three ways how companies can handle compliance when issuing a security token. Aboveboard used a network of brokers and qualifiers to create whitelists, in order to benefit from their networks consisting of local investors. Issuers can choose to use any set of whitelists and the registry will bring this distributed information together for the issuer. Furthermore, the registry provides a control panel for the issuer to manage all permissions and communication. Besides that, it also provides visibility for a company that is listed on many exchanges, and control for a closely held company that is not listed on any exchanges.
The second option is to make use of centralized exchanges. Issuers place a batch of their stock or “tokens” in custody with an exchange. The exchange then tracks all of the people who use the exchange, and tracks the owners of the stock using central transfer agents. This is the approach that seems to be favored by US exchanges like tZero. However, this option would be limited to US investors, and the need for a registry to track and control your shareholders in multiple markets and exchanges would still be there.
The third alternative would be the owner registration approach, where the buyer of a security is anonymous, but has some qualifications that are posted to the network, or to a whitelist. Later, when the owner wants to collect dividends or vote, he would have to register. This approach matches with the standard process for ICOs, which just keep a KYC/AML/Qualification portal open for new owners to come back and register. It does not maintain a stock registry, which is why distributing stock using this approach could be highly complicated, and it conflicts with rules that make bearer securities illegal in many jurisdictions. While this might makes sense for funds that don’t mind who buys their security, it certainly doesn’t for companies that are governed by shareholders.
What does the future hold for issuing stock on the blockchain?
Although Aboveboard was the first company to issue stock on the blockchain, it certainly won’t be the last. Major players like Goldman Sachs backed Circle, Overstock subsidiary tZero and Aboveboard itself are building the necessary infrastructure for trillions of dollars worth of assets to be tokenized on the blockchain. Only time will tell if this technology meets the expectations of industry experts, but the benefits it can potentially deliver definitely give it a good chance to do so.