Encoded Compliance: How this not so sexy aspect of tokenized securities will change the future of finance
Blockchain technology will indelibly change the global financial system by ushering in increasingly autonomous methods for issuance, management, and trading of securities. Fractional ownership, 24/7 markets, and depth of liquidity in historically illiquid asset classes are often cited as the notable potentials of tokenized securities. But encoded compliance controls that automate regulatory aspects of securities exchange are often overlooked — while everyone at a dance party is focused on the music, the floor and gravity usually goes mostly unnoticed.
To appreciate automated compliance and the impending evolution of our financial system, it’s important to understand some basics about existing securities law and notable processes that occur under the hood.
History — United States Securities Law
After the Great Depression hit the industrialized world in 1929, the SEC (Securities and Exchange Commission) was formed to regulate financial markets. The genesis of the SEC and modern securities law is based on two fundamental pieces of legislation. The Securities Act of 1933 and Securities Exchange Act of 1934.
The Securities Act requires registration with the SEC to issue a security (or file for exception). The issuer is obligated to maintain compliance with the Securities Exchange Act to facilitate secondary trading. This includes filing annual, quarterly, and current financial reports with specific information regarding a given security and the participants involved in any exchange.
Trade Execution & Settlement
Selling and buying securities involves two distinct processes — execution and settlement. Execution is the process by which buyers and sellers are matched. When a price and amount of a given asset is matched, the agreement is recorded. Settlement occurs when the asset exchanges custody.
Execution of trades is easy and rapid. Exchanges like the NASDAQ can execute thousands of trades a second. But the settlement process can last two days or more after the trade is originally executed. The lag occurs because of resource intensive reconciliation processes between broker-dealers, exchanges, and custodians.
When an asset changes custody, numerous aspects of the buyer or seller and the asset itself must be logged and reported to ensure legal transfer. Custody of an asset can only change hands after all of this information is validated and relevant regulatory considerations taken into account. Failing to provide proper reporting can result in serious penalties and consequences.
This may sound simple and straightforward. But each entity involved in a securities trade usually has their own database and distinct methods of indexing data. Without a shared source of information, each entity is forced to manually reconcile data with one another. The process is error prone, costly, and slow.
Reporting Under the Hood
Maintaining financial reporting as an issuer is extremely cumbersome. Aspects of securities custody and trading that need to be traced and reported include accreditation status, quantity, holding duration, location, AML (anti-money laundering) checks, transaction monitoring and exposure limits. The information is stored “on paper” in PDFs, paper contracts, and various cloud based spreadsheets. Unsurprisingly, because of the disparities in data management the settlement process can be slow and expensive. Without a shared source of information between relevant entities, data is manually reconciled between custodians. The process has only become more demanding with the introduction of legislation such as MiFID II (markets in financial instruments directive).
Long term there is a very clear need and vision for a “shared golden source” of information. If all of the main parties involved in a trade indexed all aspects of securities issuance and trading in the same way, while using interoperable DLT (distributed ledger technology), manual reconciliation could be nearly eliminated. This would result in the ability to generate (automated) reports for regulators easier by several orders of magnitude.
“Geo-Fencing”
Whether issuing or trading securities, market participants must comply with the regulatory framework in the jurisdiction they reside. “Geo-Fencing” is a concept that entails encoding accounts and tokens with transfer limitations that reference underlying, on-chain share registries and identity information, in order to guarantee that the exchange of a given security is compliant with securities laws.
For example, assume the vision described in this article comes to fruition. Person A would simply sign up an account with Chintai. This would include KYC procedures and registering accreditation status which can be automatically cross checked by smart contract. Person B also has an account with Chintai except they have not registered their accreditation status. Both person A and person B are United States citizens.
Person B attempts to trade a security with Person A, but a smart contract recognizes that they have not registered their accreditation status. Since the security in question is encoded to only allow transfer to accounts that have achieved accreditation status, the smart contract would not allow the trade to execute, thereby automatically enforcing compliance.
Implications for Securities Trading & Regulated Decentralized Exchanges (DEX)
The aforementioned example is simple, but it’s easy to imagine how accreditation status is interchangeable with numerous checks that are required to take place before a securities trade could occur. Furthermore, this concept introduces the idea of a DEX for securities trading. Whereas the current process of accessing securities trading requires entering a “walled garden” that is provided by primary issuers and broker-dealers, the future could entail a far less restrictive environment to trade securities on a DEX that automatically confirms the validity of a trade based on securities law in real time.
Regulatory Oversight In Real Time
By porting legacy financial systems to DLT a unique opportunity arises whereby real time regulatory oversight, monitoring of transactions, and updating legal requirements for industry participants in real time is possible. By sharing a unified, trustless source of accurate, transparent data, regulators would no longer be “left in the dark”. Current methods of reporting are always behind real time due to the aforementioned friction points and inefficiencies in the global financial system. Consequently, regulators are always catching up to real time and do not have the resources to efficiently synthesize all of the data being received.
Updating Compliance Obligations In Real Time
Legal frameworks and regulatory requirements are constantly evolving. This requires industry participants to constantly adapt to new compliance obligations. In a future that fully leverages DLT, new rules could be issued on-chain. Depending on the nature of the regulatory requirement, new rules could either be updated and enforced immediately, or participants could make simple code changes that can be audited in real time with automated oversight.
Industry Trends & Vision
Chintai is an exchange and product suite for decentralized finance instruments. We service B2B white labeled blockchain technology for institutional finance — fully on-chain, compliance enabled DLT for issuance, management, and secondary trading of tokenized securities.
Conversely, competitors are mostly focused on issuance and cap table management software and do not offer high performance secondary trading capabilities. Since other solutions are built on protocols that cannot support low-fee, high performant, compliance enabled solutions fully on-chain, many aspects of issuance and management are handled off-chain. These sacrifices undercut the efficiency gains of a fully on-chain, transparent, compliance enabled solution.
We see an opportunity to build unique solutions that fully embrace the potential of blockchain technology with entirely on-chain compliance enabled products. By keeping all aspects of issuance, management, and secondary trading fully on-chain, Chintai preserves a vision that enables issuers, regulators, and other industry participants to maximize the efficiency gains of DLT.
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将合规控制写进代码里: 这个功能不起眼，未来金融却因此而改变
区块链技术的出现，将不可逆转的改变全球金融体系。借助于区块链技术，证券发行、管理与交易有了更多自主的方式。以房地产为例，这一历史上流动性较低的资产类别，会通过代币化证券的方式，获得所有权拆分、7x24小时无间断交易、以及更好的交易流动性。但是，证券交易平台的合规监管，往往会被忽视：舞会上歌舞升平，人们沉浸在音乐之中，却忘记了舞台和灯光，忘记了幕后的辅助者们。用编码方式实现自动化合规控制，为证券交易平台提供了新的潜力。
要理解自动合规和即将到来的金融系统的演变，有必要了解现有证券法的一些基础知识，以及发生在幕后的精彩过程。
美国证券法的历史
在1929年的大萧条之后，美国证券交易委员会(SEC)成立，用于监管金融市场。1933年的证券法案和 1934 年的证券交易法案，奠定了 SEC 和现代证券法的基础 。
证券法案要求，如果要发行证券或申请例外豁免，需要向美国证券交易委员会注册报备。证券发行人有义务遵守证券交易法，方可从事二级市场交易。这包括提交当前财务报告、季度和年度财务报告，需要列出特定证券的具体信息，并披露从事交易的相关各方的详细情况。
交易执行及结算
买卖证券，涉及两个截然不同的过程 — — 执行和结算。执行是买家和卖家匹配的过程。当给定资产的价格和金额相匹配时，会记录下来一笔交易。而结算过程涉及到资产的托管者变更。
交易的执行简单而迅速。纳斯达克(NASDAQ)等交易所一秒钟可以执行数千笔交易。但在交易最初执行后，结算过程可能持续两天或更长时间。交易结算过程滞后，是由于经纪交易商、交易所和托管机构之间协调过程复杂，需要进行大量的共工作。
当资产托管权变更时，必须对买卖双方和资产本身的许多方面进行记录和报告，以确保资产可以合法转移。只有在确认所有这些信息并考虑到相关监管因素之后，资产的托管权才能易手。提交报告不当，会带来严重的惩罚和后果。
这听起来简单明了，但是，实际情形并非如此。
证券交易中的每个实体通常都有自己的数据库和不同的数据索引方法。如果没有共享的信息源，每个实体都必须手动协调彼此的数据。这个过程很容易出错、成本高昂，效率低下。
在财务报告背后，工作繁杂
证券发行人准备财务报告时，要做极其繁琐的工作。证券托管和交易，需要对多种信息进行跟踪和报告，包括认证状态、数量、持有期限、地点、“反洗钱”检查、交易监控和披露限制等等。这些信息以 pdf、纸质合同和各种基于云服务的电子表格的形式存储。毫无疑问，由于数据管理的差异，结算过程可能会缓慢且昂贵。如果相关实体之间信息源不共享，就要在不同公司的管理员之间手动同步数据。随着 MiFID II 等法规的出台，这一过程变得更加苛刻。
长期来看，对于信息的“共享黄金资源”有着非常明确的需求和愿景。如果交易中涉及的所有主要参与方以相同的方式对证券发行和交易的所有方面进行索引，同时使用具备互操作性的 DLT (分布式账本技术)，那么，就几乎可以省掉人工对账过程了。这样一来，证券发行者想要创建财务报告提供给监管机构，容易程度提升了好几个数量级。
“区域限定”
无论是发行或交易证券，市场参与者必须遵守其所在司法管辖区的监管框架。
“区域限定”是指：需要通过编码方式，对帐户和代币进行转账交易限定，确保证券的交易符合证券法的要求。这些帐户和代币可以引用底层、链上的共享登记信息和身份信息。
例如，假设本文中所描述的愿景已经实现，用户老王在 Chintai 注册了账户。注册时，会完成 KYC 程序和注册认证，可由智能合约自动交叉检查。用户小张也在 Chintai 开设了账户，但是并没有获得许可资格。
现在，如果小张想跟老王交易证券，但智能合约检查发现，小张没有注册自己的认证身份。由于通过编码控制，限定只允许将证券转给已认证的帐户，因此，智能合约会中断交易，从而实现了自动合规的控制要求。
对证券交易和合规去中心化交易所(DEX)的影响
上面的例子很简单，但很容易想象在证券交易发生之前，如何对交易账号进行大量的自动核查的。此外，这一概念还引入了证券交易 DEX 的概念。目前，想要进行证券交易，有不小的门槛，需要通过一级发行商和股票经纪人所提供服务的 交易场所，如同“围墙花园”一般。未来证券交易可能通过更为便捷低门槛的合规 DEX 进行。在这个 DEX 之中，会根据交易法的要求，对交易的有效性进行实时自动确认。
实时监管
将 DLT 分布式账本技术提供给传统的金融系统，会创造出独特的机会，可以对交易进行实时监管监察，并实时更新对行业参与者的法律要求。由于前文所述痛点的存在，全球金融体系的低效率，导致目前财务报告方法总会滞后。因此，监管机构总是疲于追踪进度，缺乏足够的资源来有效地综合接收到的所有数据。通过共享一个统一、去信赖、准确、透明的数据来源，监管机构将不再“被蒙在鼓里”。
实时更新合规义务要求
法律框架和规章要求不断演变。这要求行业参与者不断适应新的合规义务要求。在充分利用 DLT 分布式账本技术的未来，可能会在链上发布新规则。根据监管需求的性质，可以立即更新和执行新的规则，或者参与者可以进行简单的代码更改，这些更改可以通过自动化的监督进行实时审计。
行业趋势和 Chintai 的愿景
Chintai 专注于分布式金融领域，既提供了交易平台，也为 DeFi 领域提供了金融产品套件。我们为金融机构提供 B2B 白牌区块链技术服务 — — 全部链上执行，提供内置的合规控制，用于代币化证券的发行、管理和二级交易。
Chintai — DeFi Multi Exchange
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