Within the capital markets, listed products are issued and traded in formal, regulated venues whereas unlisted and OTC products are typically issued, bought, traded and settled bilaterally between parties. While these products can benefit from being highly tailored in nature, the lack of established market structure gives rise to a distinct set of challenges.
Adopting centralised models has delivered significant benefits to the primary capital markets. However as these markets continue to evolve together with the new innovative products that they facilitate, as well as the increasingly varied demands of the investors that use them, we foresee the emergence of multi-tier markets. It is for those reasons that we embarked on this pilot project. We wanted to research and test the feasibility of using distributed ledger technology to serve as the underlying market infrastructure for unlisted and OTC markets.
it was clear that there could be structural improvements made to unlisted and OTC markets to increase their transparency and efficiency. However, we also wanted the distributed, non-standard nature of such markets to be preserved. This was the primary appeal for utilizing distributed ledger technology. A peer-to-peer network would still allow the market to retain many of its unique characteristics, avoiding the rigidity of a formal market venue, while at the same time allowing for open innovation in transparent, efficient and more cost-effective solutions for the future. With this in mind, an initial scope and conceptual blueprint was crafted to explore the feasibility of such a market. The objective was to prove that such a market could operate on a distributed ledger network. Of the possible unlisted products, we chose equity crowdfunding due to the relative white-space for this new product, which allows us to innovate and test potential solutions without being overly encumbered by legacy.
This pilot project uses two open Ethereum Smart Contract Standards, namely ERC20 and ERC721 to represent tokens and assets instead of building our own proprietary standards. The most popular communities within the Smart Contract space, is Ethereum, who are pioneering standards being adopted within distributed applications. Most major crypto-currency wallets that accept Ether now support or are in the midst of implementing support for ERC20 tokens. The Hyperledger Project, which is one of the large enterprise blockchain initiatives have also announced support for ERC20 and ERC721 for their Fabric and Sawtooth protocols.
Our industry blueprint lays down what the SC considers as the foundational elements for when building a distributed market structure. While we have provided general guidance and expectations on how certain elements are to be approached and thought about, it should really serve as a jumping-off point for further, more in-depth discussions on specific implementation details. It is our firm belief that for the capital markets, “decentralise everything” is not and probably will not be the final solution. We have demonstrated a path where it can work for unlisted and OTC markets, but given the diversity of asset classes and the different behaviours of each market, the technology solutions for the individual market infrastructures will need to be tailored to fit these specific needs.
We would like to thank the Neuroware.io team as our technology partner for this project and for their support during the early ideation through to the final implementation, as well as their willingness to challenge and push the boundaries of what was possible with this pilot project.