Introduction to Distributed Ledger Technology or Blockchain




Posted by on August 29, 2017

Introduction to Distributed Ledger Technology or Blockchain- On July 13, 2017, FINRA held a Blockchain Symposium to assess the use of distributed ledger technology (DLT) in the financial industry, including the maintenance of shareholder and corporate records. DLT is commonly referred to as blockchain. The symposium included participation by the Office of the Comptroller of Currency, the US Commodity Futures Trading Commission (CFTC), the Federal Reserve Board and the SEC.

FINRA also published a report earlier in the year discussing the implications of DLT for the securities industry. Delaware, Nevada and Arizona have already passed statutes allowing for the use of DLT for corporate and shareholder records. This is the first in many LawCasts that will discuss DLT as this exciting new era of technology continues to unfold and impact the securities markets. In this LawCast series I will discuss FINRA’s report published in January 2017 and in the next series, I will summarize the recent SEC investigative report on initial coin offerings and conclusion that cryptocurrencies and tokens can be securities. I will also be completing a LawCast series summarizing the state blockchain legislation to date, including Delaware’s groundbreaking statute.

Blockchain is an openly distributed database which is used to continuously maintain a list of records, called blocks. Each new block is linked to prior blocks in such a way that data cannot be retroactively changed in a prior block without changing all blocks, which is virtually impossible, although technology is being developed to correct prior transactions on the chain. A DLT ledger is shared among a network of participants, instead of relying on a single central ledger.

The blockchain technology could be used to maintain shareholder records in a secure immediate form as well as to process capital markets trades instantaneously. It is thought that stock ledgers and any transfers would be updated instantaneously, effectively allowing for T+0 settlement of trades without the need for intermediaries. A change of this magnitude in our trading markets is many years away as effective regulation and consideration on market impacts will take time. However, many top transfer agents are developing blockchain systems for shareholder records and some will be available for testing in a matter of months.

The technology is already being utilized, most notably by the cryptocurrency industry. At least one industry leader, Overstock CEO Patrick Byrne’s t0 Technologies, has created a system that could form the basis for widely used blockchain technology which disrupts the capital market trading systems. I don’t expect quick changes to trading systems and settlement. Blockchain remains widely unregulated and without consensus from top financial regulators, any change to capital market structures will face roadblocks. However, I expect that the ability for public companies to maintain stock ledgers using DLT technology will be forthcoming very soon.