One of the most obvious potential applications of distributed ledger technology is in financial record-keeping. Blockchains promise greater efficiency and higher resiliency, say the technology’s advocates, as well as cutting out a whole range of unnecessary intermediaries. Together, these changes promise to reduce the cost of capital and boost economic growth.
London-based financial technology start-up Globacap says it thinks there’s a niche in tokenising a range of privately held assets, starting with the equity of unlisted companies, while staying in compliance with existing regulations. New Money Review recently asked Globacap’s CEO, Myles Milston, to explain his company’s plans.
New Money Review: Myles, your company uses a proprietary blockchain to help firms raise capital, settle share transactions and administer shareholdings. Which blockchain did you choose and why?
Myles Milston: For a number of reasons, we don’t think public blockchains like bitcoin and ethereum are suitable for use in the securities markets yet. So we decided to use a private blockchain to underpin our platform. We chose Hyperledger Fabric, which works much in the same way as a public blockchain, but has some added features.
We were attracted by the open-source nature of the Hyperledger project: by comparison, several other private blockchains that could be used to support security token issuance have a less transparent and flexible architecture.
“post-trade processes can be performed much more cost-efficiently”
New Money Review: What is your commercial model?
Myles Milston: We charge a transaction fee upfront for helping our clients raise capital, levied as a percentage of the amount raised. On an ongoing basis, we charge for custody and administration of assets.
We believe these post-trade processes can be performed on a blockchain much more cost-efficiently and quickly than in the traditional securities markets, where a number of intermediaries currently perform these roles.
New Money Review: Many observers say that recording share or debt issuance and ownership on a blockchain could help replace registrars, clearing houses, securities depositaries and other intermediaries. But is custody cheaper on a blockchain? Storing private keys safely can be costly.
Myles Milston
Myles Milston: You have to distinguish between public and private blockchains. On a public blockchain, the cost of securing cryptocurrency storage can be significant, because if private keys are lost you cannot retrieve your holdings.
But with a private blockchain, while there is an immutable transaction record, the participants in the network are restricted. In the event that there is some kind of fraud, we can go back and reconstruct the network’s records, if necessary.
New Money Review: How would you compare your role as record-keeper on a blockchain with that of a central securities depositary (CSD)? In the traditional securities market the CSD is the record-keeper of last resort.
Myles Milston: The role of the CSD in the public securities markets is underpinned by legislation. In Europe it is a legal requirement to have a CSD for any transferable security, as defined in the EU’s Markets in Financial Instruments Directive (MiFID).
We’re focusing on private assets, where the use of a CSD is not obligatory. However, we’re also looking to partner with existing CSDs to help make the end-to-end processes in securities markets more efficient and to capture some of the efficiencies that blockchain can bring.
“the incumbents are scared for their long-term livelihood”
New Money Review: Exchanges, central clearing counterparties (CCPs), CSDs and custodian banks have a lot of power in the current financial market infrastructure. Is it realistic to expect to compete with them?
Myles Milston: It would be extremely naïve for me to suggest we can single-handedly put institutions like these out of business. But I can also assure you that most of the incumbents are scared for their long-term livelihood. That gives us a little bit of leverage and some pathways towards changing that back-end infrastructure, even if it’s slow progress.
New Money Review: What if one of these institutions came along and wanted to buy Globacap—wouldn’t you find the offer hard to refuse?
Myles Milston: I suppose everything has a price, but I’m not in this solely to make money. My background is in over-the-counter (OTC) derivatives, which is an incredibly inefficient market. And the listed securities market is also way less efficient than it should be. There are layers of back office functions that shouldn’t be there.
Part of my goal is to do something that significantly changes the infrastructure. And the opportunity to do something new, which blockchain technology currently offers, is one that doesn’t come along very often.
New Money Review: The global regulations for cryptocurrencies and digital assets seem very uneven. What can be done to improve things?
Myles Milston: If we’re talking about securities, they already have a very robust regulatory framework. There could be some improvements: in my opinion, if blockchain were to be considered an adequate way to record asset ownership, then removing the legal requirement to use a CSD would make sense. But given the long history of securities frauds, the existing rules governing how securities offerings can be promoted to investors are important.
How cryptocurrencies should be regulated is a trickier question. Personally, I think they should be treated as currencies. But many people have a different view.
“tokenisation is more effective than existing forms of securitisation”
New Money Review: At a recent Financial News event in London, you and the Chairman of CoinShares predicted up to $2-3bn of security token issuance next year, 2019. Isn’t this a drop in the ocean when compared to the size of the existing securities markets?
Myles Milston: I agree that it’s small, but it is a conservative figure.
There’s $1tn invested annually in private equity, project finance, and other institutional private assets. Then there is a pool of unlisted small and mid-sized companies, with $39bn of direct lending across Europe in 2017.
And there’s also a pool of assets that currently isn’t securitised at all. Some estimates of this market are as high as $100tn.
For example, take London’s black cab fleet: you could potentially tokenise each cab’s revenues, allowing drivers to sell forward some of their earnings, and offering investors a new asset class.
New Money Review: What level of demand do you see for your services from those managing private assets?
Myles Milston: There’s a lot of interest. Right now, a venture capital, private equity firm or a high net worth individual wanting to sell a private asset has to wait several months or even years. They have to go through an intensive process involving lawyers and back office administrators before ownership can be transferred.
If they were holding their asset in tokenised form, the same process could take a few seconds. Tokenisation, the securitisation of assets in a digital form, is more effective than existing forms of securitisation due to its speed and efficiency. Then the decentralised nature of blockchain also allows access to a broader liquidity pool.
New Money Review: How much capital has your project raised to date?
Myles Milston: We’ve raised around $2.5m to date, and expect to do a larger funding round next year.
New Money Review: What impact has the cryptocurrency and ICO bear market had on your plans?
Myles Milston: It hasn’t had an immediate impact from a customer perspective. But the natural investor base for projects like ours is also the same investor base holding cryptocurrencies. So to the extent that this audience has less firepower now than a year ago, clearly there’s been a change.
New Money Review: What are the biggest opportunities for you in the next twelve months?
Myles Milston: We’re still in the UK Financial Conduct Authority’s regulatory sandbox and are about to conduct our second test within it. We are looking to exit the sandbox early in 2019 and are building up a pipeline of deals in anticipation of the full launch of our platform.
The first few deals are likely to be focused on equity in private companies. Further out, we have some deals that are real estate- and commodity-related. I think those will be interesting as indicators for the potential wave of private asset tokenisation that I’ve talked about.
New Money Review: How do you find those potential clients?
Myles Milston: We haven’t been searching for them: they’ve been coming to us. Maybe that’s surprising, but to me it’s indicative that there is demand for our type of service.
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