News review : Testing the crypto waters

TESTING THE CRYPTO WATERS.

London-based venture studio 20:30 made the news as the first UK company to successfully complete the tokenisation and issuance of their equity as part of the UK Financial Conduct Authority’s (FCA) Sandbox 4. The next step is to go live for their first third-party client, via TokenFactory.

“TokenFactory is a platform that allows buyers and sellers to meet in the primary issuance process. Issuers can be hand-held through a modular approach to creating legal documentation, building in governance models, accounts and audit models,” according to Jack Thornborough, Chief Compliance Officer of 20:30.

“It consumes this data, generates the tokenised instruments and then our next generation data room allows the offer to be exposed to investors that are on the platform. Our aim is to make raising capital for start-ups and SMEs incredibly cheap and incredibly fast, by leveraging powerful technologies like AI and blockchain.”

20:30 tested the waters in April with its TokenFactory product and settlement of the tokenised securities took place on the blockchain, with subscriptions in sterling and matching via the LSE’s Turquoise platform. 20:30 successfully raised capital via the process, which is now complete, and exited the Sandbox in May 2019.

The process was not without its complexities, and highlighted many of the current regulatory challenges inherent to tokenisation of securities on a more industrial scale. It was also notable for the collaboration between both incumbents (including the law firms Allen & Overy and Latham & Watkins as well as the London Stock Exchange), and pioneering fintech start-ups, such as 20:30 and Nivaura, a firm specialising in workflow automation of the middle and back-office processes involved in the primary debt and equity issuances.

From a legal perspective, Stuart Davis, an associate at law firm Latham & Watkins, said that part of the complexity is due to the fact that UK legislation has been drafted without digitisation in mind. For example, the Uncertificated Securities Regulations 2001 requires a system that allows for the digitisation and transfer of securities to be registered, and there is currently only one registered entity that meets these requirements – Crest.

In addition, the Companies Act 2006 mandates that shares that are issued in physical form may only be transferred through use of a stock transfer form, which is a manual (i.e. non-digital) process, creating additional barriers to full tokenisation of equities.

Avtar Sehra, CEO of Nivaura, says solutions were developed to address some of these issues. “While for tokenised bonds we are able to simplify the structure to a simple tokenised security, where the token is the bond,” he says.

“For equity we needed a pass-through structure where a Nivaura nominee entity held the legal title on the equity, and passed through all the beneficial interests to a new security token that is issued. The new security token was not actually the equity, but a claim on the benefits of the equity. This structure is very similar to a depositary certificate model.”

©BestExecution 2019

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