The exploration of Blockchain applications in the securities Industry has already begun and seems possible to pick up steam in the next several years. Many financial institutions have created in-house teams and study labs to construct and examine Blockchain networks, or are working together with third party sellers specializing in this space. In addition, companies have sought to participate in collaborative efforts with consortia to develop a frequent Blockchain frame and make industry standards.
The used cases of Blockchain applications are between the equity, debt and derivative markets. Since the implementation of these Blockchain applications advances, issues are being raised concerning how processes involving Blockchain fit within the present regulatory framework. In light of the trends, this section highlights some key factors linked to Blockchain execution and regulation.
Developing Blockchain applications in the securities Industry can present many challenges. In trying to overcome those challenges, some of the essential considerations for market participants in executing a Blockchain network may consist of governance, operational architecture and community security.
One of the key governance principles of the Bitcoin Network Was to establish a “trustless” environment open to the general public, where no single party is responsible for, or enabled with, governing and operating the network. Although this kind of network may offer certain advantages like providing a decentralized system which isn’t dependent on any particular party to operate, it may also pose some vulnerability in case it contributes to inefficient management of the machine. As an instance, recent events have shown that lack of a central governing body for its evolving Bitcoin Network has generated concerns for the system, as participants try to ascertain an approach to handle greater transaction volume. Therefore, a Blockchain network dependent on the use of a trustless system, where no party is responsible or liable for the appropriate operation of the machine, may pose risks to investors and markets. Many market participants are working to use private Blockchain networks using a governance structure that takes into consideration that participants in the network are generally known and trusted parties.
When setting up or engaging in a private Blockchain Network, in which multiple organizations across the sector are involved, a number of the first governance questions that need to be answered relate to the operation of the network and deciding that bears responsibility for it. Below are the types of questions that market participants may wish to consider when creating a governance structure to get a Blockchain network.
· Can the governance arrangement for the Blockchain system be determined by a single entity or a set of firms? How would the pursuits of end-users, that aren’t participants on the community, be represented?
· Who would be responsible for ensuring adherence by amateurs to the prerequisites established for the Blockchain network, and how could this be ran?
· Who would be accountable for the day-to-day operation of this system and resolving any technical problems on the network?
· Who would be responsible for setting and maintaining a affordable business continuity plan (BCP) to your network, to address some unanticipated emergencies or significant business disruptions?
· How would any conflicts of interest in the performance of or participation on the community be addressed?
· How would mistakes or omissions about the Blockchain be mirrored or rectified?
A Vital concern for market participants in executing a Blockchain system is discovering the operational structure of the network. The operational structure of a Blockchain system would normally include creating a framework for: (1) network participant access and related on-boarding and off-boarding processes; (2) trade validation; (3) asset representation; and (4) data and transparency demands. Following are a few locations that market participants may want to consider when creating such a framework.
On-boarding, Off-boarding and accessibility:
It is vital for a Blockchain system to launch, as portion of its operational infrastructure, the standards and processes for establishing and keeping participating members and determining their level of access. Especially, in developing a Blockchain community, applicable parties may Want to think about how they would:
· Establish eligibility standards for participants to gain access to the network;
· Establish a vetting and on-boarding procedure for new participants, including establishing an identity verification process and executing proper user arrangements prior to on-boarding;
· Grow an off-boarding process for participants that may be non-compliant or disqualified for violating securities laws, rules and regulations or for violating system rules; and establish exclusion criteria to discover previous participants which might have been disqualified;
· Memorialize the terms of engagement and code of conduct required from all participants;
· Establish varying degrees of access for different player groups (e.g., direct network participants . indirect users running transactions via direct participants)–that might include restricted access to certain data sets, and even constraints on ability to read or write about the shared ledger; and when the network includes global participants or entities from different countries, it may be desired to present special focus on regulatory requirements in those various jurisdictions, particularly as it relates to privacy and information sharing; and
· Determine which sort of access would be given to regulators.
As previously described different kinds of methodologies before launching a transaction identification methodology, network operators are most likely to evaluate the advantages and disadvantages of each methodology. In doing this analysis, some prospective questions network operators might desire to consider are mentioned below.
· If consensus-based, would it take a proof-of-concept or would it be an easy consensus algorithm? How much latency and sophistication would that add to the validation process? What is the risk of collusion by multiple parties to validate a fraudulent transaction?
· In case single-node verifier (i.e., one single node will be responsible for confirming all transactions), how would that verifier be determined? Is the simplicity and speed of a single-node verifier value the concentration of risk? What would be the backup or recovery process in the event the single-node is unavailable or endangered?
· How would the amount of nodes needed for verification be determined? If other nodes or arbitrary nodes are put up as verifiers, how could the order be established? Does this procedure expose the network to possible dangers from a number of nodes?
· What procedure will the system embrace to rectify or correct any erroneous entry that may be recorded on the shared ledgers?
To the extent an asset is represented on a Blockchain network, Operators will need to determine how those assets will be based on the community. Following are a few factors operators may want to take into account in the investigation.
Will assets be directly issued and digitally represented on The system? Or would they be issued in traditional form and subsequently tokenized on the community? Would the network consider both kinds of asset representation?
• If tokenized, what extra security dangers and complexities are posed? How would any loss or theft of the conventional off-chain advantage be managed? How would asset fluctuations (e.g., stock splits and conversions) be handled?
• Will the network only permit new advantage issuance or can it allow on-boarding of present assets?
How would money be represented on this network? Industry participants are contemplating a variety of versions to ease the cash aspect of a transaction settlement. For instance, in a recent effort, a few banks are tinkering to create a virtual “settlement coin.”
• If cash-backed settlement tokens are utilized, would these tokens be termed as virtual money? Could there likely be a scenario where multiple such native tokens are made by various networks or companies? In that case, are they tradable?
• If fiat money (i.e., money that’s created by the authorities of a country to be utilized as cash) is used and settlement happens off the system through a conventional cash payment process, how, when, and from whom will the trade and asset transfer be recorded on the network?
• How will a participant’s ability to fulfill the money obligation be determined? Can a deposit be accumulated from network participants to be utilised in the event of non-payment? How will this type of deposit be calculated?