Blockchain – Coming to a Transfer Agent Near You?
Very likely someday. But not tomorrow. Nor next year. Maybe within a decade.
Blockchain, the distributed ledger-based transaction and record keeping medium, is definitely off the ground (in part due to Bitcoin), but it will probably hover only just above the ground for quite some time – for stock transfer agents anyway. That is because while it sounds wonderful to have a simple and “incorruptible” transaction portal and database in place, not requiring a potentially “corruptible” intermediary or set of intermediaries to run it, there is a complexity in shareholder services like stock transfer that will take years converting to blockchain.
Remember, we are not talking about dabbling in a parallel, alternative universe of “cash” like Bitcoin. We are talking about changing the way share ownership transactions are processed and record-kept for the U.S. securities industry, involving tens of TRILLIONS of dollars in market value. Before one or two major transfer agents, or brokers, can handle their work using blockchain, the securities INDUSTRY, or a sizable portion of it, will need to have been built out to handle it. Not that this won’t happen eventually – after all, the Direct Registration System, Cost Basis and T+2 did – but there is a huge amount of work to be done to get there with blockchain, assuming no insurmountable hurdles arise to derail the process along the way.
Some of the hopefully surmountable hurdles are regulatory, given we think the buck has to stop somewhere for blockchain to be officially in place; technological/operational (look up “permissions” and “smart contracts”); legal, for example blockchain is transparent and immutable, whereas the new European GDPR regulations that U.S. agents must abide by allow individuals to have certain records expunged; and financial, in that while blockchain has the potential to save billions of dollars in transaction and record keeping costs over time, it will also cost billions to fully implement the necessary infrastructure.
One major shareholder services company, Broadridge Financial Solutions, has already put their foot (more than a toe) in the water, starting not surprisingly with proxy distribution and tabulation where Broadridge has the largest industry presence. Using Broadridge, one company has already incorporated some blockchain practices into its annual shareholder meeting, and we believe others are planning to do the same this Spring. Broadridge has also invested in blockchain-related start-up companies to supplement its own R&D efforts. NASDAQ has its foot in the water with blockchain as well, consistent with Delaware Law having been amended last year to allow for “digital securities” maintained on a distributed ledger.
Bottom line: blockchain is going to take a while to supplant the vast apparatus for securities issuance and record keeping currently in place, including the stock transfer industry. But blockchain is coming, and it will be the biggest game changer since everything went electronic 50 years ago.