The management of financial securities and their life cycle are included in a regulatory context. Indeed, companies issuing securities must comply with this framework, whether in the context of a capital increase or reduction, or in the organisation of a secondary market for the life of the securities.
Several European Directives and Regulations are applicable in this area.
MIF II Directive and MIF Regulation 600/2014: this provisions deal with the organisation of the markets for access to the European market by undertakings from third countries and the powers of the supervisory authority; also, with regard to the KYC (Know Your Customer) procedure — which ensures that a particular investor is entitled to invest in a particular bid — the Directive allows it to be shared for one year. This simplifies the life of individuals who do not have to go through a KYC every time they wish to make a transaction.
Directive 2004/109, amended by the Transparency Directive in 2013: this directive harmonises the information requirements for issuers of securities admitted to regulated markets within the European Union.
Market Abuse Regulation 596/2014: in this document, we have a definition of market abuse, which consists of any unlawful behavior in a financial market (e.g. unlawful disclosure of inside information). The Regulation aims to improve market integrity and investor protection by updating and strengthening the current market abuse framework, extending the scope to new markets and trading strategies, and introducing new requirements.
Settlement Directive 2009/44/EC: this directive is applicable in 15 Member States of the European Union. It ensures that movement orders entering the systems are also settled definitively or have been revoked in the meantime.
Central Depositary Regulation 909/2014: increases the safety and efficiency of settlement-delivery and infrastructures in the European Union; harmonises the rules of central depositories and establishes a more level playing field between central depositories.
AIFM Directive 2011/61/EU: this Directive establishes a harmonized regulatory framework for the management and distribution of alternative investment funds in the European Union.
Prospectus Regulation 2017/1129: this regulation concerns the prospectus to be published in the event of a public offer of securities with a view to the admission of these VMs to a regulated market; it came into force in July 2019. Its purpose is to simplify the presentation of information for issuers while improving the usefulness of the document for investors.
AML Directive 2018/843 : the Directive aims to improve cooperation between Member States by establishing uniform provisions on investigative tools and rules for determining which Member State has jurisdiction when an offense falls within the jurisdiction of more than one Member State; it provides harmonized definitions of criminal offenses relating to money laundering, etc.
As stated above, Equisafe has developed extremely modular smart contracts.
As a reminder, there are 4 of them:
Digital identities management,
Digital representation of the company issuing securities and related regulation,
Materialization of securities registrars,
Custody of titles directly on blockchain.
The fact that these smart contracts are modular allows any securities issuing company wishing to digitize its securities movement register on the Equisafe Platform to do so in accordance with the law applicable to them; and this in at least 70 countries.
Automated and autonomous compliance
Because Blockchain is tamper-resistant and can be automated with smart contracts, it is therefore the best compliant system anyone can build. This would enforce regulation and help any public sector department to do their job more effectively. Indeed regulators will be able to track transactions and movements across multiple parties (Which would make reporting cost decrease substantially).
Smart contracts are not only an enforcement tool. They can govern distribution (yearly, quarterly, monthly, daily), return of capital, preferred return, clawback provisions, insurance products, derivatives. They are set to become the main governance system in the coming years.
There is still much to do, specifically in M&A where we could use smart contracts to govern transaction of equity, cash , but also earnouts (with appropriate audit) and notes.