Smart contracts gave birth to digital securities

We continue the topic of Smart contracts with a specific application: the Digital securities.

Capitalization table management for private companies can be held now via smart contracts. To comply with custodian and exchange regulations, you will just onboard them into your smart contracts.

The problem nowadays is the fact that a lot of intermediaries increase the cost.

In this system, clearing (denotes all activities from the time a commitment is made for a transaction until it is settled) will no longer exist. In trading, clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction. On blockchain, since we could qualify it as a distributed transactional database, no such situation would appear.

A 2014 Oliver Wyman report estimated that the industry spends as much as $80 billion (€70.6 billion) annually on post-trade processes, with most of that money going either to depositaries or the numerous agents employed along the settlement chain.

A sub-custodian is an institution that provides custody services, with respect to securities traded in a particular market or jurisdiction, on behalf of another custodian who may not have an operation/office in that jurisdiction.

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications. It is a messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes.

A SWIFT code is used to identify a specific bank during an international transaction, whereas IBAN is used to identify an individual account involved in the international transaction. Both play an essential role in the smooth running of the international financial market.

But smart contracts can’t be the answer for everything because they are enforceable only when events can be verified by a third party. (Remember the Oracle in our first Cheat Sheet). If you want to calculate dividends you need to track profit. Moreover, as much as you want to enforce governance rules (smart contracts) to mimic a Contract, you never think of all conditions/events/actions. Therefore, “completeness” is complexe to set up, but not impossible.

How should we act then?

Indeed, “smart-contracts” are neither contracts nor they are smart. It’s like Artificial Intelligence, they do what humans told them to do in some specific, predefined cases.

Finally, in the case of private placement, subject to some limitation in terms of number of investors allowed within the structure, some economics and priority rules can be modeled with proper work.

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