The development of the internet enabled great progress in investor relations. But despite the advances, efficiently managing shareholder records and communicating directly with investors has remained a challenge. By removing system redundancies that can mask true share ownership, blockchain technology makes investor relations simpler, faster and more reliable.
Over the last couple of decades, communication and shareholder data has largely moved from paper to digital formats, yet the industry has still been plagued by onerous administration. Shareholder ownership can be complex, and there has traditionally been no clear way of distinguishing between the legal owner and beneficial owner of a security.
According to a 2014 supplement produced by the SEC entitled A practical guide to SEC proxy and compensation rules: ‘The single greatest source of confusion in the proxy process is undoubtedly the separation of legal and beneficial ownership resulting from what is commonly referred to as ‘street name’ registration. The vast majority of publicly traded shares in the United States are registered on companies’ books not in the name of beneficial owners – that is, the investors [that] paid for, and have the right to vote and dispose of, the shares – but rather in the name of Cede & Co, the nominee name used by the Depository Trust Company.’
A BNY Mellon report, Global trends in investor relations 2015, states that within North America, the top three goals for IR departments were to ‘expand or enhance engagement with existing shareholders, diversify shareholder base, and have greater management visibility and accessibility.’
Blockchain technology helps make these goals attainable. A relatively new way to store and manage data, blockchain decentralizes data across a shared ledger, removing the vulnerability created by a central point of authority. It allows for the transfer of value from peer-to-peer (P2P) without the involvement of a third party. This new way of transferring monetary value, communications or securities is less costly, more efficient and more secure than traditional systems.
Since the inception of bitcoin, blockchain – the underlying architecture that allows for swift transfer and ownership of bitcoin – has proven its value in establishing verified identity, digital ownership and ease of P2P transfer across a secure network. While bitcoin is generally better understood, it is blockchain that is revolutionary, streamlining complex systems by making intermediaries redundant.
Each blockchain network is supported by nodes that host a distributed ledger. As data is transferred through the network, each of the nodes participates in confirming receipt of the new data as well as all existing data on the ledger. In this system, the network confirms accuracy and authentication by way of automated consensus. The network self-audits, removing the risk of data being manipulated or fraudulent and quickly identifying any incongruent entries.
Using today’s systems, identifying and reaching the correct recipient of shareholder communication can be challenging. Applying blockchain technology to the securities industry removes the complexity of unnecessary third parties in the clearing, transferring and identifying of securities. Its data architecture system allows for direct connection with non-objecting beneficial owners and, in the case of objecting beneficial owners (Obos), removes the barrier to communication that third parties create.
Blockchain technology encrypts data, making it secure, but because the data is distributed across a shared ledger, there is transparency within the network. Transparency with anonymity makes it possible for IR professionals to know which accounts hold their company’s shares and makes it more likely that shareholders themselves will hold securities, rather than operating as an Obo. By putting securities on the blockchain, the issuer can send shareholder communications directly to the account that owns the security, regardless of anonymity.
Discovering how inefficient the involvement of third parties can be throughout the capital markets, Equibit Group saw that blockchain could revolutionize how securities are transacted and managed. Now, for the first time, it’s possible to create real-time, highly robust registration and settlement systems with which existing services can’t compete. Decentralized securities networks are set to transform shareholder communication and the business of IR.
Stephen Barnard is vice president of marketing at Equibit Group
