Digital securities exist before the advent of cryptosecurities essentially as issued, and transferred through a process of electronification. The Paper Chase paper stock certificate is antiquated, and no longer required according to securities regulation, practice and procedure in certain countries, at least partially, as the stock/share certificate can be dematerialised (removed from paper format, or be not issued in paper format, but remained electronic and transferable through an equally electronic means). These types of securities in a digital format qualify in the ordinary course of business as “digital securities”.
Such digital securities exist within individual “data silos” largely operated by regulated legacy stock exchanges, with a copy of the shared ledger being kept by the issuing entity (usually a public company). The Dole Food case reveals the fundamental errors in centralised database table, and furnishes a near comprehensive and stark-naked reason why this centralised “data silos” data management infrastructure is broken. In the Dole Food case, a class action lawsuit, the court found that there were more claims to shares than there were available shares, with each claim backed by evidence, facts and documents from the brokerages to support the fictitious claims. The blockchain as a Distributed Ledger Technology (DLT) is a decentralised, bespoke solution to centralised capital market monstrosities of this nature.
These “legacy digital securities” are beginning to take a new form, or better still, being reborn as digital securities through a set of digital asset class also known as cryptosecurities, implemented on the Distributed Ledger Technology (DLT) with smart contracts. While legacy digital securities are only digital and electronic, they have no features and functionalities of the new securities, called cryptosecurities (which are based on public and private key cryptography), smart securities (because they are written in a software contract code known as “smart contract”, and invented by Nick Szabo), blockchain securities (because they are based on a cryptographic distributed ledger known as blockchain), digital securities (because they are digitised and therefore not in a material format), security tokens (the most popular industry term for smart securities), cryptographic securities (because once again, they are based on cryptography), and distributed ledger securities (because the securities are based on a distributed ledger, an example of which can be the blockchain, Hedera Hashgraph, Directed Acyclic Graph (DAG), etc.).
Raising Business Capital
Though popularly called security token, as mentioned above, the digital securities through smart contract implementation on the Distributed Ledger Technology (DLT) has been used as a market capital formation strategy to raise millions of United States Dollars (USDs). Within a quick period, it evolved from Initial Coin Offering (ICO), its widely unregulated and thus controversially fraudulent precursor, whose Achilles’ heel rises from the fact that there are no regulatory oversights and guidelines to curb the wild market activities which earns it the “Crypto Wild West”. Nonetheless, jurisdictions keep working on guidelines, regulations, statute-laws, issuing investor protection, education notices and instituting enforcement actions to tame the ICO beast.
Electronic Securities Issuance and Transfer Under the Nigerian Securities Regulation
Section 345 of the SEC Rules and Regulations 2013 provides that an entity may conduct securities business through an electronic means, provided that an investor who elects to have a certificate shall have such certificate issued to them by the issuer. Further lending credence is section 55 of the Investment and Securities Act (2007). The marginal note is “Electronic and other means of issuing and transferring securities”, the main section reads thus:
“(1) Securities registered by the Commission including securities issued pursuant to part XIII of this Act, may be issued or transferred electronically or by any other means or system approved by the Commission under such terms and conditions as the Commission may prescribe, through a securities exchange or capital trade point or any other self regulatory organisation.
(2) The Commission shall prescribe the documents and information to be provided by the issuer, an issuing house, stockbroker or any other person authorised by the Commission to offer securities for sale or subscription to the public.”.
From the statute-law, it is crystal-clear that the securities registered by the SEC Nigeria may include digital, or more precisely, electronic securities, which may be transferable yet in an electronic format, plus even if the securities where issued by any other means, the electronic transfer vehicle can still remain available. This electronic securities issuance and transfer process is also allowed by any other means approved by the Commission, under the terms and conditions of issuance and transfer, provided by the Commission via a securities exchange platform, Capital Trade Point (CTP), or a Self-Regulatory Organisation (SRO) that implements digital securities issuance and transfer mechanism. Furthermore, prescription of documents and information regarding this electronic/digital securities issuance process is also incumbent upon the Commission, who prescribes for the issuer, an issuing house, or a stockbroker or any person authorised in that behalf to make securities offering and sale to the public for subscription, certain documents and information required to do so.
Capital Market Utopia or Not?
The blockchain implementation as a near invulnerable capital market infrastructure atop which securities are tokenised ensures investor protection, investor confidence, market integrity, fair and orderly market, instant liquidity, faster transaction and settlement time, among others. Features and functionalities of this new capital market infrastructure are transparency, immutability, accountability, authenticity, traceability, disintermediation, cryptography-based consensus algorithm, decentralisation, and other cognate areas, which are hitherto the problems and pain-points shared by capital market institutions, boards, commissions, authorities, investors, and market participants across the globe.
In an era of smart securities heralded by cryptographic distributed ledgers and smart contracts, which are making their way into the global capital market at an accelerated speed rate, the statutory attitude of the securities regulation in Nigeria is smart securities-friendly, as can be gleaned from Section 55 of the Investment and Securities Act (2007), though the capital market implementation of the blockchain technology is non-existent at the moment in the country, as no blockchain security token offering and sale is down on record, as shown by research.
Elsewhere, some of the areas most profoundly affected at the moment are unregistered, and thus exempt securities, in private securities issuance, where securities regulation-compliant private securities are issued as smart securities based on blockchain smart contract architecture, in a registration statement exempt private securities offering, and tokenisation of company share ownership interest by shareholders. A fast-growing number of public companies and organisations across the world also adopt and implement the blockchain technology in the equity market, debt market, and derivatives market.
Smart securities trading exchanges, smart securities issuance platforms, token standards for smart securities, the most popular examples of which are ERC20 smart contract token standard, ERC1400 smart contract token standard, and many other smart contract token standards in development as Ethereum Improvement Proposals (EIPs), or being developed on other blockchain protocols, all lead credence to the swift smart securities industry productivity growth rate, adoption and comprehensive capital market use case implementation in 2019 and beyond.
Boulevard A. Aladetoyinbo, Esq., a pioneer cryptosecurities lawyer. Boulevard is a Partner at a global blockchain & Distributed Ledger Technology (DLT) law firm, Lex Futurus Group LLC.
Shamim “Sam” Khan Esq., a veteran cryptosecurities lawyer. Sam is a Director at the consultancy arm of the firm in the United Kingdom (UK)
Not a piece of legal advice. Talk to a lawyer.