The Canadian Securities Exchange (CSE), whose profile has soared amid a frenzy in marijuana stocks, says it wants to operate a new platform powered by blockchain that, in theory, will clear and settle stock trades instantly.
That process is the plumbing for a stock exchange that ensures that, when a trade is placed, the cash and shares wind up in the right hands. Today, for equities, the function is done by an arm of TMX Group Ltd., takes place two business days after a trade is executed, can be prone to errors, and relies on the financial support of a group of middlemen. But the technology behind blockchain – the digital ledger – could upend the tedious and costly way that trades to buy and sell securities are finalized today.
"The real intent is to drive costs out of the system, so we, as the public markets, can compete better with private equity and venture capital and ultimately reduce the cost of capital for issuers in a public-market setting," Richard Carleton, chief executive officer at the CSE, said by phone on Tuesday.
"We could sit by and wait for someone else to get around to doing this or we can be thought-leaders and disruptors. And frankly, that sounds like a lot more fun."
He added that the concept has been well-received by brokers on Bay Street and by private companies keen to go public in Canada in a regulated fashion through what's called a security token offering (STO). He said he has been approached by at least 10 companies looking to raise funds by selling digital tokens.
A token is like an electronic contract that gives investors the same rights that come with a normal stock or bond. Companies seeking to list their tokens on the CSE would first have to file a prospectus with a provincial securities regulator, Mr. Carleton said. The token would then trade like a stock would, with a symbol, bid and offer prices and the same disclosure rules that govern other CSE listings.
The difference is that when an investor places their order to buy or sell a token through a broker that has connected to the platform, that order would be directed to the CSE's planned blockchain system, which would know if the buyer and seller actually had the cash and token to complete the trade. In theory, there's no need for a delay in this exchange or for banks to put up capital in case of delivery failure or market risk.
"The whole clearing and settlement and back-office process are a source of costs and risk that have been very hard to address," Mr. Carleton said. "We believe, with this technology, we can reduce the cost to the dealers."
The CSE has licensed the technology for its clearing house from New York-based Fundamental Interactions Inc. The next step for the CSE is to submit an application to the Ontario Securities Commission to get its platform recognized as a clearing house and its design approved following the regulatory review and a public comment period.
Exactly how the platform and tokens will work is still up in the air, as is which brokers are going to participate, Mr. Carleton said. But he says that making the CSE's plans public will spark a conversation between the CSE and regulators, brokers, investors and current and future issuers.
Kabuni Technologies Inc., a Vancouver company that uses blockchain technology in 3D printing on an industrial scale, wants to be the first to list tokens on the CSE. In the next few months, it intends to file a prospectus with the British Columbia Securities Commission.
Neil Patel, Kabuni's CEO, says he wants to sell stock through a token but he doesn't want to issue an unregulated initial coin offering (ICO), which gained popularity around the world last year.
"You're going to see more companies choosing STOs over ICOs because they're regulated, there's no grey area and it's done the right way," he said. "I think you'll see hundreds of companies taking this route in the near future."
He added that there is a lot of work ahead to iron out the details of his proposed STO, adding that he hopes his company's tokens will be listed and trading on the CSE by the end of 2018.