Using Blockchain for the Securities Industry – Custodian Part I

Using Blockchain for the Securities Industry – Custodian Part I

By beachbummer | ProBeach | 27 Feb 2020


One of the characteristics of the blockchain is the distributed ledger, meaning that there is no centralised database or ledger that keeps track of transactions. Instead, the ledger is decentralised amongst all the nodes, so there is no single point of failure for the database, and all new transactions coming into the blockchain will need to be verified before it can be included into a new block.  

The Custodian

In the context of the Securities industry, a Custodian is defined by Wikipedia as "a specialized financial institution responsible for safeguarding a firm's or individual's financial assets and is not engaged in 'traditional' commercial or consumer/retail banking such as mortgage or personal lending, branch banking, personal accounts, Automated Teller Machines (ATMs) and so forth." With this in mind, we shall determine if the Custodian is a good candidate for utilising the blockchain. 

Some assumptions will have to be made for the Custodian blockchain model. Shares will be represented as tokens, and Custodians will have a collection of wallets under their control to represent both their holdings as well as those of their clients. 

The Client

In this blockchain model, end clients will not have the private keys to their wallets as they will be owned by the Custodian. This is similar to the existing Securities model where the Custodian stores the clients' inventory under main or sub-accounts belonging to the Custodian. A public blockchain may be used to allow clients to explore the blockchain and see the transactions for their wallet. However, this also does mean the loss of some anonymity as everyone using the same block explorer will be able to see the inventory belonging to the wallet address (although some forensics will be necessary in order to find out who owns the wallet). If a private blockchain is used instead, it means that the client will need to go into a trusted relationship with his Custodian because he may never know if the actual inventory assigned to his wallet actually corresponds to the statement he is receiving. 

Under current Securities rules, it is likely that the end client will never have the private key and full wallet access due to KYC/AML (Know Your Client / Anti Money Laundering) requirements. They will never be granted the power to transfer shares (i.e. tokens) from their wallets to another wallet without going through a proper Custodian.

To be continued...


beachbummer
beachbummer

Professional in Financial Services


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