The CSE plans to apply to regulators for recognition of the new clearinghouse, which aims to provide real-time clearing and settlement that would cut costs and reduce errors when compared to conventional clearing services. The platform, using technology licensed from New York-based Fundamental Interactions Inc., would use tokenized securities called Securities Token Offerings (STOs) for both equity and debt issues, the CSE said in a release Tuesday.
“The Canadian Securities Exchange expects to be the first recognized exchange in Canada to introduce a fully developed blockchain platform for trading, clearing and settling tokenized securities,” said Richard Carleton, chief executive of the CSE.
“Our platform represents an intersection between blockchain and the capital markets that delivers on blockchain’s promise to disrupt conventional transaction and record-keeping mechanisms, thereby providing tangible benefits for market stakeholders.”
Proponents of the distributed ledger technology behind blockchain have pinpointed clearing and settlement of stocks and other securities as an area ripe for innovation because it is still heavily dependent on paperwork and transactions that can take days to settle.
But while the centralized database of records at the heart of clearing and settlement makes it vulnerable to blockchain’s key strength, some market watchers suggest investors would balk if clearing and settlement took place outside the confines of trusted intermediaries such as banks.
Clearing and settlement of equity, debt, and money market transactions in Canada are handled by CDS Clearing and Depository Services Inc., which is owned by the TMX Group. TMX also owns the Toronto Stock Exchange, CSE’s principal and much larger competitor.
CDS’s clearing and settlement operations are tightly regulated by the Bank of Canada, as well as by securities regulators across the country.
The CSE says its proposed platform would provide “substantial” cost savings over existing options, in part by eliminating the need for investment dealers to post initial and market-to-market capital with a clearing house pending the settlement of trades.
In addition, since trades would clear and settle immediately using blockchain technology, risks would be reduced, the exchange said.
Under the plan, token issuers would be required to adhere to the same listing requirements as the more than 300 conventional, non-tokenized issues on the CSE, and the platform would have a formalized “disclosure environment” for investors purchasing tokens initially and in the secondary market.
“By harnessing this technology, the potential exists to extend corporate finance beyond the limits of traditional equity and debt offerings,” Carleton said. “We look forward to working with regulators and with corporations seeking to raise capital through STOs (securities token offerings) to fully realize the benefits of the new platform.”
As part of its push to enter the clearing and settlement business, the CSE signed a memorandum of understanding with Kabuni Technologies Inc., a private Vancouver-based company that intends to file a prospectus with the British Columbia Securities Commission for approval to issue tokens to investors through an STO on the Canadian Securities Exchange.
The CSE was recognized as an exchange in 2004 by the Ontario Securities Commission.