Security token platform Dusk Network says it will tokenize shares for thousands of small and medium-sized enterprises (SMEs) in the Netherlands and the broader Benelux region.
The Amsterdam-based company announced Thursday it has partnered with Firm24, one of the region's largest shareholder registries, and will use blockchain for an automated infrastructure that could introduce market efficiencies and transform how shares, that are not publicly listed, are traded.
Blockchain infrastructure provider LTO Network will also provide an interface between Dusk and Firm24 to link off-chain activities to the blockchain system and manage procedures that require approval from a notary.
Dusk Network's business lead and director, Jelle Pol, told CoinDesk there were clear advantages in moving shareholder registries and operations onto a distributed ledger. For example, tokenization creates a new secondary market for investors to trade shares and having all the information in one place makes it easier for companies to monitor who owns their shares.
"Across the board, we're definitely seeing these efficiency gains and especially also on the corporate side, the amount of data that they're able to leverage additionally just opens up more custom-tailored services," Pol explained.
Shareholder registries are essentially records of all the individuals and entities that own shares in a particular company and are supposed to be updated on an ongoing basis. However, that can be a laborious process, and in the EU notaries were required to sign off whenever share ownership records changed.
Although the process has significantly improved in recent years, with notaries placed in a more supervisory position, there are still recurring problems in keeping track of who owns company equity. For smaller companies that aren't publicly listed, paying out dividends and organizing shareholder votes can be next to impossible.
This is a problem that Firm24, which has more than 35,000 SMEs from Belgium, the Netherlands and Luxembourg (known as the Benelux region), hopes to address with the new partnership.
As many smaller companies aren't publicly listed on exchanges, trades that take place in the secondary market happen privately. Cap table management breaks down because no one, not even the issuer, is made aware these trades have taken place. Even when they are recorded, they usually use a different notary which makes it hard to create and maintain a single source of truth.
“For almost a decade we have been bringing automation to everything related to the company incorporation procedure," said Firm24 CEO Martijn Migchelsen. "Thanks to Dusk and LTO we are now ready to deploy our Tokenized Share Register, automating corporate actions, and lay the foundation to connect our customers directly with the world of alternative finance.”
Pol said that in initial discussions with Firm24 they had initially envisaged Dusk as an "administrative mirror." But as they started "playing around with it," other potential use cases arose. As well as cap table management, the firms also realized they could create tokenized representatives of share certificates that could be freely tradable on the platform.
Tokenization – either a representative of paper equity or a fully digitalized security – creates significant cost and time efficiencies, Pol said. Dusk estimates SMEs can save anywhere between 20-30 percent on costs associated with the production and distribution of documentation and proposals. In the case of dividend payouts, blockchain technology can take costs down by as much as 90 percent.
Dusk could tokenize stock for public companies, but Pol suggested SMEs had the most to gain from using blockchain technology. One of the key challenges brought up by SMEs is the difficulty in accessing new capital. Tokenization, Pol said, can broaden the investor pool, allowing companies to raise funds from retail investors and institutions outside of their immediate network.
A Dusk spokesperson said the company expects the new Firm24 platform to go live in Q2 2020. After that it plans to tokenize as many as 10,000 newly incorporated companies by the year's end, as well as start work on tokenizing an estimated 25,000 companies that are already incorporated. Registered firms are able to opt out of the scheme if they choose.
UPDATE (May 19, 09:50 UTC): This article has been updated to clarify that it is the Firm24 platform that is set to go live in Q2 2020.
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