Digitalisation of the Private Market
Tags: Smart Contracts, Compliance, Blockchain, Hyperledger, Tokenization

Key Market Enablers

We’re confident that blockchain-based electronic instruments represent a future pillar of the private market financial sector; offering massive operational efficiencies and enabling investment features in ways that are difficult or impossible to achieve in conventional paper-based instruments.

Our analysis found that there are still a number of blockers preventing this new asset class from fulfilling its potential. To achieve our mission of enabling a decentralized economy, we’ve built a platform that addresses these critical obstacles to market acceptance.

Autonomous Investor Rights Enforcement

Our most important and powerful innovation is our solution for enforcement of investor rights — a central challenge to the market adoption of blockchain and smart contract based instruments. We understood that we had little ability to hasten the adoption of legal code that would solve the uncertainty around smart contracts and the handling of investor rights, so instead we looked at how we could bring the real world onto the blockchain.

Through the use of our patent-pending decentralized Sentinel System™, our platform allows issuers of investment instruments to make business-model specific commitments (covenants) to investors, pre-plan and pre-authorize remedies in the case of non-compliance. Our smart contract technology autonomously verifies that issuer commitments are being met and, if they aren’t, executes the remedies that have already been described to investors. It provides investor rights enforcement with previously unimaginable speed, clarity and predictability.

We believe our system doesn’t just match the types of enforcement options available in traditional asset classes, but represents an improvement over them. Faster, cheaper, predictable enforcement of investor rights that are business-model specific.

Regulatory Compliance — Ad Infinitum

Ongoing, long-term regulatory compliance has been costly and operationally challenging, especially if a company has issued investment instruments under a securities registration exemption that has specific limitations.

Even companies like Google and Facebook have experienced organization-altering regulatory challenges. In both cases, Google and Facebook conducted public offerings in the year in which their shareholder bases increased beyond 500 investors due to secondary trading outside of the companies’ control (which breached their regulatory category and required them to start reporting to the SEC similarly to a public company). In both cases, the inability to maintain compliance with their SEC registration exemptions was cited as a primary driver.

With smart contract based compliance rules, an investment is able to assure that any defined compliance requirements are respected indefinitely. In the above example, the investment instrument itself would have prevented any transactions that would have created a 501st shareholder. If an investment instrument is issued with specific rules about investor accreditation or geographic location, smart contract based compliance (and investor identity management) is able to assure ongoing compliance in a dispersed secondary market.

As smart contract based compliance has visibility into its full token holder base, generating mandatory corporate reporting can be fully automated. This brings valuable relief for issuers and their financial service providers from the dual obligations of maintaining control over its regulatory categorization and maintenance of its regulatory reporting.

Investor Identity

Knowing Your Customer (KYC) is mission-critical in a regulated but non-centralized private market. Our approach is to represent an identity (individual or corporation) via a decentralized system where the investor has full control over their personal data — existing in a permissioned distributed ledger (blockchain) outside the control of any centralized party.

Using a decentralized platform for identity management allows for qualified investors to take part in these offerings via a wide ecosystem financial service providers without the need to continually reestablish their identity. This is an important feature of today’s centralized financial model.

This approach also allows for fully decentralized secondary trading, as smart contract based compliance systems can verify that regulatory requirements are being met when instruments are being traded between investors. These systems are further able to generate automated regulatory reporting and distribute investor payments (dividends, royalties, interest coupons). Without decentralized identify management, secondary trading and ongoing token program management are limited to exchanges where buyer and seller identity can be verified from the same database, which negates many of the potential benefits of a decentralized economic model.

Hunit works with external partners, combined with in house technology, to provide investors and issuers with portable identity management under their control.