Last week it was revealed that several institutions, including the DTCC, and ING alongside fintechs such as Fireblocks and Circle, have been involved in trialing the FinP2P solution for digital security tokens.
There are dozens of new blockchain security token platforms. However, for the sector to gain traction, what’s needed is a way to bring them together, which is FinP2P’s objective. The core concept is for investors associated with any institutional network to be able to buy digital securities from any token platform.
The need for FinP2P
Taking a sneak peak into the near future, there will be many security token platforms issuing digital securities for private stocks, bonds and other assets. And they use all sorts of blockchain technologies. If an institution wanted to enable its clients to buy tokens from all those platforms, how would that work? Would it end up connecting its own solution to dozens of others?
Of course, blockchain interoperability can solve the problem. Except it’s not quite there yet.
Stepping back, blockchain’s big promise was to remove friction and cost. Hooking up all the blockchain-based buy and sell-side platforms individually starts to repeat the spaghetti sins of the legacy systems, along with the costs of maintaining them.
So the options are to let investors in your blockchain network invest only in your tokens, delay launch until there’s blockchain interoperability, go down the spaghetti interoperability route, or find another way.
Recognizing this issue, the Global Digital Finance (GDF) association set up a working group to explore the challenge. It includes 70 organizations, half of which are large regulated institutions, and it came up with the FinP2P protocol.
Anthony Woolley, Head of Business Development at Ownera and Chair of the Institutional workstream for the GDF working group, said, “We’re bringing the industry together, whether that’s large financial institutions, buy and sell-side, FMIs (financial market infrastructures). Whether it’s large tech providers like IBM and R3 or leading fintechs in this space.” Critically it also includes post-trade solutions, settlement providers and custody providers.
What is FinP2P?
FinP2P solves the distribution problem by enabling all the institutions to connect to each other through a single integration which routes orders between the various security token platforms. In some ways, it’s not dissimilar to the role of conventional mutual fund distribution platforms such as Carlyle-owned Calastone, Allfunds and FNZ.
In March, the DTCC, ING, and several other institutions and fintechs participated in a FinP2P Proof of Concept (PoC) involving ten providers. The demonstration showed investors buying securities across different networks. And stablecoins on one network were used to pay for security tokens on another in delivery versus payment transactions. Compliance, including across borders, is dealt with automatically using data from each platform.
Another participant in the PoC was enterprise blockchain startup Symbiont which is working with Nasdaq on a blockchain-based private securities network. Dan Truque, Symbiont’s head of alternative assets, explained that sometimes token issuers might be wary of joining a specific network because it may lack liquidity. With FinP2P that’s not a worry because investors from other networks can invest.
“By the same token (no pun intended), you can have investors in the network access assets that are somewhere else. So you get the benefit of attracting both service providers into your network because they won’t feel like they’re stuck in this ecosystem only. But at the same time, you’re also attracting investors to your network for the same reason,” said Truque during the Security Token Summit.
Other PoC participants included solutions using Fabric and Corda enterprise blockchains, institutional digital asset custody firms Fireblocks and GK8, stablecoin provider Circle, as well as Securrency and Ivno.
At a technical level, FinP2P is a network transaction routing protocol, but it does not use blockchain itself. Instead, it’s a network of nodes connected to blockchains through APIs. This enables the connection of blockchain nodes using different blockchain technologies, both public and private. The FinP2P network protocol and APIs are open source.
Security tokens do not move between different blockchains. The token remains on the original ledger, which updates the new token ownership.
The DTCC’s role
One of the PoC participants was the DTCC, known as the world’s largest securities settlement organization, processing $2.15 quadrillion transactions in 2019. It’s exploring the private securities markets with Project Whitney, which initially targets tokens for SEC Regulation D exempt securities (an issuance of less than $10 million). As part of the FinP2P PoC, Whitney was integrated into the network.
“DTCC is attempting to do for the private markets what we’ve been able to do for the public markets, which is solve for standardization, as we believe it will significantly lessen the operational burden, reduce risk, and reduce the cost to transact,” said Artem Korenyuk, the DTCC’s Executive Director, Business Innovation and Digital Asset Strategy, during the Security Token Summit.
Project Whitney has three goals. Firstly it aims to create a standard way to issue private market securities. Secondly, by creating a shared stock record, it is possible to manage life cycle events such as dividends. And finally, it wants to automate compliance and suitability rules – in other words, ensure the stock’s risk is appropriate for the investor – which it refers to as its ‘transaction consent engine’.
Whitney is an off-chain solution that aims to be agnostic of the blockchain protocol but will support public Ethereum and permissioned enterprise blockchains.
Turning to ING, it connected its Pyctor digital asset solution to the FinP2P protocol. Talking about FinP2P, Hervé François, CEO of Pyctor and ING blockchain initiative lead said, “This is clearly the type of interoperable and open ecosystem where Pyctor, a digital assets initiative led by ING, will excel by providing a truly decentralized custody for any tokens.”
What sets Pyctor’s digital asset custody solution apart is not so much the technology – it uses hardware security modules (HSM) and multiparty computation (MPC) – but its decentralization. In other words, the private keys that control the digital assets don’t just sit within one organization but are spread over a decentralized network of financial institutions.
While ING initiated the Pyctor project in late 2018 other participants in the network include ABN AMRO, BNP Paribas Securities Services (BNPPSS), Citibank, Invesco, Société Générale – Forge, State Street, UBS and others. It’s notable that State Street, Citi and BNPPSS are all top five global custodians. Last August, Pyctor said it was looking to expand its network and bring on additional investors.
The road ahead for FinP2P
The next step for FinP2P is developing a pilot for live transactions with plans to take it into production in three to four months. The governance of the network is in the process of being fleshed out.
The timescale seems ambitious, but Anthony Woolley thinks it’s achievable. “FinP2P doesn’t require a massive network with many nodes to be live,” noted Woolley, who said just two institutions is enough to get started. “It’s not all or nothing. It’s not like there’s a Big Bang and this big thing everybody’s using. It will go into production and grow node by node.”