Digital Finance

Security Tokens and Unlocking the Real Potential of Blockchain

Baxter Hines

• Publisher: Wiley
• Year: 2020
• Print ISBN: 9781119756309
• eBook ISBN: 9781119756316
• Edition: 1
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

Explores how the financial industry will be affected by developments in blockchain and cryptocurrencies at the dawn of a new digital age in finance?

Our financial system is in the midst ofa digital revolution. Blockchain, viewed by many experts as "the most important invention since the Internet, " haschangedthe way we exchange value and information. Although most people are aware of Bitcoin and other cryptocurrencies, fewunderstandhowsecurity tokens—digitized forms of traditional ownership certificates—candriveblockchainto reach its fullestpotentialbyofferinginvestors features and innovations that are simply not possible with paper certificates.

Digital Finance: Security Tokens and Unlocking the Real Potential of Blockchain explainshowthe integration of blockchain and security token technology willtransform the current financial infrastructure and radically improve efficiency, transparency, and security. Using clear language and an easy-to-follow framework, author Baxter Hines draws upon his decades' experience in the financial industry toaddresshowthedigitizationof assetswilldrive cost reductions, enhance flexibility, andpave the way fornew business models and revenue streamsfor years to come. Filled with real-world case studies and expert insights on the latestopportunities andtrends, such as the COVID-19 pandemic'srole inacceleratingthe adoption of blockchain, this must-have resource:

• Shows how blockchainanddistributed ledger technology are disrupting the financial industry
• Explains what security tokensareandwhythey are the next major breakthrough for investing
• Highlightshowblockchain technology has created newand moreefficient ways of fund raising and investing
• Identifiesthewayscompanieslike IBM, Fidelity Investments, and AXA are deploying blockchain and tokenized solutions
• Describes howassets only available to institutional investors could become marketed to the mainstream
• Discussesthe impact that security tokens will have on real assets such as stocks, real estate, bonds, and derivatives
• Provides insight into how centralbanksaround the worldare embracingblockchain and beginning to issue digital currencies

Digital Finance: Security Tokens and Unlocking the Real Potential of Blockchain is essential reading for financial professionals, general investors, finance and technology students, regulators, legal professionals, and users of cryptocurrency and blockchain technology.

PART I
THE MAGIC LEDGER

CHAPTER 1
BLOCKCHAIN BASICS

• Blockchain provides a highly effective means for exchanging value.
• Blockchain technology is made up of three main elements: accounting, computer science, and governance systems.
• Distributed ledger technology is the mechanism by which transactions are recorded and relayed to all participants on a blockchain.
• By design, blockchains are trustworthy, secure, transparent, efficient, and innovative.

What Is Blockchain?

Blockchain technology is a powerful means of exchanging value. A blockchain is a growing system – an interconnected list of records that are timestamped, secured, and agreed upon by such system's participants. The content of these records can include almost anything – amounts transferred, user information, details of terms behind each transaction, and really just about anything else pertinent to the transactions. A blockchain provides users the ability to access, observe, and analyze the data stored on the blockchain.

Foundational Elements of Blockchain

Blockchain stands on three basic elements: accounting, computer science, and governance systems.

Accounting

Ledgers In accounting terms, a ledger is used to keep track of money going in, out, and around an organization or system. The ledger serves as a diary to record the transactions and financial matters occurring over the lifespan of an organization or system. Blockchain is simply a digital ledger that records and logs the transactions of a community of users. Every participant maintains his or her own copy of this ledger. (See Figures 1.1 and 1.2) Updates of the ledger are automatically sent out to all participants. As an example, this simple ledger contains just two columns: names and amount.

FIGURE 1.1 A Simple Accounting Ledger

FIGURE 1.2 Sharing & Inspecting a Ledger

Ledger A has 5 participants each holding a specific number of units. Suppose that Scott decides to send Rose 100 units. Scott will then have 100 fewer units and Rose will have 100 more units. Debit and credit entries are taken to reflect this change to the ledger and the total number of units in the system remains unchanged. By changing from Status A to Status B, the ledger is successfully updated and accurate. Despite the fact that just Scott and Rose were involved in this particular transaction, all participants receive and maintain a copy of this new ledger state.

Processing & Communications Accounting not only measures what has occurred but also describes the processing and communication of financial and non‐financial information across an entire entity. Take the case of how blockchain can be used to replace the role of a notary. Originally conceptualized in the early 1990s, blockchain was intended to be an electronic way to notarize documents.

Let's elaborate on this topic a bit more and understand how blockchain may be used to automate this process. As trusted third parties, notaries have played an important role in business over time as they act as official, unbiased observers and endorsers to a document's authenticity and validity. The duties of a notary may include the following:

• Identifying the parties involved and the provisioning of significant proofs of identities
• Acknowledging that the parties involved are of proper capacity to engage in what is intended
• Witnessing the state of a document
• Attesting to the seals and signatures contained in that document
• Recording the signatures along with the timing
• Delivering copies of the document to all relevant parties

Notarizing a document deters fraud and provides documented proof that a transaction is consummated under proper procedures, is complete in its entirety, and that parties involved are willing and aware at the time of execution. The notary process gives notice to all that the intended terms of a document are in full force and effect against the parties thereto.

Blockchain technology allows the duties of a notary to be written into computer code and performed by the blockchain itself, eliminating the need for a third‐party notary.

The notary function is one of many accounting tasks that blockchain will perform. Blockchain can employ many other mechanisms from accounting to update and maintain the ledger referenced above. The digital nature of blockchain can facilitate the financial accounting, tax accounting, auditing, and reporting of activities that occur on the blockchain system. Through coding, just about any accounting procedure can be executed on the chain.

Computer Science

As mentioned earlier, computer science is one of the fundamental disciplines upon which blockchain technology is based. As a scientific field, computer science deals with how data is best handled, processed, stored, and communicated. As blockchain is based on the internet, a vast array of computer systems can be utilized to collaborate with one another on a global scale. As various subjects of computer science are employed and interact together, the resulting combination of technologies can create a synergistic effect and further enhance the capabilities of blockchain's potential. In this section, we will review selected topics that enable blockchain's attributes and abilities.

Networks Networks consist of two or more connected computers that work together for the purpose of sharing resources. The internet itself is a prime example of a network. Each participating computer in a network is known as a node. Individual nodes are assigned unique addresses to ensure all messages and connections are properly routed to the intended recipients.

Centralized vs Decentralized Networks are designed to be either centralized or decentralized. Centralized systems depend on one machine doing most of the heavy lifting. Advantages are that the system is relatively inexpensive, consistent, and requires little upfront time commitment. Changes or upgrades can be done quickly. In the early days of computing, most networks were centralized, meaning the majority of processing functions were carried out by a single machine in a remote centralized location.

Today most networks run off decentralized architecture. In a decentralized system, all computer nodes form the larger computer network. Many computers in use today have capabilities that far exceed the requirements of the business applications intended for them. Just to give this last statement some perspective, a modern smartphone is said to contain more computing power than what NASA had in its entirety in the 1960s when it put a man on the moon! As a result, many computers run relatively idle in comparison to their capacities and a decentralized system can utilize these spare resources to maximize efficiency.

Decentralized systems have numerous advantages. Decentralized systems can share files, peripherals, and other tools. Decentralized systems are more reliable than a centralized system since they are not prone to a single point of failure (i.e., they do not rely on one central node to complete a specific process). They are also scalable; if more resources are needed, you simply add more machines to the network.

Accessibility There are four known types of networks that blockchains run on today – public, private, hybrid, and consortium. The main difference comes in the form of “permissioning” – i.e., certain chains require consent to access particular features.

• Public blockchain networks have no restrictions whatsoever as to who can access them. If you can find an internet connection, you can participate in and validate the activities on the blockchain. Ethereum and Bitcoin are two well‐known blockchain platforms that use public networks.
• Private blockchain networks require permission to join. Typically, a network administrator has rights to grant this access.
• Hybrid blockchain networks have a combination of characteristics from both public and private networks. Various factors determine the information on the blockchain that is made available to the public or held back for permissioned use. Dragonchain operates on a hybrid network.
• Consortium blockchain networks could be described as semi‐d...

Table of contents

• COVER
• TABLE OF CONTENTS
• TITLE PAGE
• COPYRIGHT
• DEDICATION
• DISCLAIMER NOTICE:
• ACKNOWLEDGMENTS
• PREFACE
• INTRODUCTION
• PART I: THE MAGIC LEDGER
• PART II: CREATING THE DIGITAL WRAPPER
• PART III: REALIZING THE POTENTIAL OF SECURITY TOKENS
• CONCLUDING THOUGHTS
• ADDITIONAL RESOURCES
• ABOUT THE AUTHOR
• INDEX
• END USER LICENSE AGREEMENT