Russia’s stock market is stalled, and the stock market infrastructure, including record and registration institutions, lives through harsh times. Still, a crisis is always the time of new opportunities. For registrars and other similar institutions, such opportunities to a significant degree relate to introducing blockchain technologies or even expanding over the financial markets borders. Invest Foresight discussed the current situation with Peter Lanskov, Chairman of the Board of PARTAD (Professional Association of Registrars, Transfer Agents and Depositories).
– Some ten years ago the hot story was a “central depository”. It has been finally set. To sum up the present-day results of its existence, has it met all of the expectations? The point of concern nowadays is a possible abuse of its monopolistic position.
– Even when the central depository was being set, the concern was already there. Now we merely state we were right in being concerned. As classics of Marxism pointed out, any monopoly results in stagnation. Some trends in the central depository’s management policies cause worry. Since it was incorporated as a business entity, the organization strives to maximize its revenues, which is in contradiction with the nature of the internationally recognized central depositories’ activities. In fact, the central depository is one of profit sources of the Moscow Exchange Group now. The limitations envisaged by the law on the central depository, hardly function. Customer Committee is formed under supervision of the central depository’s management and is made of the representatives of the loyal banks, therefore the Customer Committee does not perform its function of setting restrictions in a number of monopolized segments of the central depository’s activities, especially since the situation is further aggravated by the fact that the Customer Committee is dominated by government-owned banks. Such banks aim to resolve the issues of their own which general public is barely aware of, and they do business with the Moscow Exchange Group in general. Given their overall goals, the problems of payments for the central depository’s services by other infrastructure participants seem insignificant to them. The charges for small and medium custodians including special depositories are therefore growing. Even the cascade method of corporate information distribution and communication with shareholders who are or are represented by National Settlement Depository’s depositors, is in fact a monopolistic mechanism too, as for distributing corporate information the depository charges 0.005% of each issuer capitalization. Let us look at, for example, Nefteprombank with a trillion rubles capitalization. You can calculate what 0.005% is in this case.
– 50 million.
– So, would you think that having sent to few hundred of its depositors some information on a corporate action in some Nefteprombank, the central depository should be paid 50 million rubles? It should, in line with the pricing policy of the National Settlement Depository. But it should not, as common sense and my own vision suggest. Sending an email communication within an electronic data interchange system may not be more expensive than a mail delivery. All the more so, it may not be multifold more expensive. For me as an expert, there is no point to discuss the central depository any further. It has exhausted itself and gone obsolete by the time it was established, since even by 2011-2012 there were distributed data base technologies available which offer horizontal peer-to-peer communications instead of a central institution topping the hierarchy. The central depository has become an obstacle for infrastructure development since it bleeds dry all other system elements and now even the issuers.
Just recently, the depository sent out some corporate action information to an issuer whose securities are held by 50 depositors of the National Settlement Depository. So, according to its Fee Schedule, the National Settlement Depository wanted to charge 2 million rubles ($ 35,000) for the said 50 messages. At the end of the day, the fee was negotiated down to 100,000 rubles which means each of the emails was priced at 2,000 rubles (USD 35). In my view, the said money is an unearned infrastructure charge which as a matter of fact was stolen from the issuer and hence from its shareholders.
– When the central depository was launched, it was declared our country was thus accepting international practices.
– It was accepting outdated international practices. Any imitation is nothing but chasing a fast running train. There is no point in gaining on somebody, the point is to lead the process. Since Achilles can never overtake the tortoise in a footrace, the tortoise will in turn never overtake Achilles for sure.
– What about market dynamics? The statistics available suggest that the number of registration institutions is not growing in the Russian market.
– Indeed, the number of such institutions is stable, or gradually decreasing, to be exact. A particular number is of little significance. What is important is their revenue base which is now diminishing. It is diminishing because national economy is contracting, regardless the claims of the government on the subject. Our securities market is in stagnation, to use the mildest term. From the legal regulation standing, the reasons for businesses to operate as public companies are scarce. So as entrepreneurial activities decline, the activities of registrars and other registration institutions go down accordingly. Still, they could engage in keeping any other personal data registers for any entities, including those in digital economy. Our goal therefore is to put information resources available to the registrars in a blockchain format and to offer personal data records systems and systems of compliance between personal data and the assets owned by a given individual. Such options may be applied anywhere, including to issuing tokens, etc. Someone has to keep the register of such records, so it would be best if that is a party uninvolved in the business of developing assets that make up tokens, and hence having no conflict of interests.
Besides, at the current pre-blockchain technology level of the records system development, we observe as the central depository consumes the functions of both the registrars and the custodians. And this cadaver will feed on the market until explodes. It’s preferable not to watch that happen but implement innovation projects which can offer to the customers of registration institutions technical capabilities identical to those of the central depositories but provided by distributed systems on competitive terms.
– With a stagnating market in the background, what is happening with the fees of private entities?
– The fees of the registrars are regulated by the Bank of Russia, thus nothing good is happening with the fees. The fees do not match the registrars’ expenses. The Bank of Russia intends to adjust the fees schedule, but the process is still underway. We certainly advocate lifting limits on fees in a competitive environment. We assume that the more we operate in a system, the more uniform the fees are since within the system they become a competitive market element. The Bank of Russia has taken an ambivalent standing. On the one part, it follows the line of the Federal Commission for the Securities Market of the 1990s, aimed at limiting the registrars’ fees. On the other part, it turns a blind eye on the charges orgy at the central depository where the management through its impolicies compromises all those positive aspects in developing new technologies and communicating with global markets which do possibly exist in its functioning as an infrastructure institution.
– Is it right to assume there are some blockchain analysis efforts being undertaken in your industry?
– Some pre-project developments on the pilot implementations concept do take place on the basis or certain platforms, programs, protocols, etc. in order to choose the best costs-vs-quality option, to test the technology on some simple cases and to gradually expand it onto the major functions of the registration institutions which perfectly match blockchain technology. It looks like blockchain has been specifically invented for the business of registration of any titles to any properties. It repeatedly replicates one and the same data, makes sure it is cryptographically protected, sets the range of attestors of whatever transactions, makes impossible any unilateral data tampering, provides for obstructing unauthorized transactions, etc. Blockchain technology resolves numerous problems which every given market participant confronts when dealing with malevolent actors face to face. More so, as any other actors, market participants tend to make mistakes. In blockchain systems, a mistake will be detected immediately when an entry is attempted, or, to some degree, by other distributed database participants since such other participants of the project and/or smart contacts will not authorize this or that transaction in case it contains erroneous data or does not meet certain requirements.
– Who is most active in these developments in your community?
– In PARTAD, we have some divisions focused on such efforts. This year, for example, we established Financial Technologies Committee. It is now the second year our STAR (System of Transfer Agents and Registrars) Committee is in operation having united most of registrars in a single system of transfer agent functions. One of the blockchain principles is rendering mutual services. Just as a private blockchain, the system based on mutual trust is implemented in our STAR where every registrar (or a branch thereof) is a transfer agent for another registrar within the very same rules of the game. The point is, in this case the rules are not smart contracts but are put on paper. Technology leaders of our market are most active. Among those is DRAGA (Natural Gas Industry Shareholders’ Registers Keepers), the best 2016 infrastructure institution whose representative heads our STAR Committee, or New Registrar, the best 2015 infrastructure institution. Other registrars and depositories get gradually involved in this work as well.
The core of the innovation pioneers should not be large to be able to discuss every issue and to come to mutual understanding in order to jointly disseminate the knowledge then. We arrange conferences and seminars to describe the essence of all we have done, to a broad spectrum of market players hoping they will gradually progress from being observers to being process participants.
– Is it imaginable that registration institutions will deal with cryptoassets and engage in tokens trade recording?
– How would one do without that? Virtually any asset may be converted into a digital format. When we say blockchain, we manifestly assume that within this information system an asset is presented in a digital format. It just can not be otherwise. Our concept is, we do not need to invent the product, but merely to digitalize the product which already is in the market, such as a bond or a share. At the initial stage, we intend to digitalize personal data. As an information asset, it may be similarly subjected to digitalization.
– What is most important for the development prospects of your industry?
– We want it to go digital. International Association of Financial Market Regulators and major markets’ regulators all confirm it is a prevailing trend. As a matter of fact, that is one of the areas where implementation of financial technologies is most possible. In our case, we suggest to use the Corporate Technology term to separate ourselves from the bank-specific transactions, from settlements and payments. Our activity relates to corporate events and corporate shareholders interests. It involves a broad range of infrastructure services which are not about sale and purchase of something, in the first instance, but about maintaining the property rights already acquired. The trend has been manifested by life itself and the sooner we come to accept it, the sooner we may commence implementing pilot projects in an organized, systemic and smooth manner, proving such projects’ efficiency, in order to present them to the regulator. We will ask the regulator to set regulatory playpits when required, or just proliferate the new means of recording rights and protecting data from unauthorized access and distortion when regulation is not required. In closed systems accessible by authorized users only where no anonymity, no cryptocurrency and no alien miners are permitted, blockchain technologies will allow us to get an effect unattainable in hierarchically structured systems.
– What is unattainable there?
– In hierarchic systems, Law No 115 on money laundering [Federal Law No. 115-FZ of August 7, 2001 On Countering the Legalization of Illegal Earnings (Money Laundering) and Financing of Terrorism] hardly works. At the moment, that law does not protect anyone from anything at all but creates a surplus burden on market participants. If the requirements of that law regarding customer identification are incorporated into cryptotechnologies, we will be able to make the law work. We may dislike it, but its requirements will be applied automatically saving us lots of efforts, human resources and costs of paperwork, and visual identification of passports and faces. None of the existing factors can guarantee a required level of identification. With an enhanced digital signature we would say: this is your signature, so if you claim it is not, it means you lost your key and failed to notify us thereof or you just allow other individuals to use it. But all that is your side of the story. All those are issues of the civil law and you should deal with them somewhere else. We will only execute orders bearing your signature. By doing so, we convert a huge layer of risks, otherwise ineradicable, into much more moderate and much more manageable risks where human factor is put down to a reasonable minimum.
New technologies implementation is certainly not a goal in itself. We intend to introduce them gradually, stage by stage, and to a degree and extent where they reduce risks and lower costs. In case we are unable to expand our income basis due to market stagnation, we should strive to at least cut expenses by excluding intermediary components at every stage of data processing.
– As far as I remember, Central Bank representatives have been mentioning setting regulatory playpits since long. Has a single one been established so far?
– We have not seen one, therefore we say we should be getting ready for that. The pilot projects we are drafting and developing do not require any playpits since they will function within the current legislative frameworks. They will only require the implementation experience to be taken into account in further activities. We have submitted our proposals to the Bank of Russia detailing our conceptual vision of the registration system prospect development. We see such development being based on distributed data base and we suggest to the regulator to take it into consideration when formulating its strategies in order to adapt the current norms and regulations to the future conditions. We believe that within such a technology the Bank of Russia may be immediately present in all distributed data bases and to monitor any processes at its discretion. It will thus be able to supervise market players by different means, not by requesting additional information and by expanding the reporting scopes only. To a substantial degree, that will simplify regulation and will abrogate a fair share of the current legislation. Various statutes will die out. Subsequently to the social relations digitalization the state will be dying out while state regulation of the pre-financial technologies will either die out together with such technologies or will evolve from tough requirements to indicative and commendatory provisions, to supervision and benevolent monitoring. For that to happen, the regulator needs to realize full potential of these technologies for the market participants and, in the first turn, for itself. The regulator should put on that new digital attire.
By Konstantin Frumkin