At BlockRules, we are working to revolutionize how growing companies can access capital markets. Traditionally, companies looking to expand their operations are at the mercy of inefficient and costly financial intermediaries and institutional investors.
Security token offerings (STOs) are an attractive alternative. Through STOs, companies are able to more directly reach investors from across the globe. However, enforcing global regulatory compliance remains one of the main obstacles to widespread security token adoption.
BlockRules VP of Engineering, Pramod Madabhushi, sat down with me to discuss why the proprietary BlockRules Compliance Engine can drive the blockchain fintech revolution by filling this critical role.
SB: What was the inspiration behind the BlockRules Compliance Engine?
PM: At this point, a lot of companies have issued utility tokens, but more and more companies want to launch security tokens because they have regulatory oversight. They can be anything from revenue to debt or dividends. STOs are a global alternative to traditional fundraising methods. But, because they are global, regulatory compliance is a key problem. One that we decided to solve.
SB: Why is regulatory compliance particularly tricky for STOs?
PM: Every company that issues a security token needs to ensure that their tokens are sold and traded according to the regulations of every country involved. For conventional securities, the stock exchange or brokers take care of this. For security tokens, however, the issuing company is responsible for it. We did a lot of research on vendors and platforms for regulatory compliance that are already on the market and were surprised to realize that they were only partial solutions.
SB: What do you mean by “partial solutions”?
PM: The main appeal of security tokens is the ability to trade them globally. No other available platform provides regulatory compliance that is comprehensive and flexible enough to adhere to multiple nations’ compliance rules. This is because they rely on whitelists, which are very limited in what they can handle, or oracles, which process compliance off-chain making them less secure and less transparent.
SB: How is BlockRules different?
PM: From the investor’s perspective, tokens only have value if they can be traded. When regulatory compliance cannot be implemented across global borders and security tokens cannot be traded across those borders, they lose their value. Currently, issuers are able to launch security tokens, but their tokens can’t be traded across borders in a regulatory-compliant way. To finally address this problem, our Compliance Engine breaks the existing paradigm of geographically-limited trading and opens up regulatory-compliant cross-border trading.
SB: What does this mean for companies launching their tokens with BlockRules?
PM: Working with their legal counsel and our partner token managers, token issuers will set the guidelines to enforce regulatory compliance in as many jurisdictions as they want. They’ll provide BlockRules with the information to determine who is eligible to buy or trade a specific token. We then translate those instructions into suitable abstractions contained in our on-chain smart contracts. These arbitrarily complex rules will be enforced for each and every token trade, blocking non-compliant trades while maximizing security and transparency.
SB: And on the flip side, what does this mean for investors?
PM: We provide investors with a unique experience as they buy and trade security tokens on the blockchain. People are attracted to blockchain because it’s inherently trustworthy—the code you put on it, the smart contracts, are permanently recorded. The BlockRules Compliance Engine keeps the whole process on the blockchain, taking full advantage of the blockchain’s security and transparency in a way that is unprecedented in fintech.
SB: Are there other unique features of the Compliance Engine that we haven’t talked about yet?
PM: One point I don’t want to overlook is that existing fixed compliance processing platforms, like white- or blacklists, are not adequate solutions to the problem of global regulatory compliance we set out to solve. The world is a big place with complex regulatory laws that are constantly evolving. The Compliance Engine was designed to be flexible to adapt as compliance does.
Check out the Compliance Engine whitepaper and overview brochure. Reach out to us if you have questions or would like more information on the Compliance Engine or any other piece of BlockRules technology.
Welcome to BlockRules
Thu 21 February 2019