Canadian Exchange Plans Clearinghouse for Digital Tokens

(Bloomberg) -- The Canadian Securities Exchange plans to create North America’s first clearing house based on blockchain technology, allowing companies to issue digital tokens with the blessing of regulators.

The small Canadian bourse will build the clearing and settlement platform for so-called security token offerings, which would be subject to full regulation by securities commissions, the Toronto-based company said Tuesday in a statement. This would differentiate the tokens from initial coin offerings, which currently fall into a regulatory grey area.

The tokens can take the form of conventional equity or debt securities, CSE Chief Executive Officer Richard Carleton said in a phone interview. The difference is that they’ll use the blockchain platform, which would allow trades to clear immediately instead of the usual two-day wait, and will also reduce costs.

“We really have to drive costs out of the system if the public markets are going to be a relevant part of the capital-formation process,” Carleton said. “We’re competing with private equity and venture capital sources of funding for early-stage companies and we have to get more competitive.”

Carleton said he expects the regulatory review process to be “fairly lengthy” and believes it will be “some months” before the platform can go live.

Australia Example

The CSE has made its mark in Canada’s capital markets by offering an alternative marketplace to the TSX Venture Exchange, operated by TMX Group Ltd. The CSE, which is 49 percent owned by Urbana Corp., has become a haven for smaller companies, especially those tied to the country’s burgeoning medical marijuana industry, cryptocurrencies, blockchain and other emerging technologies.

The CSE also said it has signed an agreement with 3D-printing firm Kabuni Technologies Inc., which plans to issue the first security tokens that will be traded on the CSE. Vancouver-based Kabuni said Tuesday in a separate release that it intends to file a prospectus for its security token offering with the British Columbia Securities Commission.

The CSE accounts for about 18 percent of total trading volume on Canadian exchanges, compared with about 54 percent for TMX’s exchanges.

TMX is also experimenting with blockchain. It’s working with the Bank of Canada and Payments Canada to test the technology for clearing and settlement of securities and it has launched a blockchain-based proxy voting system.

Australia’s main stock exchange said in December that it will replace its clearing house with blockchain. When completed, that will allow all trades on the ASX to clear and settle using the technology.

©2018 Bloomberg L.P.

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