The central securities depositories of South Africa and Russia have agreed to collaborate on finding fintech solutions using distributed ledger technology — the basis of blockchain — in a first-of-its-kind agreement globally, Coin Desk reported.
A central securities depository is an entity that provides a central point for depositing securities such as bonds and shares. Its clients are typically financial institutions such as banks and brokers rather than individual investors, according to the European Central Securities Depository Association.
The South Africa-Russia collaboration will begin by focusing on proxy voting — a ballot cast by one person on behalf of a shareholder of a corporation. Shareholders receive a proxy ballot in the mail along with an information booklet called a proxy statement describing the issues to be voted on. These can include electing directors to the board, approving a merger or acquisition, and approving a stock compensation plan, according to Investopedia. Registered investment management companies can also cast proxy votes for the securities in their portfolios, such as on behalf of mutual fund shareholders.
Strate, the central securities depository of South Africa, and Russia’s National Securities Depository agreed to collaborate to develop new solutions, focusing initially on past explorations into proxy voting in Russia.
As part of the agreement, the two countries plan to share information related to standardization and regulation of blockchain and distributed ledgers, Coin Desk reported.
A distributed ledger is a digital record of who owns what, but unlike traditional database technology, there is no central administrator and no central data store of the ledger, according to Clearmatics. Instead, the ledger is replicated among many different nodes in a peer-to-peer network. A consensus algorithm ensures that each node’s copy of the ledger is identical to every other node’s copy. The set of copies is referred to as a single shared ledger. Asset owners must use a cryptographic signature to debit their account and credit another’s account, so a distributed ledger cannot be forged.
When the Russian National Settlement Depository announced in April that it planned a trial of a blockchain prototype for e-proxy voting, this positioned it as one of the more progressive firms globally on the technology, Coin Desk reported.
Proxy voting is considered an antiquated, expensive and time-consuming area of capital markets that can be streamlined by blockchain-like systems, according to International Business Times. The South Africa-Russia project will explore cost savings.
Other countries’ depositories that have announced blockchain-like initiatives include U.S.-based Depository Trust & Clearing Corporation (DTCC) — a post-trade financial services company providing clearing and settlement services to the financial markets — and the Korea Securities Depository in South Korea.
Post-trade processing is the process after a trade is complete where the buyer and seller compare trade details, approve the transaction, change records of ownership and arrange for the transfer of securities and cash, according to Investopedia.
Eddie Astanin, chairman of the Russian National Settlement Depository’s executive board, described how he thinks distributed ledgers could impact securities settlement and custody.
“I think that post-trading may become the starting point of transition of the distributed ledger technology and blockchain from theory to practice,” Astanin said.
Other central securities depositories have expressed interest in joining the Strate-National Settlement Depository partnership, and their collaboration is welcomed, according to a statement.
“It is an important time for central securities depositories to be working together to define the future landscape in the distributed ledger technologies environment,” said Monica Singer, CEO of Strate. “Strate looks forward to developing this longstanding and valuable relationship with National Settlement Depository to develop solutions for emerging-market central securities depositories.”
The partners hope they’ll be starting an industry-wide collaboration, FinExtra reported:
Blockchain technology has long been viewed as a threat to central securities depositories and their role as intermediaries for securities transactions. With this in mind, the partners say that “financial market infrastructures need to embrace the technology and identify opportunities that will add value to their current clients.”
Central securities depositories across the world can have very different activities. The E.U. regulation of 2014 describes the core functions performed by a central securities depository, according to ecsda.eu:
