Blockchain Makes It Difficult to Fool Regulators

Image credit: iStockphoto/Gustavo Muñoz Soriano

Albert Wiggin has a rather inglorious place in corporate history. 

During the stock market crash of 1929, Wiggin was in the unusual position of simultaneously attempting to save the Chase National Bank, where he was a senior executive, while at the same time shorting the stock and personally profiting from its collapse.

The bank survived, but Wiggin made around USD 40 million in profits (in today’s money) from his share trading at the same time. It created a scandal, but because there were no laws in place against Wiggin’s actions, he went unpunished He even went on to advise the U.S. Government on the banking system.

Today, of course, public company officials need to comply with a whole raft of legislation and regulation for the sale and purchasing of shares, particularly when it comes to their own listed companies.

The Wiggin example was quoted at a webinar held last week by the RegTech Association of Australia, where a number of new companies in the regtech space showcased their wares.

Protecting reputations

One of these companies was DigitalX, a fintech company that launched a product called Drawbridge aimed at compliance by publicly-listed companies. Drawbridge was created to serve a need: there are over 10,000 changes in director interest which are lodged each year on the Australian Securities Exchange, and the process is often prone to high-profile mistakes, often caused by human error or a lack of understanding of the rules.

Based on DAML open-source smart contract language, Drawbridge is an application that allows listed companies to digitize trading restrictions under their policies and automate approvals for employee and director trading.

Unlike Albert Wiggin, whose reputation suffered even as he profited, Drawbridge is designed as a reputational and brand safety net for the contemporary market.

DigitialX is itself publicly listed, and claims to be the world’s first publicly-listed Bitcoin company. In addition to digital asset funds management, it also builds regtech products, and Drawbridge is one of these.

The company has identified DAML distributed ledger technology — developed by 18 strategic financial industry investors — as a key development opportunity, particularly when connected to the ASX DLT infrastructure as that comes online.

The Drawbridge app aims to leverage the ASX infrastructure, guaranteeing and automating compliance and integrating the app with the exchange. In this way, the relationship between Drawbridge’s DAML technology and the ASX DLT is akin to a blockchain version of open banking — using access to the existing infrastructure to innovate and create new products.

Different use cases

Drawbridge offers a number of case studies as to how director share trades can go wrong, and not only contravene regulations but also inadvertently trash the reputation of the company and its executives.

They make the point that too often, securities trading policies are adopted as a box-ticking exercise.

“Securities trading violations are rife in corporate Australia for a variety of reasons, most of which are entirely preventable,” the Drawbridge case study whitepaper says.

In the first case study, the director of an investment firm traded during a restricted period. They thought they had secured the appropriate permissions, but it was clear no one actually understood the rules of the company’s policy.

In the second example, an e-commerce firm violated its own approvals policy, and the company chairman made multiple market trades without the written approval of the board. The company faced suspension from the ASX as a result.

The last case study was a fintech company that failed to disclose the fact that family members of a company director had subscribed for shares, prompting a “please explain” from the ASX.

None of these examples were malicious or even intentionally counter to regulations.

“A lack of awareness and honest mistakes don’t prevent embarrassing public questions on exactly who did what and when – and they won’t keep your company out of the headlines in the event of a breach,” Drawbridge makes the point.

Digital guardrails

Policies and procedures are great to have, but guardrails need to be put in place to drive compliance, and an effective way to do this is through blockchain.

“Digitizing your securities trading policy and automating what has traditionally been a manual and error-prone trading approvals process is the best way to implement and enforce your governance obligations,” says Drawbridge.

The governance app communicates policy to all internal stakeholders and creates automated approval settings with transparency on real-time trading requests.

“Because we’re working in close co-operation with ASX’s DLF platform, Drawbridge uses the latest securities market technologies to eliminate risks through in-built compliance,” says Drawbridge.

The result is that corporates will be able to identify any potential issues in their trading policies before they become a problem, reducing costly errors.

Good corporate governance, it seems, is too important to be left simply to humans.

Implementing technologies such as the Drawbridge app draws a definite line between compliance and the flouting of the law, and limits the opportunities for people like Albert Wiggin, who played both sides of the trade and got away with it.

Lachlan Colquhoun is the Australia and New Zealand correspondent for CDOTrends and DigitalWorkforceTrends, and the editor of NextGen Connectivity. His fascination is with how businesses are reinventing themselves through digital technology and collaborate with others to become completely new organizations. You can reach him at [email protected].

Image credit: iStockphoto/Gustavo Muñoz Soriano