The Rise of Blockchain Technology in IR: An interview with Chris Horlacher
Chris Horlacher, the CEO of Equibit Group, is one of Canada’s earliest adopters and biggest proponents of cryptocurrency and its underlying Blockchain technology. Chris describes Equibit as the ‘Blockchain of capital’, a peer-to-peer crypto-securities network, which enables issuers and investors to conduct business without the need for intermediaries like custodians or transfer agents.
Since 2010, he’s been connecting Blockchain to the capital markets. He explains, “Stocks and bonds were the natural next step for the technology.” His vision is to enhance the capital markets ecosystem, by leveraging Blockchain as a security register to handle earnings distributions, investor relations, polls and proxies.
We recently caught up with Chris to hear his thoughts about the emergence of Blockchain and crypto, and how it’s revolutionizing IR and securities.
What potential does Blockchain technology offer IR and the capital markets?
Basically, Blockchain technology is a new way to mobilize computing infrastructure. Traditionally apps and software services would need to develop infrastructure by adding computing power and bandwidth, but Blockchain completely undoes this model.
With Blockchain, rather than buying and building your own infrastructure, you create your own value token and set of incentives for earning and using it. With the right economic incentives, the infrastructure shows-up all by itself. The ‘token’ represents the cost of using that service and people can compete for a share of that action. At Equibit, we’re applying this technology to a self-managing digital network for accessing security registers and transferring value.
It’s a new solution to the old problem of handling custody and the settlement of securities. Decades ago, the owner of a security was printed on a paper certificate and either held by investors at home or by their brokers. This is known as a ‘direct registration’ form. But the problem was that every time a security changed hands, certificates would go back and forth for authentication, cancellation and reissuance. The whole process involved countless transfer agents, adding costs and delays to the clearing and settlement process. While this might have worked for centuries, by the 70s more people were getting into capital markets and making transactions. The old system simply couldn’t scale with the demand.
The only solution in the pre-computer era was indirect registration, also known on the street as ‘name registration.’ Rather than tens of thousands of certificates with many names, one certificate was issued in the name of a central custodian, who recorded the actual investors in book-entry form as its creditors. Today, this means that if you own stock in a publicly listed company, you’re not actually the ‘legal’ but ‘beneficial’ owner. Moreover, if the actual entity that is the legal owner runs into any financial problems, this will likely cause you problems downstream. The collapse of MF Global is a good example. While indirect registration was a stop-gap measure that allowed the system to scale, it also introduced a whole host of high-cost risks.
Because Blockchain technology is a networking protocol, it’s essentially a language. Blockchain is a series of commands you give to other machines on the network so that your messages propagate across the network for everybody to see. It’s the same technology as peer-to-peer file sharing for music and software files. Satoshi Nakamoto took it one step (or rather a giant, innovative leap) further, by figuring out how network participants could trust updates to the file from unknown sources. Bitcoin was the first solution for a peer-to-peer file share that could accept participant updates (known as ‘blocks’ in the Blockchain).
How is Blockchain transforming IR as we know it?
Blockchain will transform IR in several ways. In terms of Equibit, it’s transforming IR by making the outreach process more secure through strong encryption. All messages are encrypted end-to-end, ensuring that investors and shareholders are getting their messages without anybody else reading their communications. This is especially important when it comes to polls and proxies.
Digital signatures also ensure the authenticity of information transmitted over the network. This means that public ledgers are no longer prone to proxy battles or contested votes because the ballot is transparent and everybody can audit the box as votes come in. This substantially reduces the problems inherent in a centralized model for reconciling multiple ledgers. As a decentralized network, Blockchain eliminates the risks and errors that incite proxy battles and contested shareholder actions.
Will Bitcoin be adopted by the masses or will there be too much backlash from the capital markets and government regulations?
I think that Bitcoin is about five to ten years away from mass adoption. In fact, most revolutionary technologies take about twenty years to become the dominant way of doing things. We’re nine years into Bitcoin, so we’re about halfway there. I predict that by 2028, Bitcoin will be a major component of the global monetary system, with Equibit not far behind in the securities industry.
It’s similar to the technological shift from the ‘horse and buggy’ to cars. The advantages far outweighed the costs of adoption and inevitably won-out against the detractors. In Britain, they applied ‘flagmen’ laws, originally created for locomotives, to the emerging automobiles. The purpose was to warn people, everytime a car was coming down the street. Nantucket even banned cars entirely. But despite the fear of the new technology changing the status quo, cars became the dominant mode of transportation by 1920. And ever since, nobody has really missed the horses. When we consider the rise of Blockchain and crypto in IR, the financial industry is essentially up to its ears in manure and here comes Henry Ford with the Model T.