Citi – one of the major bulge bracket players – in collaboration with Nasdaq, has recently introduced a settlement system for secondary market transactions concerning private company securities. The former has partnered with Chain for its DLT infrastructure needs. The system seeks to unlock liquidity in the traditionally less liquid market. The official Nasdaq press release document lists greater operational transparency and ease of reconciliation as other benefits of the system.
We attempt to understand how the new system in place creates value for the players involved in the existing private securities market. We start with the basic tenet of Distributed Ledger Technology that advocates value creation in an ecosystem of multiple players who do not trust each other.
Let’s begin with defining the players in the private securities ecosystem:
- Nasdaq Private Market: A marketplace where qualified investors can buy securities from private company issuers.
- Citibank: One of the global banks whose services aforementioned issuers and investors use to trade on the Nasdaq Private Market.
Now that we have established Nasdaq and banks as institutional players facilitating transactions between investors and issuers, let’s understand what DLT stack is used by these institutions:
- Nasdaq Linq: As early as late 2015, Nasdaq started experimenting with Chain to find a secure way enabling issuers to use its Nasdaq Linq platform to complete and record a private securities transaction.
- CitiConnect for Blockchain: Citi in partnership with Chain, developed a system which links CitiConnect, an existing STP tool that can be used to manage large-sum payments across borders and across currencies, to blockchains.
- WorldLink® Payment Services: Citi’s cross-border, multi-currency payments service.
Starting with the above pieces, the settlement system involves a digital sub-ledger that establishes the final link between CitiConnect and Nasdaq Linq. Therefore, a typical private securities transaction originates in the Nasdaq marketplace, gets recorded on Linq and the sub-ledger facilitates the flow of payment information into CitiConnect which in turn integrates to WorldLink® for final exchange of funds between parties.
We have always asserted that the real potential of DLT lies in the network effects and the scale of usability. However, the infrastructure underpinning global financial systems is operated by multiple entities across jurisdictions, making it highly improbable for all the players to run on a single software. Having said that, we certainly do not envision such a utopian scenario but there lies significant merit in gaining transaction volumes and user acceptance with any new technology, more so for the potentially game-changing ones.