In our previous blogs, we have broadly highlighted how tokenisation of securities could essentially solve the problems faced by both issuers and investors of traditional securities. 

The blockchain technology simply enables issuers to issue any asset in digital form, fractionalise it, sell it in a primary offering and then list the tokens for secondary trading.

The three notable features of tokenising securities on a blockchain are as follows:

• Immutable audit trail
• Cheaper alternative
• Liquidity

But today, we shall dive deeper into the details of how the feature of immutable audit trail can actually foster the much-needed innovation in the fintech space. (We would be encapsulating the other two features in our upcoming blogs so stay tuned!)

Immutable audit trail:

One key ingredient of security tokens are smart contracts. Smart contracts allow compliance and ownership to be embedded into a digital representation of a real-world asset such as securities or real estate. Security tokens also utilise the Distributed Ledger Technology (DLT), a database where data (such as ownership data including timing etc.) can be accessed by multiple participants through a protocol that enables the database to work in a distributed and decentralised way.

The DLT is important but without smart contracts, it would be challenging to enforce digital transfer of the value of assets and at the same time meet regulatory compliance requirements.  

In essence, the DLT on a blockchain can store both the security token as well as the record of its transfer in real time since every transaction is publicly logged in case of a public blockchain and available with the approved nodes in case of a private blockchain. Thus, blockchain allows a uniform method of verifying and tracking data and prevents any tampering with it due to its built-in immutability.

This feature of immutability helps to especially verify and track investor data in the register of shareholders.

To understand this better, let’s take a simple example. In a private database, a regular user has read-only access which disables him/her from making any changes in the data. On the other hand, a system administrator with high privileged access can easily change the database in whatever way they please. This is where blockchain’s immutability steps in to make the data more reliable, imparting a sense of trust, confidence and authenticity to the users. This is much better than traditional ledgers of transactions having page numbers where anyone can easily make alterations to it by simply tearing out any page and replacing it with another page with slightly different transactions. Well the immutability in a blockchain doesn’t mean that the data is immune to any kind of tampering, but it simply means that altering data on an offline blockchain is extremely difficult and almost impossible on a live blockchain. Even if someone tries to alter it, the attempt can be easily detected by regulators. So if anyone were to alter data regarding the ownership or transfer of tokens in the register of shareholders on a blockchain, it would notify the related parties on the blockchain that the blocks have been tampered as its leads to mismatching of investor records and hence creates suspicion and demands proof of authenticity.

With these characteristics in place, would DLT on a blockchain become the perfect infrastructure to store ownership and transfer of security tokens in a fully transparent and secure way?

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