Understanding Blockchain Technology’s Impact on the Securities Markets

June 12, 2019

A team of legal and business researchers from Columbia has been awarded a grant to study how blockchain technology is affecting the security markets.

The grant, from the Columbia-IBM Center for Blockchain and Data Transparency, will allow the researchers to design and conduct a survey of securities-market stakeholders such as regulators, academics, policymakers, securities employees and journalists. The survey will allow for a deeper understanding of how blockchain technologies and digital ledgers are likely to affect the markets and how their potential should shape future regulation.  Once the survey is done, the researchers will outline their findings in a white paper and present their results in a conference at Columbia. The researchers are affiliated with The Program in the Law and Economics of Capital Markets, a joint program of Columbia Law School and Columbia Business School.

Merritt B. Fox, the Michael E. Patterson Professor of Law at Columbia Law School who is leading the legal aspects of the project, said there is a vast amount of potential in blockchain but also many pitfalls. Each of the various stakeholders to be interviewed for the survey has a unique perspective on these issues and it’s important to learn the learn these perspectives in order to design regulation that best advances the interests of society.

“The area is bursting with innovation and experimentation and we look forward to learning more about these,” said Fox. “Facilitating clearing and settlement, reducing the role of intermediaries, increasing global access to data, and furthering empirically-driven policymaking are just a few examples of areas we’ll look at.”

Juliette Fisbein, Director of Strategy and Operations for the Columbia University-IBM Center for Blockchain and Data Transparency, said the center awards grants to cutting-edge research in the area of blockchain and data transparency technologies, with this project being a good example of such research. Formed in the summer of 2018, the center is devoted to research, education, and innovation in blockchain technology and data transparency. The Data Science Institute and Columbia Engineering are partnering with the center, which also works in tandem with Columbia’s Business School, the Law School, the School of International and Public Affairs as well as Columbia Technology Ventures.

“The center is pleased to fund multidisciplinary research allowing to combine the complementary perspectives of lawyers and economists,” Fisbein said, “and will continue to seek multidimensional expertise to study blockchain technology and its potential throughout 2020 and beyond. Additional calls for research grant proposals will be announced this fall.”

In this Q&A, Fox discusses how the researchers will seek to gain a broader understanding of the role that blockchain technology may play in the securities markets.

How do you define digital ledgers?  

Digital ledgers are essentially encrypted, secure databases that synchronize, or “distribute,” many copies of transactions across multiple parties in many locations—without relying on any centralized authority.  

Are they used commonly in the securities markets?

Digital ledger technology stands to impact the securities markets in many potential ways but here are two main areas to consider. The first is enhanced regulatory capabilities: transaction data reveals valuable information about market actors’ behavior. By securely synthesizing that data, blockchain technology could lower the cost of market monitoring, enhance empirically-driven policymaking, and make more effective enforcement of rules against insider trading and other undesirable trading practices. And the second is a more fully informed market: increased availability of data and lowered cost of producing and verifying information could reduce adverse selection problems and search costs in the markets. The role of market participants and the structure of market access or linkages could also change, as the need for intermediaries, such as brokers, is reduced or eliminated. In addition, self-executing trading limits to curtail rogue trading behavior or halt markets in times of crisis are more easily implemented.  

The securities markets are enormous. What parts of the markets will your team focus on?

We would define the securities markets to comprise (1) the primary markets in which corporations issue equity to obtain new financing; and (2) the secondary markets in which stocks, bonds and other financial instruments are traded. These markets—together—provide investment opportunities for households and institutions, act as a sources of financing for companies, facilitate the hedging of economic risk, and provide information about the future prospects of businesses.  

Why specifically are you doing this survey and what do you know going into it?

We are doing the survey as part of our New Special Study of the Securities Markets, a multi-year comprehensive, from the ground up, examination of the securities markets and their regulation. The goal of the project is to produce both new research and a report aimed at Congress, regulators, and the public to inform the future of the regulation of the securities markets. It is clear that the current laws on the books require new assessment to account for changes over the past half-century -– change driven by globalization, transformative advances in information technology, and regulatory choices at the federal and international levels. The last comprehensive study of the securities markets was conducted by the U.S. government in 1963. We aim to complete our project in 2021.

Can you talk a bit about the research team and how each member will contribute to the project?

We have an excellent team with a variety of different skills and experiences. Lawrence R. Glosten, the S. Sloan Colt Professor of Banking and International Finance at Columbia Business School, will lead the economic aspects of the project. He is co-director of the Program in the Law and Economics of Capital Markets at Columbia Law School and Columbia Business School and is an adjunct faculty member at the law school.

Laura Miller, an Assistant Director in the Program in the Law and Economics of Capital Markets at Columbia, will work on all aspects of the project. She’ll work with the program’s research projects and with the co-directors on planning and logistics.  

Sue Guan, a post-doctoral research scholar in the Program in the Law and Economics of Capital Markets at Columbia, will work on all aspects of the project, focusing on its legal inquiries. Her primary research interests are in corporate law, financial markets, securities regulation, and contracts.

Edward F. Greene, a Senior Counsel at Cleary Gottlieb Steen & Hamilton, will lead the regulatory aspects of the project. He is also a Co-Director of the Program in the Law and Economics of Capital Markets, as well as a Lecturer-in-Law & Senior Research Scholar at Columbia Law School.  He is a former General Counsel of the Securities Exchange Commission (SEC) and a former head of the SEC’s Corporate Finance Division.

Reynolds Holding, a research consultant for the project, will play a critical role in survey design and administration. He also oversees Columbia Law School’s Blue Sky Blog. Before joining the law school, he was the law editor at Reuters Breakingviews, a national editorial producer for the Law & Justice Unit at ABC News, and a senior writer for Time Magazine.

What kinds of concerns are you hearing regarding blockchain and the markets?

There are many concerns surrounding the use of blockchain and digital ledgers, but three stand out:

Initial Coin Offerings, or ICOs, which involve the issuance of digital “coins” or “tokens,” surged in 2017 and 2018. The SEC then determined that many issuances constituted securities as defined in the Securities Act of 1933.  That determination, at a fundamental level, would bring any such ICOs within the purview of the securities laws—and impose all resulting obligations on their issuers. The full scope of application of the securities laws is still being fleshed out.

Many ICOs were outright fraudulent.  Many times, even “legitimate” ICOs did not possess code that reflected the contractual promises made by their issuers.

International regulatory coordination deserves more attention.  Digital ledger technology is borderless. There is great value in the sharing of information, concerning not only the technology as it is, but as it is developed in international regulatory “sandboxes.”

Can you discuss how you’ll frame the project?

It’s in three parts. The first part consists of preparing a set of draft survey questions and the testing and discussion of these questions at an initiating workshop, whose participants would include a sample of potential interviewees and academics from law, finance and computer science. The second will consist of conducting the Stakeholder Ledger Technology Survey and synthesizing the results in a preliminary white paper. And the third will consist of hosting a conference to discuss the white paper and more generally the results of the survey and the ways in which blockchain and smart contracts will impact the functioning and regulation of securities markets both domestically and internationally. After the conference, a final white paper covering these topics will be prepared.

We are grateful to the Columbia-IBM Center for Blockchain and Data Transparency for awarding us this grant, and hope our research contributes to a deeper understanding of the transformative potential of blockchain as its being applied in the securities markets.