Blockchain 101

Blockchain technology facilitates digital asset transactions that are stored and validated using cryptography. The technology is defined by a few key characteristics.

  • Consensus: The consensus algorithm provides durability and trust, eliminating the need for a third-party intermediary.
  • Initiation: Every participant within a transaction can trace where an asset has originated and detail ownership throughout the history of that asset.
  • Immutability: The distributed ledger technology (DLT) records all user data and digital transactions that are executed in the network. Once recorded to the ledger, participants cannot alter that transaction. A new transaction must be created to reverse any errors creating visibility throughout the platform.
  • Certitude: Blocks are the structural element that archive the data and create the immutable record. With distributed ledger technology, accessing a single point of reference to identify who owns an asset and all participants within a transaction is now possible.

With the advent of this technology, the market has seen the proliferation of currency blockchains like Bitcoin (BTC), smart contract blockchains like Ethereum (ETH and ERC20), and the creation of Utility tokens like Binance Coin (BNB) where you can use tokens in lieu of payment for execution.

Within finance, the use of blockchain technology can range from identity verification (AML / KYC), structuring for capital markets transactions (debt, equity, hybrid structures), and trading of digital securities with custody and banking also part of the process. The Commonwealth of Bermuda will enable and allow for secure blockchain application by providing a robust regulatory framework.

The use cases for this technology in Bermuda primarily focused on the evolution of the capital market system. Three key benefits for this technology will be:

  1. Digital Identity (AML/KYC): The system will provide a “Gold Standard” of legitimacy for participants in the network so investors, issuers and regulators know their counterparties.
  2. Structuring: The exploration of various structures given the flexibility of this technology provides greater utility and will ultimately lower transaction costs for participants. The technology provides greater transparency to investors in the form of access to the library of investor documentation, governance, and ultimately pricing of assets providing active managers a gain in efficiency.
  3. Democratization of Capital: The network effect for issuers will be access to a greater pool of investors that are all seeking some risk adjusted return. Based on this profile, deals can be vetted and acted upon by a broader set of investors thus providing issuers a lower cost of capital.
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