On August 25, India’s securities regulator Securities and Exchange Board of India (SEBI) announced that it is adopting blockchain for Security and Covenant Monitoring System.
The System will use Distributed Ledger Technology (DLT) and record the process of creation and monitoring of security (viz. due diligence, charge creation, etc.), continuous monitoring of covenants (agreement or contract) by Debenture Trustees (as applicable), the credit rating of the non-convertible securities by the Credit Rating Agencies, etc.
SEBI is planning to deploy this system on April 1, 2022.
Features of this DLT system by SEBI.
It would be a permissioned DLT. It means only certain participants get access to the control layer. Moreover, only certain actions are allowed to be performed by the participants.
Transaction data would be shared only with necessary stakeholders on a need-to-know basis.
The relevant stakeholders will have access to only their portion of information and transaction history on the DLT ledger.
All the information would be fully encrypted. The information will be cryptographically signed, time-stamped, and sequentially added to the ledger, providing a verifiable audit trail of transactions.
Advantages of the system
DLT has the potential to provide a more resilient system than traditional centralized databases. It offers better protection against cyber-attacks because of its distributed nature, which removes the single point of attack.
DLT enables programming pre-agreed conditions that are automatically executed once certain conditions hold true. It is similar to what is called a Smart Contract in blockchain parlance.
It will also enable programming a logic that will not allow any additional charge (a legal claim) on any asset if the charge is already created up to the present value of the asset.
“Thus, this system will be a quasi-registry of charges on full implementation and will achieve the objective viz –what is the value of a security that a charge holder has and who all does it shares with,” Sebi observed.
Regulators are now realizing the power of blockchain and making use of it. A transparent and distributed system will be crucial to create a robust and trustless system. It also makes verification easier.
Recently, the PolyNetwork hackers’ assets were blacklisted and frozen, making it difficult for the perpetrator to use them. Thus, digital assets can help regulators rather than undermine them in case of any financial mishappening.