UK Financial Regulators Are Preparing for a World of Crypto Assets

Still, that's what's happening now in the U.K. where the London Stock Exchange Group and U.K. financial regulator, the Financial Conduct Authority, are working with distributed ledger technology startup Nivaura and 20|30, a UK company building a blockchain platform for corporate equity issuance.

One of the more exciting projects within the fourth cohort of the FCA's regulatory sandbox, the project will target institutional as well as accredited investors using the LSEG's Turquoise, the hybrid exchange platform for European equities that allows trading both on and off traditional exchanges.

The aim is to demonstrate for the first time in a live deal that equity in a U.K. company can be tokenized and issued within a fully compliant custody, clearing and settlement system.

The test follows a number of similar efforts to make more liquid markets for equity crowdfunding using blockchain tech, including the Korea Exchange which launched the Korea Startup Market for trading tokens on an over-the-counter basis back in 2016.

The ramifications of tokenized equity being distributed via an exchange are weighty, but the initial problem the project set out to solve is the inefficiency of equity crowdfunding, which essentially operates a bilateral relationship between the share issuer and the investor.

Oftentimes, people talk about equity tokenization that's just tokenized digital certificates which are not transferable, explained Sehra.

"Equity is driven by legislation and the legislation makes it very hard for the token to be equity itself."

Looking ahead. Designing the legal structure around the equity token meant creating a legal markup language and ensuring compliance with Central Securities Depositories Regulation, which Nivaura has been working on with law firms like Allen & Overy and, as part of the latest FCA cohort, Latham & Watkins.

Once there is a certain legal structure around the token, that gives the holder of that token the right to the equity and the right to all the beneficial interest in that equity, said Sehra, permitting a forward glance at the next possible phase of the project.

"The industry is going to become a world of tokenized assets - that's inevitable. We don't really care if it's ethereum or bitcoin, the underlying infrastructure isn't that important. But it is going to be a blockchain."