Equibit, which bills itself as a global P2P OTC platform, is a block-chain-based securities register that manages OTC equity, warrants, partnership units and more. The system includes a shareholder communication system, plus the ability to issue BTC-denominated dividends and distributions. Equibit manages functions typically performed through transfer agents and central depositories. Hence, the system saves costs to issuers and brokers.
If successful, this P2P electronic equity system will revolutionize securities trading. CCN reported on Equibit’s formation in June. CCN recently contacted Chris Horlacher, managing partner of the Toronto, Canada-based venture, to find out how he got involved with the block chain and why he believes the Equibit-powered OTC market will be successful. Following are excerpts of this Q&A interview.
Tell us about your professional background and experience.
Horlacher: I graduated college with an honors bachelor of accounting degree and immediately went to work as an auditor in Deloitte & Touche’s manufacturing and retail client practice. That was a fantastic experience, and I got to work with some of the world’s largest companies and pension funds. Many of these companies had hedging operations, and that became an area I focused on.
I was drawn to the abstract and esoteric nature of derivatives and other financial products. Auditing a manufacturing company for me became an exercise in valuing and assessing the effectiveness of interest rate swaps, foreign currency futures, and other financial instruments commonly used by companies dealing in multiple jurisdictions. Thus, my love of financial institutions began.
In late 2010, I was lured away by Euro Pacific Canada, Peter Schiff’s expansion of his stock brokerage into Canada. They were starting up and needed someone to help them through the process of setting up their businesses’ financial end. It was the opportunity of a lifetime, and I joined them for a stint as their chief financial officer. I learned a tremendous amount about how a securities market works during my time there and was astonished at just how dated the industry infrastructure is.
After Euro Pacific Canada, I started my own accounting and consulting practice, which has given me the opportunity to work on some amazing projects. I restructured the internal controls of one of Canada’s largest energy companies, started up a new national insurance underwriter, and worked on a number of other multimillion-dollar ventures.
How does the current OTC system work and what are the weaknesses?
Horlacher: It’s hard to know exactly where to start. The industrial model is a product of its time. It evolved out of the need to organize enormous amounts of paperwork and so the entire process of creating and assigning ownership of individual securities became a hyper-specialized network of functionaries, each focused on only one or two things in what is essentially a multi-company document management system. While reliable, it’s incredibly labor-intensive. It also requires investors to take on risks they may not even be aware of.
Industry regulators have codified this structure into the existing regulations, limiting the amount of innovation that can happen to within each functional silo. This has led only to computerization of existing processes that used to be managed by humans. Speed has greatly increased, but the model is unchanged. The only way to improve upon the system as a whole was to start over from scratch, and that’s what we did with Equibit.
What’s the difference between directly-registered securities and securities in their “street name”?
Horlacher: This is a very important concept in the securities market as it refers to who has actual title ownership of a security. A directly-registered security is a certificate issued by the company that has the investor’s name on it. In this case, there’s no question of who the owner of the security is, it’s written right on it. The trouble with directly-registered securities is that transferring them to another investor becomes an onerous process of sending the certificate back to the issuer for validation, cancelation, and re-issuance to the new investor. It can actually be more complicated than that if the issuer is using a transfer agent.
Due to the limitations on transferability, most securities are registered in what’s called a “street name.” This is just industry jargon that means the name printed on the security is actually that of a broker (in the case of a publicly-traded security) or transfer agent (in the case of an OTC security). These entities hold title to the securities because they don’t have to go through the process of changing the registration of the security when two of its clients trade it. This is a similar relationship to the one you have with your bank when you open up a checking account. The bank takes title to your money, and you can easily transfer it to other customers of the bank. However, if the bank goes bankrupt, you find yourself being an unsecured creditor and the last group to receive their money back if anything at all. The same risk applies to anyone that has securities registered in street name. If the broker or transfer agent goes under, your assets may be gone forever.
What was the biggest development hurdle when designing Equibit?
Horlacher: That definitely had to be figuring out how to get multiple block chains working together seamlessly in a single application. We wanted something transparent and scalable, and our team worked on that for over six months before coming to a solution we were happy with.
Originally, we tried to achieve cross-block-chain functionality using a single public key. This had a number of advantages. But we quickly realized that preventing block-chain cross talk was going to be incredibly difficult, leading to the risk of lost and unprocessed transactions as well as some modifications needing to go into other block chains in order to prevent one from overrunning another.
After returning to the drawing board, we came up with a routing system that can associate addresses from multiple block chains together as part of the public database. So now it’s easy for everyone on the network to know what the correct bitcoin address is for a particular Equibit user, or vice-versa. This was critical because the system would have to initiate bitcoin transfers on the basis of where certain equibits are held at a specific moment in the case of dividends. There are other scenarios as well where this address lookup needs to occur in order to ensure that all data is routed to the proper public keys.
This represents a major breakthrough in the block chain application community, and we can now pick and choose what block chains we want to combine to create an application. Apps no longer need to be bound by the amount of functionality that can be placed on a single block chain.
How do you envision an Equibit-powered OTC market working?
Horlacher: The Equibit system completely replaces traditional securities depositories, custodians, and transfer agents. That alone frees up billions in additional investment capital that can go towards financing more business initiatives. It’s a paradigm-shifting development for the industry.
After getting over the initial disruptiveness of the technology, however, I’m optimistic that we will quickly build up a network of investors, brokers and issuers on the platform. Investors will be drawn to the fact that they get directly-registered, highly-liquid, and easily-transferrable securities. Issuers will love the much lower issuance and maintenance costs, and brokers will have unprecedented access to information in order to find and identify potential investments for their clients.
Equibit opens up the OTC market completely and grants total information awareness to everyone on the system. It begins the process of a major overhaul of the global securities market and we could even see public exchanges built on top of it to act as a market maker for selected Equibit issuers that comply with the exchanges’ regional reporting requirements.
Can investors join the project?
Horlacher: I’m happy to say that we will soon be opening up an opportunity for North American angel investors to subscribe to a portion of the Equibit pre-mine. The system will ultimately generate 21 million equibits. A half-million equibit units are up for grabs in an offering that we will be opening up in the coming weeks after we finish going through the legal process to draw up all of the required documents.
This will be structured through an Ontario partnership that be replaced by an international non-profit foundation after the system goes live. Investors will also receive a lifetime voting membership in this non-profit, whose mission will be to continue developing and promoting the Equibit system.
Accredited investors can get additional information as well as early notification of the offering when it opens by emailing us at [email protected]