Posted by Luke Parker on 28 October 2015 |
In his keynote speech at the Victoria & Albert Museum, Greifeld unveiled that Nasdaq will test blockchain technology to “better manage and streamline the proxy voting process,” starting with a Nasdaq market in Estonia.
Voting is the primary way shareholders can influence a company’s operations, its corporate governance, share structure, or mergers and acquisitions. These are all matters that shareholders, the true owners of the company, will vote on.
Proxy voting allows shareholders to vote when they can’t attend a shareholder meeting, by assigning an agent to act on their behalf. Investors can then own equity in companies that might be located and registered anywhere in the world, while maintaining the power of their vote.
“We are going to put that proxy voting on the blockchain, on the immutable ledger and obviously enable people to do that with their cell phone and have that record with them forever.”
– Bob Greifeld, Nasdaq Chief Executive Officer
During the U.S. Securities and Exchange Commission’s (SEC) proxy roundtable in February, Commissioner Luis A. Aguilar elaborated on the issues faced by the industry. “The ownership of today’s public companies is both too widely dispersed geographically and would involve too many shareholders to reasonably attend shareholders meetings (such meetings would require football stadiums rather than typical conference rooms. Rather than attending the annual shareholders meetings in person to cast their votes, shareholders of public companies typically submit their votes by proxy.”
“The advent of the internet and other recent technological advances that have resulted in the rapid evolution in communications have raised tremendous possibilities, and a host of issues, related to how shareholders can engage in the proxy process.”
– Luis A. Aguilar, SEC Commissioner
According to the global leader in secure financial messaging services, SWIFT, the proxy voting function has been characterised by non-standard, proprietary processes, with frequent requirements for manual intervention. “This has resulted in a process that is laborious for investors and intermediaries alike, and is prone to errors which increase the costs and risks.”
According to SWIFT’s research, there are more than 85,000 investor meetings held each year, accounting for more than $100 trillion in global assets.
While proxy voting allows investors to vote in these meetings, the process was traditionally manually done, with a “proxy card” indicating an agent’s authority. However, voting online has gained popularity over the recent years.
Broadbridge, whose infrastructure underpins voting services for more than 90% of public companies and mutual funds in North America, processed over 4,000 meetings, and 409 billion shares for the 2014 voting season, from March to June. Nasdaq uses the Broadbridge online platform, proxyvote.com, for retail investors.
For the 2014 season, Broadbridge reported that voting via online platforms accounted for over 95% of the shares voted. Voting by mobile platform also continues to grow. Broadbridge statesthat these efforts saved corporate issuers an estimated $904 million this season.
Despite these technological advancements, there are still improvements to be made. According to David Jefferson, a computer scientist at the federal research facility Lawrence Livermore’s Center for Applied Scientific Computing, online voting has more “security risks and privacy problems” than many realize.
With over 15 years experience in internet voting security risk assessment, Jefferson says that the security, privacy, reliability, availability and authentication requirements for internet voting cannot be satisfied by any internet voting system available today, or in the foreseeable future.
“Internet elections are essentially impossible to audit and there’s no meaningful way to recount because there are no original indelible records of the voters’ intent against which to compare the outcome. The only vote records are on the server, and they are highly processed electronic ballot images that have been operated on by millions of lines of code on the client device, during transit through the Internet and on the server and canvass systems.”
– David Jefferson, Lawrence Livermore’s Center for Applied Scientific Computing
While there are sophisticated voting systems in the works that use ‘end-to-end auditable cryptographic protocols,’ which offer some security and privacy protection, Jefferson states that even they have their weaknesses. Moreover, since only cryptographers understand how these systems work, maintaining voter trust “would be challenging.”
“Blockchain applied to the private market is innovation built on top of innovation, and carries with it the opportunity to forever alter the future of financial services infrastructure.”
Brave New Coin spoke with Ott Raidla, Nasdaq Baltic Market Communications and Marketing Manager in Estonia, to clarify some of these issues, and confirm the announcement. “We are currently in the process of a case study,” he said.
“Blockchain is seen as a solution because it is secure and info is stored in an immutable ledger.” Raidla stated. “We also believe that this will enhance the quality of investor relations, because shareholders can be more easily engaged.”
Engaging investors is no small undertaking. During the 2014 mini voting season, from July to December, Broadbridge reported that out of 1,077 US company shareholder meetings, over 22 billion retail shares went unvoted during the 2014 mini-season.
“Estonians are very keen on them,” Raidla asserted, referring to the multitude of e-services which have become routine in the country, such as e-elections, e-taxes, e-police, e-healthcare, e-banking, and e-schooling. Voting online has been available for all Estonians since 2005, “which means that is fairly easy to implement and find users.”
Alongside an audience that won’t be troubled by a technology like the blockchain, Nasdaq Tallinn, the only regulated secondary securities market in Estonia, has provided general meeting (voting) service to its clients for over 15 years.
Raidla explained that Nasdaq Tallinn has a 1-tier depository system, so most end-investor accounts are directly registered at the Estonian Central Securities Depository (CSD), which is100% owned by Nasdaq Tallinn, giving Nasdaq access to any data they require.
This European blockchain initiative is one of many from Nasdaq. In May, plans were announced to leverage the Open Assets Protocol, a colored coin innovation built upon the bitcoin blockchain, on the Nasdaq Private Market (NPM) platform.
A month later, in June, the exchange announced a partnership with San Francisco-based start-up Chain, to implement blockchain infrastructure for the issuance and transfer of shares on its Private Market. “This Nasdaq Private Market project aims to simplify the overwhelming challenges private companies face with manual ledger record-keeping,” said Greifeld.
Nasdaq Private Market recently acquired SecondMarket Solutions, founded by Barry Silbert, which provides software solutions for streamlining private securities transactions.
On October 27, Nasdaq delivered on a promise made in May, announcing its first blockchain-enabled platform, Nasdaq Linq, which will be demonstrated at the Money20/20 event this week, in Las Vegas. Some of the platforms first participants include Chain, ChangeTip, PeerNova, Synack, Tango and Vera.
While all these efforts have been directed at Nasdaq private markets, in an interview withBloomberg, Greifeld recently stated that Nasdaq is not discounting any possibilities, but is testing options within the private market, citing that “we can control the whole vertical stack.”