Nicola Plain - The Swiss DLT law in practical application

Transcript

thank you so much and thanks everyone for being here despite the uh very nice weather that we are having today uh my name is nicoa plain I'm the CEO of O arot and we use Swiss DLT law uh to tokenize equities and make them tradable and I'll tell you a little something about that uh in the next couple of minutes so um how it all started uh Lucius uh one of our co-founders um actually released an article a comment in the uh in the year 2016 a comment about how beneficial it would be for

Switzerland as an economy if we would have a DLT law that um as we just heard would give you legal certainty to run your business uh this article was followed by more um comments and also academic contribution about this topic um but little did he know that just a couple of years later we would actually have a DLT law in Switzerland of course uh the whole legislation process was respected went to the uh normal formal steps um Lucius was actually also one of the advisers to the Parliament and federal Council when it came uh to shaping the law and then uh on uh 1st of February 2021 uh the first part of the law was enforced uh which is

allows us for example to issue shares on on a blockchain as a token um and on 1 of August the second part about DT trading systems uh was released and uh taken into force and as you can see from this uh nice little graph uh graphic here on the bottom of the slide there were no votes against in the Senate uh so that's a huge success even though probably not everyone knew what exactly they were voting for or against um but still of course great result and now you may ask what exactly what what advantages do we have from from having a DLT LW in Switzerland and if we look at the application with uh equities equities of non-listed

companies especially um then I think this picture uh says it all um basically nothing changed from before when you had a paper certificate to now with a token uh but of course that's only on first s so let's uh have a deeper look here so in the past if you had a share of a nonl company and you wanted to transfer it uh that meant you needed to have uh a paper not necessarily the share on paper but a paper with a signature from the buyer and the seller uh just to have it uh legally sound and then you would uh be the new rightful owner uh of the share if you have like a contract signed uh with the seller but in order to have your

shareholder rights you would still need to reach out to the issuer to the company uh and make sure that you would also be part of the O of the share registry of the company so it's a two-step process very manual uh you need to have a paper you need to have signature on paper and then you again need to reach out to the company and now with um the application of the Swiss DLT law um this process can be uh made much more efficient so first of all a transfer of a share token under Swiss law is already legally sound transfer of a share so you don't need to have any contract any buying selling contract with signature on it you just

transfer the token and this is a legally solid uh transfer of a share of a Swiss company and um if you use our tools to do that so you send it from a wallet to OT wallet where you can register yourself you would automatically also be in the shareholder registry of that company so you would not only become the rightful owner but you would also automatically get your shareholder rights because um the entry in the shareholder registry of that company was automatically updated so it's still a two-step process but these two steps can be merged into one uh be automated with just the transfer of the token so even if in first s these two uh Graphics look

exactly the same uh actually there's a huge efficiency gain that we got from the Swiss DLT law okay let's uh let's look a little bit into uh how blockchain and private Equity um or how blockchain can be used in private Equity to make things more efficient um what are the huge problems that we're having there mainly three problems that uh we detected so it's a very exclusive thing usually the ticket sizes are quite high so only High net worth individuals and institutional investors have access to these deals to this asset class and if you're invested in Switzerland you're uh stuck with the investment for S and a half years on

average uh because there is no real secondary market so that means uh you must be in it for the long run um if not you should rather not invest in private Equity today um and then before you can even invest you need to negotiate a price so again since there is no Market there is no market price so the price is basically always a negotiation between the buyer and the seller so quite inefficient and we the use of blockchain Technology we think that we can solve all of these three problems so first of all uh by making the transfer of the shares because they're in a token form much more efficient uh you could also lower the ticket sizes um which then makes it more accessible less

exclusive uh secondly um you can create uh small markets um for example using amm uh automated Market maker uh smart contract we will get to that in a minute and then create create more liquidity or make the assets more liquid um and by that also have more reliable prices because if you have asset that is traded a bit uh then the it's not just a negotiation uh between two parties but there are several parties involved in the pricing mechanism so let's have a look um at how today in the traditional world uh Shares are traded so if a share is listed on an exchange like six or NC or wherever you

would have an order book and uh an order book works extremely well it's very efficient it allocates uh the the assets uh to the one that is willing to pay uh the most but you need a lot of Trades you need a lot of liquidity for these order books to work out because if you don't have that you would have large bid ask spreads and very little trading uh that takes place so that's why we try to different mechanism uh a very blockchain uh Native mechanism if you want so so we were uh inspired by Unis swap uh with the liquidity pool approach and we thought that may be work out uh for

shares as well in a bit different way though so what you can do with our technology and based on the swis DLT law is as a company you can of course first of all you tokenize part of your shares and then you can offer them in a liquidity pool pool amm smart contract and on the other side of the pool you can have a Swiss frank stable coin uh and Define define the price of the share of course um usually you start with selling your tokenized shares and buy that your raising funds um but as you sell shares the pool of crypto gets filled up and you can decide to leave part of those cryptos uh in that amm

smart contract in order to finance buyback so now investors can not only buy shares from you but they can also sell them back to you to the extent that you have liquidity in in your pool um and that's a very simple mechanism which leaves uh a lot of control also over the market to the issuer um so it's um we always say a first step if you want to make the shares a little more liquid and have some price exploration mechanism uh then this is a very good solution uh to to start off with before you're big enough and you would have uh enough liquidity uh so it's worth being traded on uh order book based

exchange so um we we did that as I said so we had uh we developed our own small uh automated Market maker smart contract that works of course a bit differently than the one from Unis swap um we call that the broker bot that's the front end to it and obviously it allows you to go on a website of a Swiss or startup and buy the shares directly on the website uh but also if the company allows to sell them back to the company and you can do that using cryptocurrency obviously but also uh with simple wire uh transfers Bank transfers um the smart contract is of

course only one uh uh the broker bot smart contract the amm is of course only one of the smart contracts that we have um and one of the tools so overall uh this is basically the front end where the investor can uh place the investment decision uh behind that uh there there is this widget and the company steers everything in the background with a corporate dashboard so they that's where they have all their settings their shareholder registry uh everything they need to manage their shareholders and the market um the user can access uh the broker B widget through the browser or for um our own wallet with an inapp browser currently um and of course the admins can uh access the corporate

dashboard uh through the browser um let's have a look how the uh smart contract ecosystem works so we have of course a share uh contract uh that contains all the functions uh to deploy a token that can represent shares under the withs DL Tila as we just uh learned then there is a multi- signature contract and the broker bot the amm smart contract and this broker bot smart contract is also connected to a payment Hub um we have a simple earc 20 smart contract that we use but on top of that we are able to wrap them uh in other token smart contracts to add some uh

functionalities one functionality that is extremely important in the startup space is uh the dragable uh contract so if you want to perform an exit and you have a few shareholders uh maybe you did even a crowd funding at some point you need to make sure that you can get rid of them uh if you want to sell the company if you want to exit uh that's why we wrapped the base token in a um ec20 dragable contract and the dragable contract allows you to if the majority voted to sell the company just uh take out the the shares from the wallets of the investors and hand them over to the buyer uh and take the uh the money and

distribute it proportionally automatically to the sellers so that's um a very easy way to perform an exit especially if you have quite a few shareholders uh in your shareholder registry um of course we also uh have a a recovery mechanism um yeah and as you can see we buil uh the smart contract in a very modular way we don't try to make one smart contract with all the functionalities in it but rather uh build it in a modular way um that's one thing that we're currently working on uh the secondaries we call it OTB uh instead of OTC so over the blockchain uh secondaries it's um

one thing that uh hopefully you will be able to do in the future is to place a sell intention on the website of a certain issuer so you uh connect your wallet where you have your shares on um with the widget on the issuers website um you place a sell intention you just State how many shares you want to sell uh at what price and then other people can come and uh buy the shares from you and the smart contract in the mid middle make sure that one party receives the agreed amount of shares and the other party receives the agreed amount of uh currency um that's one thing we're working on um but overall there are four main use cases that we can cover based on this with CT law and um the

blockchain technology um it's efficient way of fundraising as we just have seen because the transfer um of the shares is done in a very efficient manner with a transfer of a token digital governance so um also things like a digital GA or uh dividend distribution for example uh can be facilitated and made more efficiently um as well as employee participation and as we just have seen SE in secondaries uh with different approaches overall uh we built a tool U that you can use from the seat phase to an IPO phase um as I just mentioned for employee participation for financing

rounds where where we are adding more and more distribution channels some uh crypto wallets where you can buy the shares through in the future as well uh shareholder management but also custody as Swiss banks which is very cool um because we can build the bridge from uh trfi to defi or vice vers Versa um so uh if you don't want to have the responsibility over your assets yourself you can go back to the traditional world and hand them over to a bank um and then secondary markets as we said through the broker bot but also some more traditional exchanges that um are also building blockchainbased uh stuff currently um to conclude we have um done this since three years now we have 52

tokenized companies we have more than 48 million Swiss Franks in transaction volume uh 26,000 users and this is the chart of the monthly uh transaction volume thank you so much uh for bearing with me and your interest and um yeah I hope to see you soon if you have more questions please reach out to us thank you so much thank you very much Nicola it's amazing so this is how much much you can do if a a certain and stable uh DLT low is being formed and uh voted for in your country so it's amazing this is how sophisticated it can get um now it's time for questions oh we have a good few

ones so could you just maybe start with the gentleman it's good that we spared more time we do have time for a lot of questions like 10 minutes if we need so go ahead it's not turned on yet one two yeah the thanks for the presentation just have a question so it looks like a great technical solution and the question is on the regulatory side like are you selling shares to the public are you how are you addressing the um typical regulatory requirements of having a a product disclosure statement and and to have also to trade shares for certain parties so do you have a broker dealer license or do you

issue a prospectus every every time a client come on online or do you stay under the threshold um usually our clients stay below the threshold of uh 8 million swis Franks A year uh there is one that surpassed that and is now preparing the prospectus so what we do is especially in the beginning we make sure that all the laws are respected uh what we did in the very uh beginning is we asked finma so the financial regulator in Switzerland what they think about this mechanism with this amm that they just explained before and since there is no Financial intermediary involved and no one really commercially making the market uh we received a a nons subordination

confirmation from finma so that means that um even kyc you don't necessarily have to do it you as an issuer selling your tokenized shares directly to an investor uh still we have such a module and uh we make sure of course that everyone uh stays within the the legal boundaries um also in terms of perspectiv that you also mentioned does that answer your question yes thank you but as a broker dealer you allowing other people to trade shares or to trade shares for other people um so with the with the first mechanism where you always sell them back to the company there no broker deal dealer license required with the second mechanisms uh we are just in talks now or we just

approached finma uh to see if we uh can also get a nons subordination for that so uh it remains interesting we will see how it turns out thank you we have a couple of other questions further up could you put up your hands how many of you appro would have a question there one up there one up there nice good we have a plan very very interesting talk so if I understand correctly shares could be represented literally by erc20 tokens yeah the shares arec regular erc20 tokens more less regular yes so what happens in the case when there is some kind of flowing in contract and the tokens get hacked is it is it like potentially non-rev on the blockchain but then does it mean like

the attacker actually controls the didn't I didn't understand acoustically could you okay yeah try I'll try again so smart contracts sometimes have flows which can lead to hacks which could transfer the tokens to some attacking party so what would happen then do they keep the ownership of the company the attacker or is there a way to legally revert it but not converted on blockchain yes uh so there is actually a way um to circumvent bad effects of something like that legally so what you could do is basically you could say you could declare all the existing tokens um invalid and reissue them um you could also drag them away with this dragong

wrapper that I explained before so you could drag them out of all of the investors wallets and send them to a burn address later or you could just declare invalid and reissue them um those are measures that you would typically only do in very extreme events so actually that happened once where one investor downloaded a fake metamask and uh inserted a seat phrase and then of course the assets got stolen and were immediately dropped uh back to the company through the amm uh so the company had to stop the the the trading activities and then what we did basically we used the dragong mechanism to take away all the shares and since

they anyways wanted to switch from optimism they deployed them or we deployed them on optimism before to ethereum mayet uh we just uh took them away and then uh reissued them on ethereum mayet okay thanks were you welcome we have time maybe yeah f for one or Max two more uh there was one up there the gentlemen amazing thank you uh did I just miss it or did you not talk about a module that you could add to your solution concerning the new register for beneficial owners in Switzerland the registration of the beneficial owner you mean with the new

law that is probably coming up it's not probably it's certainly coming up yes we also commented to that and um what we would hope for is that you could delegate uh the the notification um of the beneficial owner to a third party because in that case uh if you use our tool set and our shareholder registry we could make sure that in such cases uh first of all uh the investors would need to register and and go through some registration kyc process and then secondly also that we in an automated way hopefully through an API or

something like that um um sent these data to the the central registar so um it's still open I think how uh this this law will be uh shaped uh in in some details and we that's at least what we what we stated in our comment hope for uh that this responsibility can be delegated to a third party does that answer your question yeah I I recommend you contact contact the guys uh running uh easy golf at the state Secretary for economic because they are just implementing that uh registration we just um we took part in the for and and handed in a comment but

you would suggest we we reach out through easyl as well yeah Martin go thanks for the hint aming lets have um I think here in the front we had the gentleman sorry I make you walk up and down I'm just standing here it's a great Delight to see you Nia we met first time when you just started X and it's a huge success so congratulations first of all thank you so much my question here is about dividends is it just like trading shares like buy sell or the investors through your platform are also entitled for dividends sorry I didn't get the last

part or dividends oh dividends yeah yeah um divid they just trade buy and sell shares or they could also you can also receive dividends so as an issuer you can in a quite automated way uh distribute them in the form of stable coins for example uh so that's also a functionality that we offer or a use case that we can cover so did you automate the tax as well like the 35% tax on the dividends when they're issued or not um so we cannot send it in automated way to the tax authorities of course but we we account for that uh definitely also in a tax report that you can download if you use our Wallet app you will also see the withholding taxes

for example if uh dividends were distributed uh so we account for that but we cannot send it automatically to the tax authorities yet maybe in the future thank you so much amazing so I have a 30 second last question because we have the time for it s sorry so finma those of you not being Swiss finma is the Swiss regulator and uh I believe that Nicola is one who could really give just a 30 seconds answer on how is collaborating and speaking to finma we know how it is speaking and collaborating with SEC we hear it out with Gary or whoever it is um how does that relate to finma how does aarat talk

to FMA I think there are probably other people that have more experience with that what we did we just EX changed a couple of love letters and uh so far uh that's a great experience that that that did not work with Gary I believe thanks ailan put your hands together to Nicola from aarat thanks very much