Blockchain Fixes This (No, Really)

On Tuesday 28 March, French authorities raided the Paris offices of five major banks – including HSBC, BNP Paribas and Société Générale – in connection with an ongoing fraud and money laundering investigation in which authorities are said to be seeking to collect at least €1 billion.

The survey focuses on dividend payments; custody of assets; centralized, opaque registration systems; and tax avoidance strategies.

When a dividend is paid to a shareholder, the shareholder must pay the associated taxes on the dividend. But… who is the actual shareholder who receives the dividend? In the old world of opaque, closed, centralized databases, that can often be difficult to determine. The shareholder who owes the dividend is registered before the “ex-dividend” date. If you are a shareholder before the ex-dividend date, you are entitled to the dividend and are therefore required to pay the taxes.

France’s Parquet National Financier (PNF) fraud office alleges that the French banks provided a service to their favorite and largest foreign clients where they would temporarily transfer shares held in foreign client accounts to separate French (ie non-foreign) accounts to lower the client’s tax. burden.

Since a bank with a closed, opaque, centralized database is able to maintain inconsistent records, they can know that their foreign client really owns a share of a company, while temporarily pretending to own that share of a company for tax purposes .

Here’s how it works: The foreign client owns a share. The French bank instead pretends to own the stock for 1 day before the ex-dividend date. The French bank receives the dividend payment instead of the client. The French bank pays the reduced (non-foreign) taxes. The French bank sends the dividend to their foreign client. The foreign client now owns the share again (until next time). Everyone is happy…except, of course, the tax collector.

Fraud of this type is very easy to carry out in legacy financial markets. There is no single golden source of truth for determining who owns a stock at any given time – and much of these systems rely on trust, as in the case when Dole was sued by more shareholders than it actually had.

The story continues

But – to use a familiar phrase – blockchain fixes this.

With a single source of truth in the form of a public, verifiable, read-only database, shareholders, capital market intermediaries and regulators can always have real-time access to financial markets, including ownership data, custody relationships and tax liabilities.

For example, with a blockchain purpose-built for capital markets, user 0x123abc clearly and transparently owns a share in the chain, custodian 0x456def receives dividends on behalf of 0x123abc on-chain, and 0x456def automatically pays taxes on behalf of 0x123abc chain. Blockchain eliminates the “double-owning” problem, streamlines back-office processes, eliminates inconsistencies in ownership records, and increases tax collection while reducing fraud.

People in crypto love to talk about “The Flipping”. This stems from a belief that Ethereum’s market cap will eventually outgrow Bitcoin’s and “flip” it. But there are also other twists: Bitcoin’s market cap vs. gold, transactions on blockchains vs. banks and credit card networks, and layer 2 volume vs. layer 1 volume.

But one of the less discussed yet more interesting twists is when regulators and governments stop fearing blockchain technology for its disruptive, unknown nature, and start leveraging it to improve markets, increase trust and better enforce regulations.

One day soon, all financial securities will be required to operate on blockchains. And that’s because blockchain really fixes this.