In 2016, Nasdaq announced its interest in developing a new e-voting platform on our Tallinn exchange in Estonia using blockchain technology. The project involved various stakeholders, including collaborating with our technology partner, Chain. It also leveraged local digital identification solutions, which are used by the government to issue identity cards to foreigners by the Estonian state through their e-Residency program. What follows is a brief background and progress update.
Annual General Meetings (AGM) tend to be necessary high-cost events with, on average, fairly low shareholder participation. As cross-border investments grow, there is more pressure for greater investor engagement, calling for a secure, cost-effective and flexible solution that facilitates shareholder participation and voting from a distance. This would also encourage intermediate communication between investors and company representatives. In addition, creating a lower cost, easier access solution to allow exercising cross-border shareholders’ rights could potentially facilitate further growth in cross-border listing, trading and settlement activity.
There are several web-based voting solutions currently on the market, yet there is still a preferred preference by investors to attend and cast their vote in person at the AGM. Further, investors often do not have control over their votes (and easy access to their voting history), particularly if they give voting rights to their proxies.
This presents two opportunities for a new approach: 1) create an alternative solution that could potentially leverage blockchain’s secure technology and improve voting transparency; and 2) partner with other blockchain early adopters in the industry to test the effectiveness of this technology as a medium for secure remote participation and voting at Annual Meetings.
Why base our project in Estonia? We saw five clear reasons:
- Know-how – Nasdaq Tallinn and our Estonia central securities depository (CSD) have over 15 years of experience in providing general meeting services
- Loyal and tech-savvy customer base –Nasdaq has along history of collaboration and information sharing with various stakeholders, including issuers and custodians
- 1-Tier CSD –Nasdaq operates the CSD in Estonia which provides access to securities ownership data
- Supportive economy –Estonia’s open-minded attitude towards technology and fintech innovation make it a natural fit for such a solution to be adopted
- Secure remote identification –it is required that all the people who participate during the AGM be identified as to maximize the integrity of the results and minimize risk of fraud. Estonia has secure digital IDs which allowed us to complete the KYC (know your customer) requirement.
Nasdaq has engaged with various industry and regulatory stakeholders along the way in order to adapt to market demand and expectations. For example, the custody department at the Tallinn branch of SEB Pank, shared their knowledge about their voting processes on behalf of clients and distributing voting rights to beneficial owners. This was very important for the project as this allowed us the see the whole custodian workflow from their side. In other words, how they interact with their custody clients, as well as what functionalities they need if they want to vote on behalf of their custody clients. This collaboration provided significant input to the development team during the design of the custodian user interface.
Where do We Stand Today?
We currently have a functioning proof of concept (PoC) with four web-based user interfaces in Estonia. The PoC can now identify users based on their Estonian digital ID – either via Estonian ID card or e-Residency card.
From an investor perspective, they now have the ability to:
- View information about meetings and vote before or during the meeting;
- Use the system to transfer their voting rights to a proxy;
- Monitor how the proxy voted on their behalf; and, if needed, recall the proxy; and
- Review previous meetings and transactions based on the indelible record the system creates.
Custodians can also vote on behalf of their clients or distribute voting rights to beneficial owners quickly and easily via file upload. Ownership information, vote and voting right token transfers are now recorded to the blockchain ledger.
Most recently, we successfully tested our solution in cooperation with a recently listed Nasdaq Tallinn company LHV Group – an Estonian financial group that also has experience in the blockchain field with wallet app Cuber – as well as with other stakeholders.
Some initial reactions from LVH’s management team are as follows:
- Mr. Erki Kilu, CEO of LHV Pank: Testing the prototype was simple and user friendly. The options were intuitive and required minimal amount of clicks. It is a joy to use a blockchain-based system that actually works and which is awaited by the market and can be used by thousands of people at the same time.
- Mr. Madis Toomsalu, CEO of LHV Group: It is a good initiative (i.e. start-up) and has a lot of potential. Testing of the prototype was convenient and simple. If the future solution enables mobile ID authentication as well and the security is granted, then we would definitely consider using the product in the future.
- Some feedback we received from various investors included:
- “The GUI was very clean and intuitive, design is nice.”
- “Everything was logical, simple and understandable. The only disappointment is that I did not find any bugs to report.”
- “Quick and simple way to vote. The future seems bright!”
What We Have Learned?
Non-settlement Usecase for Blockchain
Until now, the vast majority of R&D blockchain projects under development tend to center around various types of settlement transactions. In these settlement-based use cases, assets are either issued or digitized on a blockchain and then a transaction is generated that transfers the assets between participants.
The Estonia e-voting project was an opportunity to use the blockchain’s immutable transaction ledger technology in a different way. The system uses the blockchain in the traditional way to record the ownership of securities as reported by the CSD. Based on those holdings, the system also issues voting right assets and voting token assets for each shareholder. A user may spend voting tokens to cast their votes on each meeting agenda item if they also own the voting right asset. This model successfully demonstrated how a blockchain could be used for something other than transaction settlement.
Chain’s Smart Contract technology was used to implement much of the voting functionality in the e-voting system. These fairly complex scripts were deployed on the blockchain node itself and worked well. Since, at the time of coding, there was no Smart Contract support in the blockchain API, custom script implementations and API modifications were successfully implemented to use them.
Smart Contract technology is in its infancy and continues to mature. System developers require robust Smart Contract development environments so that they can design, implement and deploy solutions. Nasdaq will continue to work with Chain and the wider industry to mature this technology.
Digital ID /Mobile Authentication
Estonia citizens are issued national ID cards containing RSA tokens that can be used for two factor ID authentication when combined with a PIN. Non-citizens are able to obtain an e-Residency card with the same type of ID keys as well. As expected, pilot test feedback showed that support for mobile devices and a custom mobile e-voting application would further enhance the user experience.
In keeping with Nasdaq’s overall approach to apply disruptive technologies in innovative ways to solve our client’s problems, we’ll look for opportunities where blockchain can and should be used to improve efficiencies and bolster performance, with a close eye on risk mitigation.
We will explore how this successful PoC can potentially be applied to other Nasdaq internal and client-facing solutions. For example, we envision the end-users potentially being listed and non-listed companies, investment funds, trade industry associations, NGOs, but also investors and custodians all over the world.
While e-voting technology, may not be be the next killer app, it is very much a practical, necessary, solution that has many potential applications around the world. By leveraging blockchain technology we see enormous potential for greater efficiency and integrity in Annual Meeting and shareholder voting process and this is a very positive step for our industry and for the kind of potential that blockchain continues to represent for the capital markets.
Richard DeMarinis is Principal Software Engineer, Enterprise Architecture, Nasdaq; Hedi Uustalu is Head of Issuer Services, Nasdaq Tallinn; and Fredrik Voss is Head of Blockchain Strategy, Nasdaq
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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