Background information and technological nature of the securities
For more than a year, AS LHV Pank (hereinafter LHV or issuer) has been looking into the options of using openarchitecture, cryptographic, distributed databases (hereinafter blockchain) for creating and providing financial services.
LHV believes that blockchain-based products deserve to be tested with the aim of complementing (rather than replacing) the present-day centralised databases. Blockchain's advantages, compared to a present-day centralised database include:
- resistance to cyber attacks – no central core to attack;
- resistance to data leakages – data only exist in heavily encrypted form;
- use of open and public standards – partners speak a common language;
- building blocks for new, innovative financial products, i.e. more easily programmable and transparent architecture – multi-signature escrow accounts, M2M settlements, financial transactions that can be publicly audited, etc.
In cooperation with one of the leading blockchain technology companies Chromaway AB, which is mainly involved in the so-called Colored Coins technology, LHV has developed a new, innovative solution. Colored Coins is the Bitcoin's blockchain-based distributed database, designed for the management of assets or other (financial or non-financial) data (www.coloredcoins.org).
In order to develop, manage and distribute the required software, AS LHV Group has established the technology company OÜ CUBER TECHNOLOGY. To own a cuber, the OÜ CUBER TECHNOLOGY's mobile app needs to be downloaded and installed.
For communication with the distributed databases, client applications have been created for mobile Android and iOS operating systems. The provisional client applications have been designed for effecting small payments, above all via the graphic medium (QR code).
This document might not contain the entire information considered important by the interested parties. Since the blockchain technology is relatively new, and, as far as we know, this is the first time it is ever used in the financial sector, LHV will start testing the new securities carefully, on a limited scale and by using a design that serves to minimise security risks. The target group of the test is limited.
LHV has subjected cubers to the Securities Market Act of the Republic of Estonia (hereinafter SMA), treating cubers as securities. Pursuant to subsection 2 (2) of the SMA, "For the purposes of this Act, a money market instrument is a low credit, unsecured, transferable and marketable debt obligation issued by an issuer for a term of up to one year which is traded on the money market, including a treasury bond, commercial paper, certificate of deposit and bill of exchange secured by a credit institution complying with the aforementioned characteristics".
Cubers can be treated as money market instruments – certificates of deposit in the meaning of subsection 2 (2) of the SMA.
As the issuer of the certificate of deposit, LHV may apply to the cuber simplified conditions of issue under clause 14 2) of the SMA. We should point out that, pursuant to clause 2 (1) 2) of the Estonian Central Register of Securities Act, LHV as the issuer of cubers is not obliged to register the securities in the Estonian Central Register of Securities. Neither is there any technological need for such registration, considering the nature of blockchain. The precondition for the issue and redemption of cubers is a customer relationship with LHV. In the establishment of the relationship, LHV thus adheres, among other things, to the obligations arising from the Money Laundering and Terrorist Financing Prevention Act.