Transfer Agents have not historically been in the limelight of the financial world nor have they been glamorized as Broker Dealers or Private Equity firms have been, but they nevertheless play a crucial role in the efficient functioning of the capital markets. They work behind the scenes and perform network-critical functions such as recording & maintaining financial records and protecting the right to information disclosure of even the smallest shareholders. To date, their absence would mean that companies, public or private, would require entire departments dedicated to the management of the shareholder or bondholder records.
Tokenization is changing the investment landscape, however, and forcing Transfer Agents to make a decision: adapt and compete in this increasingly complex digital age or push back and risk being left behind.
What is a Transfer Agent?
A Transfer Agent can be a trust company, a bank, or any similar entity that is appointed by a corporation to maintain financial records pertaining to investors while vigilantly monitoring investor account balances.
A Transfer Agent will document transactions, cancel and issue certificates, process mailing with investors, and manage various other investor processes including but not limited to reissuing certificates that have been lost or stolen.
Ultimately, a Transfer Agent fulfills the role of a professional intermediary by managing the complex process of ensuring the various industry stakeholders work together and coordinating the timely implementation of high-risk, frequently manual, operational processes.
What are the primary pain points for Transfer Agents?
Transfer Agents often face various challenges, both structural and regulatory, which restrict their ability to digitally optimize the operations and processes. A few notable pain points include:
Siloed Client & Investor Data
Risk of duplicative, incomplete, and/or incorrect data is higher in organizations where departments are siloed. Transfer Agents currently perform client due diligence and investor outreach in a manual, ad-hoc, and largely inefficient manner which requires repeated outreach for data and diligence verification.
Multi-Jurisdictional Regulatory Obligations
Asset servicing firms implement some of the highest standards for Anti Money Laundering (AML) and Know Your Customer (KYC) verification out of necessity for such a high-stakes industry. Still, the process remains manual in nature and thus tedious, frustrating, and costly. The constantly shifting regulatory environment will exacerbate this challenge and test the resilience of Transfer agents, particularly those servicing multiple jurisdictions.
Real-Time Reporting & Transparency Challenges
Asset Servicers often lack cross-organizational visibility due to siloed data recording and communication channels, as previously discussed. This has negative implications for reporting and revenue realization. Said another way, without a 30,000 foot view of the ongoing organization processes, the Transfer Agents’ investor onboarding and reporting processes remain siloed, thus delaying receipt of any incoming revenue.
Transfer Agents are expected to continuously support new ways of monitoring, managing, and sharing client and investor activity data via the latest real-time reporting and analytics solutions. Moreover, they are expected to communicate and engage with all stakeholders in the fund distribution value chain. This is becoming increasingly difficult as the investment landscape changes and continues to grow.
Transfer Agents, Fund Administrators, and Asset Servicers are, by themselves, low-margin and high-volume businesses. Thus, they must remain price competitive while meeting the growing client and investor demands for performance and accuracy. Without new technology integrations, these businesses will struggle to remain sustainable.
What opportunities can tokenization provide to Transfer Agents?
Real-Time & Shared Shared Data Recording
A blockchain network serves as a distributed database or ledger allowing all parties involved in an investment offering to have access to real time data that cannot be modified under any circumstances – offering a transparent and secure audit trail.
Enabled by Tokenization, Digital Transfer Agents can maintain a chain of provenance for assets and coded asset lifecycle payment instructions. This would facilitate tasks such as investor sign-off, investor share class identification, payment distribution, and diligence review without extraneous agent requirements. Additional logic can be employed such as recording net subscriptions and liquidations / redemptions initiated by investors.
A Smart Contract is a computer protocol, enabled through Blockchain technology, intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract without the need for third parties.
Transfer Agents can leverage smart contracts to automate delivery versus payment (DvP) of securities against cash, distribution of returns based on each investor type and share class, and enforcement of local regulatory requirements for different investors. Myriad tasks can be encoded into a Digital Transfer Agent to enhance asset servicing for funds, investors, and other stakeholders.
By going digital, Transfer Agents can automate the majority of their existing manual processes and realize substantially higher operating margins. While not a direct comparison, HSBC recently issued a report relating to the issuance of green bonds which suggests a savings of up to 90% using Blockchain and Entoro suggests a minimum saving of 40% for a private placement.
What notable Transfer Agents have already begun to integrate Blockchain into their operations?
There are various Tokenization platforms in existence that have integrated with or acquired Transfer Agents but few incumbent Transfer Agents that have integrated Blockchain technology into their business.
The most prominent example of an incumbent Transfer Agent tokenizing is Pacific Stock Transfer, an SEC-registered Transfer Agency and professional services firm serving publicly traded and private companies’ needs. As the leading firm in the small-cap market, Pacific Stock Transfer now provides clients with top-notch customer service and efficient turnaround of compliant transactions through blockchain technology.
It is not a matter of if other Transfer Agents will follow suit but rather when they will follow.
What is the implication of having all Transfer Agents issuing securities via Blockchain?
Coming full circle, it is clear that Transfer Agents currently play an integral role in today’s capital market ecosystem. They ensure precise transaction execution, accurate data management, and stringent compliance & security enforcement, all important and complex tasks that most organizations would prefer to keep outsourced.
Recent technological developments have provided Transfer Agents with an opportunity to take the next digital step. Digitally transferring ownership of security can be securely and compliantly completed and verified in just minutes, free of fees or paperwork, and then instantaneously recorded on a fully transparent and immutable ledger. Going just one step further, now fractional ownership is possible, allowing retail access to previously inaccessible asset classes such as real estate and fine art, as is secondary market trading via digital exchanges, all while maintaining the integrity of each transaction.
The industry remains nascent but the technology has been proven and the process is constantly receiving approvals at the regulatory level. Eventually, most assets will be represented in this digital form. In fact, the World Economic Forum currently estimates that 10% of world GDP could be digitized and on the Blockchain by 2027
For forward-thinking organizations seeking to remain competitive and transition to the digital economy, MetaFinance provides a comprehensive solution designed to complement your business, enhance your processes, expand your network, and save you time and money starting on day 1.
MetaFinance is bridging the gap between traditional and digital finance by offering a customizable and configurable securitization platform that automates administrative tasks, helps businesses collaboratively issue & manage digital securities, and provides in-depth analytics while offering a secondary market infrastructure with near-instantaneous clearing & settlement.
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