Fin Tech Focus

Taking stock of the future...

October 16 - 22, 2019

Gulf Weekly Naman Arora
By Naman Arora

Gulf Weekly Taking stock of the future...

Bahrain is set to become one of the first countries in the world to integrate blockchain technologies into a global stock exchange, opening up the opportunity for global investors to invest in international and local firms listed in a secure, blockchain backed environment.

Blockchain is a growing list of records called blocks maintained on hundreds, sometimes thousands, of networked machines that are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.

By design, a blockchain is resistant to modification of the data. It is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.

The concept originated from the infamous Bitcoin white paper published by the pseudonymous Satoshi Nakamoto in 2008 and has found many implementations outside of cryptocurrency.

The Nakamoto paper has inspired many implementations and modifications, including the Ethereum blockchain, which is an open source, public, blockchain-based distributed computing platform and operating system featuring smart contracts, supported by a modified version of Nakamoto consensus via transaction-based state transitions.

On the Ethereum blockchain, assets have been tokenized in blocks and transfers recorded in distributed ledgers, allowing ownership to be transmitted directly between parties almost instantly with low transaction costs, due to the lack of expensive middlemen.

Sprinkle Group is a Luxembourg based FinTech organisation that wants to create a stock exchange on the Ethereum blockchain. Over the past eight years, the firm has built up a financial ecosystem mainly in US, EU and China, observing the lack of infrastructure for effective cross-border investments.

Sprinkle Group chief executive Alexander Wallin said: “With the advancement of blockchain technology in 2016 we started building out one of the first stock exchanges using blockchain technology for settlement.

“Hindered by slow regulatory improvements in the US, we set out to find the most innovative FinTech region in the world in 2018. Bahrain came out as the best place to grow our exchange.”

Eleven months ago, the company’s SprinkleXchange was accepted into the Central Bank of Bahrain (CBB) FinTech sandbox, which it has just graduated.

SprinkleXchange is the first Blockchain Bourse listing Global Depository (GDR) Receipts, capable of direct listing in the IPO market using Ethereum Blockchain, trading cryptocurrencies, equity securities, and debt instruments on a single secure platform.

Sprinkle Group also plans to allow for Initial Public Offerings (IPO) through direct listing or using automated Dutch Auction. To support its initiatives, the company is also launching the SprinkleBit social-investing platform that allows users to connect with reputed investors and follow their advice.

With an education management system in place, this platform is targeted at new investors, who can also buy fractional stocks, portions of high value stocks for a lower total price tag. So, instead of paying USD1,730 (BD652) to buy one stock of Amazon, users can buy as little as 0.01 of a stock, for USD 17 (BD 6.520), allowing them to diversify their portfolios without having six-digit base capital requirements. The fees also are lower than those charged by traditional financial institutions.

Sprinkle chairman Thomas Wallin said: “Seamlessly integrated into SprinkleBit, the company is also launching Sprinkle Brokerage, which is a registered SEC broker-dealer providing effortless access to investing in US securities such as stocks and will later add options trading.”

Setting up its global headquarters in Bahrain will create ten jobs right off the bat, but running an exchange can be a complicated affair.

The company told GulfWeekly that it plans on vetting companies and doing its due diligence in-house, which while cost-effective will have to be done carefully to prevent fraud in the system.

Social networks with investing advice have often been hit by pump and dump attacks, in which perpetrators drive up or down the price of a stock, only to sell or short at a profit, without any market need for a price adjustment.

According to Alexander, the system has a built-in Value Prediction Index, that tracks the credibility of every user on the platform to identify bad players and has built-in breakers to prevent bank runs.

In terms of local companies that will be allowed to list and raise money via the platform, the company is relying on the CBB’s stringent yet progressive assurance process.

Alexander continued: “With a progressive regulatory system which works together with the fintech ecosystem to shape the future of finance, an educated and welcoming workforce, and rigid innovation framework, including EDB and FinTech Bay, made the decision easy. We have run our operation here since August last year and the feedback has been overwhelmingly positive along with the support from the local community.”

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