Grzegorz Timoszuk - Architecting a Regulated EVM Blockchain for a Central Securities Depository

I'll talk today just a little bit about the implementation of the blockchain in the enterprise. So, we had to connect two things. Like, let's hope we took the best of two worlds. So, from web three, there's like pseudo anonymity, permissionless, code is law, and native atomicity. On the other hand, in regulated world, it's kind of different because you need to do KYC, you need to do AML, you cannot skip it.

You have to You have licensing supervision, and this is it. Like, it has to work in order that regulators will allow to you to move forward. Then, law is law. So, unfortunately, you have to fit within the regulations. And then, finally, there's like T+2 reconciliation, but taking into account recent events, I expect some blockchain would like T+2 reconciliation lately, like calp, stuff like this.

So, this was like joint effort. I'm from Seven Bulls, we are the implementation side, but we're working also with the Polish CSD. So, central securities depository, so basically the guys that need to know everything about the shares and the accounts in Poland. Every single European country has to have kind of CSD because like usually centralized and and it has to go under regulations. So, they were responsible for the legal model and definition of how to transfer the OTC rule, so over the counter trading of shares into the blockchain.

And of course, they are adding the production environment. Because like that's their job. And we are the technology provider, we're mostly focusing on the technology aspect. So, we build a smart contract, we build DLT gateway, we build a private network. So, basically it was like that.

And so, how the project was successful. So, first of all, we need to keep in mind that in order to make this project successful, you need to do two things. First of all, you need to comply with the law. Because basically, you have to operate within the boundaries of Polish law and regulation of Polish law and plenty of other regulations that are touching all the shares trading simply. Because if you want to move it to blockchain, you have to comply.

So, uh the good decision was that the CSD decided not to go with DLT pilot regime because it was like mhm sandbox, I wouldn't say a very successful one. Uh then the approach was that the technology is uh that we have to be technologically neutral. So, basically we have the rules defined by law and then we are pushing it into the technology and finally, we there's important change because that there are RWAs, but they are not new tokens, they are dematerialized uh securities. So, they are dematerialized shares. And it's kind of important because thanks to that, they do not need to get any new licensing.

And as you may know, in Poland there's still no no MiCA implementation, so could be difficult this way. So, there are some important uh decisions. So, there's like in public EVM, there are tokens and in the private EVM that was built in CSD on DLT project, there are also tokens, but we call them dematerialized securities. So, you know, like from technical point of view, exactly the same. From the law implementation, totally different things.

Secondly, then in public EVM you will have the pseudo anonymity on chain and here it's kind of complex because on chain you are totally anonymous. On the other hand, the brokerage house has to do your KYC in order for you to be able to join this blockchain. So, on chain you are totally anonymous, but in order to join it, you have to undergo the KYC. Then there's governance. So, like with public EVMs, the DAOs, organizations.

And here it's easy peasy like the central securities depository is the owner and they are the only ruler. Why? Because if the law changes, they have to adapt and they not not they do not going to ask anybody for advice. Like they have to adapt to the law. If something happens, they have to be able to do everything.

So, basically, the whole idea of this blockchain is like fully permissioned. And the CSD Polish CSD is the operator. And network access like in public EVMs is kind of obvious. You It's permissionless. Here it's permissioned.

So, in a way that first of all, in order for you to join this blockchain, your brokerage house has to join the project and then you have to be cleared for that. Okay. So, like you know, we use Hyperledger Besu. So, and the impression is like three data centers, two nodes each. So, in order that if any of data centers fails, it will be still operational.

Uh there are no gas because like it's going to be basically the private initiative, so there's no I like the business model is not about earning on gas. The earnings for both for the brokerage houses and for CSD are totally in different places, so there's no no for gas. It would just make things com- more complex. And each finance institution may have each own RPC node. Uh but this is going to be on the RPC node, so for them, for their convenience.

But the important thing is we have to think a little just a little bit how it's organized. So, when you have the CSD, so central securities depositories, they have knowledge about all the accounts and all the shares that are present in the in Poland, but they do not know anything about the people. So, the connection between the account and the person is only in the brokerage house, in a bank, whatever you decided, so financial institution. So, then the CSD doesn't know who is owning what. They don't only know that this account owns that type of shares, period.

So, and this is kind of the same, and that's why every single institution can have the node. So, there are no information leak, because you know, who is having account who is kind of business information the brokerage houses don't want to share that. So, basically how it works. The operator operator is is blind, like I've just talked, and there are of course white list. So, in order first to on chain, so only financial institution knows that I have few shares of Tesla or SpaceX.

And on chain, the CSD, so uh Polish KDPW, they do not know who is behind the address. They only just know this is the address, period. So, how it's organized. So, first of all, in order to get on the blockchain, you need to be white listed. So, the central regulation the securities depository is white listing given address on behalf of the brokerage house.

Secondly, the connection between address and investor it's like on chain, so financial institution is doing the KYC and finally the there's only part of information that Yeah.

The end of financial institution is several offices for the same person.

Huh? Like some technical From technical perspective, absolutely. From legal perspective, kind of complex. You as a person you may have multiple brokerage accounts, multiple brokerage houses, but I'm not sure if you are able as a physical person to have multiple brokerage accounts in the same brokerage house. Okay, if you are institution, that's a different case.

But of course, so if the institution will decide to join, yeah, absolutely no troubles. Like from technical standpoint, absolutely doable. From the law, or

Is it or For a physical person that is a client of a financial institution, is it just a business decision of the financial institution how it manages that person's uh account, let's say it like this, because maybe I have in the same financial institution several offices and then one office is create certain types of

Yeah, so if you are let's call it enterprise

a it's a business logic perspective rather than or a legal in Poland.

No, like uh From legal standpoint, I think there's no nobody you know forbids you to have multiple accounts. But from the business approach, if you are physical person, you will get one account. Of course, if you are like enterprise, I don't know, fund, you will you can get as many as you wish. Then and from and then from the technical standpoint, we honestly we don't care. Like this is only an address.

So they can write at least 100 of address or one address. Thank you. And so now like and like in order to make it successful, we need to fix some issues, fix some collisions, and take some of the let's say find a way in between because for example, if you are doing first simple thing, just you know, transferring any token, so signing a transaction. It's kind of obvious, you open the your wallet, you sign it, it works. And then if you think how does it works in the traditional finance?

So basically, you do not sign anything. You are using third-party, so your brokerage house uh front end, then they're going to collect the data, and finally, they will going to send text file via like dedicated link, dedicated network, for example, MQ within the secure network, and then you will see that, you know, there's a text file, CSV file flying between the institutions. So it's totally different, and basically, you do not control the finality. You just know like day after that it's final, but you don't know when, basically. So how it works?

So in the middle, you have the vessel blockchain. So there's like smart contracts and EVM, and there are two types of operation. At the top, there are system operations, and on the bottom, there are market operations. So system operations are basically the operations that are managed by the financial institution. So for example, if they want to whitelist anybody or do anything else, so they are sending them message to MQ.

Actually, we had to integrate like there's an MQ in a central depository, and they have to send the message there. Then the internal central securities depository system is pushing proper operation to blockchain, waiting until it finishes, and of course, signing by the way, and then it's vessel, and then the whole communication stream goes back. On the other hand, when you are have the market operations, then I have physical user, and then, for example, you will see only the your app and your wallet, and you're feeling like in a real life web three application. So, you don't see any difference. Okay?

And another challenge that central depository has to be able to support, like for example, stock split. So, one or two two, or you know, the company going down, whatever you like. So, basically, the smart contracts with the beacon and proxy, so basically, you can change the logic of the any smart contract, any shares that are on the blockchain. You know, that is so, if you need to divide them, you can divide them. You're going to only change one definition for all the smart contracts for given share company, and then all the shares that are owned will behave accordingly, because it's of the beacon and proxy.

So, you don't need to update every single token. Okay? And the important thing while why it is not tokenization, but dematerialization, because, like you see, it can go both ways. So, first of all, like, if you decide that you have some shares and you would like to use them on the blockchain, you can dematerialize them. So, you ask your brokerage, "How is to do that?"

They ask central securities depository to do that. Then, it's launched on the blockchain. You can use it, but um when you decided, "Okay, I'm done. I want to get back to, you know, typical world." You can get back.

With tokenization, it's not that very easy, and here it's only you can ask again the same to go up. So, you can go downstream to the blockchain and upstream back to the real world. Whatever you like. So, this is the kind of things that is not really, you know, typical for RWs, but it was necessary in line to be able to fit within the legal frameworks. Okay, and there's the most important part of this whole parties like how to pay for the shares because you know, like up to this point it's really nice.

You can dematerialize shares, you can exchange shares. You have your own top wallet, but you know, like the whole idea of this is allow people to, you know, use it meaningfully. So basically you need money. So you can sell and buy. So basically an important thing the central depository bezel will never ever have any money because it's like internal blockchain and there's no point to try to implement any stable coins there.

So we need a stable coin. So basically we need to do escrow between a CSD network and money network. So whatever it is, like there's PLN Q. I think it's on L1 or nowadays and everybody is waiting in Poland for the another stable coins that will be issued by the banks. And then like we need to do escrow that will allow people to securely exchange the shares for the money.

And how does it look like from the technical standpoint? So here it's kind of a high-level view. So on the top left you have the financial institution traditional system and there's the CSD gateway and a HSM. HSM is like simply the hardware signing tool. So it stores keys and makes them really secure.

And on the other hand you have investor and investor is living like web three life because they have their own app, they have own wallet and they behave like in a real web three world. On the other hand everything like both the financial institutions and the investor like finally landing in the hyperledger bezel where there are like smart contracts, tokens, escrows and the important thing that money network is outside like I've just mentioned few minutes ago because it really doesn't make sense to have tried to implement money network within the private blockchain. And so this is kind of it. So like you see like this first of all European regulations that will allow CSDs to move the securities out. It's like from March this year.

DTC also allowed for trading of the OTC shares. In Poland CSDs almost there. That's like cloud test with brokerage houses and the it's kind of cool that you know we can try to put uh Polish or European solutions even on par with what's happening on the in the US or in the Asia. And this is it. If you want to talk to me, I'll be walking around and if you're interested at links.

Thank you guys.