Crowdfunding plus blockchain: vive la difference!

French bank BNP Paribas, which has been exploring the potential of blockchain since 2011, announced a deal earlier this month with the direct investment platform SmartAngels under which they will use the technology to enhance crowdfunding for companies in France.

The deal was announced as “a unique partnership with big ambitions: a major step forward for crowdfunding and the management of private share ownership”. SmartAngels is a pioneer of direct investment in French non-listed companies and has invested €20m in 35 companies over the past four years. Its founder and chairman, Benoît Bazzocchi, is also chairman of France’s crowdfunding body Association Française de l’Investissement Participatif (AFIP).

Under the deal, BNP Paribas Securities Services and SmartAngels will allow private companies to issue securities on the primary market and give investors access to the secondary market using blockchain technology. The pilot scheme is scheduled to launch in the second half of 2016, subject to regulatory approvals.

GTNews spoke with Stephanie Marelle, Hong Kong head for BNP Paribas Securities Services, to learn why the bank is using blockchain and how the partnership will work.

Addressing a market issue

Crowdfunding is extremely popular in France and both regulators and businesses have welcomed peer-to-peer (P2P) funding to finance business needs. As a crowdfunding platform, SmartAngels seeks funding for small to medium enterprises (SMEs) that seek to raise capital. Bazzocchi commented when the deal was announced: “At the moment, only a few thousand companies are listed on the financial markets in Europe.

“The integration of blockchain on crowdfunding platforms will give hundreds of thousands of start-ups and growth SMEs fast access to low-cost financing from individual and professional investors.”

Marelle explains that in the French securities market, individuals can fund businesses and become shareholders of the companies they finance. The process for handling that funding has, however, been highly manual to date. As the firms are not listed on an exchange, so crowdfunding companies have had to issue physical certificates for shares and have also needed to link up with payment systems.

SmartAngels approached BNP Paribas and asked whether the bank could develop a solution more in line with today’s technology. Rather than using traditional solutions, BNP Paribas decided to leverage blockchain technology. “What we’re trying to do is use blockchain as the newest available technology to address a market issue,” says Marelle.

The solution will allow the bank to create and test its first live application of blockchain technology using a distributed ledger, enabling it to identify the benefits and understand the user experience. Blockchain is similar in many respects to Internet Protocol (IP), she notes, which was operative when it was set up yet needed a lot of work. “Unless you’ve done it, it’s just talk,” Marelle adds. “The benefit is a real concrete application of coding. There is keen interest in seeing it working.”

Under the partnership, BNP Paribas Securities Services will develop a share register that utilises blockchain protocol to automatically register financial securities issued by SmartAngels’ client companies. The solution will identify each investor so that their payments may be processed immediately, stock can be issued to them straight away in the form of electronic certificates (e-certificates) and dividends promptly credited to them. All financial transactions made via the platform will therefore be made swiftly and securely and at less cost.

“We’re trying to test the beauty of the blockchain, traceability and security,” says Marelle. “You have a place of issuance plus a ledger plus traceability. It’s an appealing proposition.”

One reason for the bank starting with SmartAngels crowdfunding is that it offers an isolated domain for experimentation with a new technology. “This is a relatively ring-fenced activity. You need to start with something ring-fenced.”

“We could use something else,” Marelle admits. “The older technology could address that.” However, it would mean creating a series of solutions, including an issuing ledger, and interfacing them. Creating a new ledger would also require making sure there is an audit trail, which is costly. Blockchain is a far better solution.

Following the full-scale launch in France later this year, will the next step involve rolling out the solution to other markets? Marelle emphasises that while the bank has announced the initiative, it is currently only a live prototype. “We’ll have a number of steps to follow,” including listening to the views of regulators. “It’s not something that we’re rolling out massively right now.”

What’s next?

Along with this solution, Marelle says the bank has other areas where they can replicate the testing, as well as digital initiatives in areas such as big data and in doing work in a different way. For now, though, blockchain gives the bank an excellent opportunity to apply new technology and test it while solving a real business issue.

An added advantage, as highlighted by the partners is that “the standardisation of transactions and the enhanced security… will also allow investors to trade their shares directly on the SmartAngels platform, creating a secondary market for companies registered with the platform.

“This will make crowdfunding investments much more liquid – an issue not given much attention in this sector until now.”


Related reading