Toronto Stock Exchange owner TMX Group is testing a blockchain-based system for tracking the ownership of shares in private companies and the settlement of trades, as a wave of renewed interest in crypto sweeps through traditional financial institutions.

Through its subsidiary, the Canadian Depository for Securities, TMX is already responsible for clearing and settling equity, fixed income and money-market trades, representing the vast majority of securities traded in the country. The proposed system would open the door for TMX to perform a similar role for private capital, which trades among wealthy investors rather than through public markets, and accounts for a growing share of global financing deals.

Steve Everett, head of post-trade innovation at TMX, said the organization has convened a working group of broker-dealers, banks, custodians and other institutions to provide input on the best way to use blockchain to process privately issued securities after a trade has taken place. It calls the proof of concept “Project Revo.” If it’s successful, TMX will consider moving the project out of the testing phase in the first quarter of 2025, he said.

The current patchwork system for tracking private securities “has got a lot of challenges,” Everett said, estimating a blockchain-based system could cut costs for the likes of banks, brokers and custodians by 40 per cent. “In the public markets, we have infrastructure that connects all the custodians, the banks, etc. In private markets, that doesn’t exist.”

The massive crypto crash of 2022 embarrassed many institutions that had invested in firms that collapsed amid fraud allegations, including FTX, backed by the Ontario Teachers’ Pension Plan, and Celsius, backed by the Caisse de dépôt et placement du Québec. The value of most crypto tokens has since recovered. In January, BlackRock and other Wall Street giants successfully launched Bitcoin exchange-traded funds (ETFs), prompting mainstream financial players to start experimenting again.

TMX was early to dip its toes back into the technology, issuing a consultation paper in July 2023 that proposed allowing the trade of digital assets Bitcoin and Ether on the TSX Alpha Exchange. (Everett said he was unable to provide an update on the progress of the proposal.)

Crypto tokens that represent assets in the real world—such as government bonds, company shares or commodities like gold—are a particularly hot trend among crypto firms and traditional financial players alike, providing better liquidity for investors and efficiency for the issuers of securities. Earlier this month, New York City-based financial services firm Broadridge announced that an unnamed major Canadian bank is using its blockchain-based platform for managing treasury securities.

“Market participants are increasingly looking to [traditional financial institutions] as their partner of choice in mobilizing their digital securities in an environment that is secure, trusted and scalable,” said Bryan Murphy and 11 other authors in a Citi report released earlier this month. People are trading trillions of dollars worth of tokenized collateral every day, according to the report, and tokenized money market funds hold millions of dollars.

The use of blockchains to facilitate trading gets a lot of attention, but TMX is exploring its potential to solve a less exciting, but nevertheless important, problem: Tamper-proof digital record keeping. Participants in blockchain-based systems compete to publish transactions to a shared digital ledger, with incentives designed to make it more expensive to sneak inaccurate or fraudulent information into the record.

Jonathan Ip, a lawyer who advises blockchain and cryptocurrency companies, said he thinks the technology has potential for improving the processing and recording of ownership of shares in private companies after trades. He said private companies can currently use “almost anything” to keep track of who owns their shares, including simple Excel spreadsheets—leaving them vulnerable to inaccuracies and disputes.

“To be able to use something that will reduce or eliminate the possibility of errors and also settle transactions faster—why not?” Ip said. “It’s a pain for someone internally to deal with that.”

A common criticism of blockchain for record-keeping is that proponents may be ignoring an even less sexy, but perfectly serviceable, solution: A regular old-fashioned database, maintained by a trusted authority like TMX. Everett said a blockchain, or a hybrid centralized database that uses some blockchain technology, has advantages including the ability to require multiple parties to sign off before officially recording a change.

However, he said it’s possible the institutions participating in Project Revo will ultimately decide a regular database solves the problem just as well.

“Just because something has a novelty value doesn’t necessarily mean it’s something we need to do,” he said. “But if it’s a good fit and meets the [desired] outcome, we test that.”