There has been a lot written about the $100 trillion bond market and the $65 trillion equity market being “tokenized”, not to mention $8.4 trillion of global Real Estate, commodities, art, cars, Intellectual Property, etc.
Indeed, Stephen McKeon who is an Associate Professor of Finance at the University of Oregon believes that tokenisation will transform capital markets, and has identified in his Security Token Thesis, eight reasons why.
· 24/7 Markets: Traditional bond and equity markets are not open 24/7 and some commodity markets, like copper, only trade 5 hours a day 5 days a week. Trading Security Tokens 24/7/365 is possible.
· Fractionalization: The fractional ownership of particularly illiquid assets, such as cars, art, property, etc will allow retail investors access to these asset classes. As we see more of the smaller investors buying and selling, this ought to increase the liquidity and save investors’ money when they need to sell their investments in a hurry.
· Rapid settlement: Traditional exchanges can execute trades in microseconds. However, the settlement can take days. Blockchain technology can potentially offer “real-time” settlement.
· Cost reduction throughout the life-cycle of security: Blockchain technology uses one database/ledger, so offers the opportunity to reduce the number of intermediaries that need to be involved in buying and selling of Security Tokens.
· Increased liquidity and market depth: The majority of private assets are illiquid, which means the ownership interests are costly and difficult to trade. Secondary markets, however, enable security tokens to “lock in the capital without locking in the investors”, as explained by Harbor CEO Josh Stein.
· Automated compliance: Security Tokens can have compliance controls built-in. This means that regulatory compliance can be pre-programmed and algorithmically enforced before a Security Token trading. This ought to lead to lower compliance costs, minimal reliance on human interaction, less likelihood of regulated firms being fined and therefore, lower professional indemnity insurance premiums.
· Asset interoperability: Nowadays, most asset ownerships are already represented digitally. The real problem is that the data is not “structured”, and so it is hard for existing systems to be able to monitor and control the data. Structured data on a Blockchain, in conjunction with other technologies - like Artificial Intelligence (AI), Smart Contracts, Internet of things (IoT), etc - overcomes many of these challenges. It will enable the ability to compliantly trade assets with different systems, therefore allowing them to operate in an interoperable manner.
· Expansion of the design space for security contracts: Security tokens allow us to build in contractual features that have previously been unfeasible, thus enabling the economic concept of complete contracts.
The use of Blockchain technology to create Security Tokens oughts to enable the buying and selling of many types of assets, those becoming more efficient, compliant, cheaper, faster and secure. It also ought to make capital markets easier to trade, be more inclusive and democratic, as well as be more relevant for tomorrow’s investors – millennials. Such investors are increasingly demanding to be able to trade using mobile devices 24/7, and not to have to use financial advisors, broker-dealers, who they often see as unnecessary commission-hungry intermediaries.
For the digitisation of assets and the widespread adoption of Security Tokens, there are still some key infrastructure issues that will need to be addressed,...
Indeed, Stephen McKeon who is an Associate Professor of Finance at the University of Oregon believes that tokenisation will transform capital markets, and has identified in his Security Token Thesis, eight reasons why.
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· 24/7 Markets: Traditional bond and equity markets are not open 24/7 and some commodity markets, like copper, only trade 5 hours a day 5 days a week. Trading Security Tokens 24/7/365 is possible.
· Fractionalization: The fractional ownership of particularly illiquid assets, such as cars, art, property, etc will allow retail investors access to these asset classes. As we see more of the smaller investors buying and selling, this ought to increase the liquidity and save investors’ money when they need to sell their investments in a hurry.
· Rapid settlement: Traditional exchanges can execute trades in microseconds. However, the settlement can take days. Blockchain technology can potentially offer “real-time” settlement.
· Cost reduction throughout the life-cycle of security: Blockchain technology uses one database/ledger, so offers the opportunity to reduce the number of intermediaries that need to be involved in buying and selling of Security Tokens.
· Increased liquidity and market depth: The majority of private assets are illiquid, which means the ownership interests are costly and difficult to trade. Secondary markets, however, enable security tokens to “lock in the capital without locking in the investors”, as explained by Harbor CEO Josh Stein.
· Automated compliance: Security Tokens can have compliance controls built-in. This means that regulatory compliance can be pre-programmed and algorithmically enforced before a Security Token trading. This ought to lead to lower compliance costs, minimal reliance on human interaction, less likelihood of regulated firms being fined and therefore, lower professional indemnity insurance premiums.
· Asset interoperability: Nowadays, most asset ownerships are already represented digitally. The real problem is that the data is not “structured”, and so it is hard for existing systems to be able to monitor and control the data. Structured data on a Blockchain, in conjunction with other technologies - like Artificial Intelligence (AI), Smart Contracts, Internet of things (IoT), etc - overcomes many of these challenges. It will enable the ability to compliantly trade assets with different systems, therefore allowing them to operate in an interoperable manner.
· Expansion of the design space for security contracts: Security tokens allow us to build in contractual features that have previously been unfeasible, thus enabling the economic concept of complete contracts.
The use of Blockchain technology to create Security Tokens oughts to enable the buying and selling of many types of assets, those becoming more efficient, compliant, cheaper, faster and secure. It also ought to make capital markets easier to trade, be more inclusive and democratic, as well as be more relevant for tomorrow’s investors – millennials. Such investors are increasingly demanding to be able to trade using mobile devices 24/7, and not to have to use financial advisors, broker-dealers, who they often see as unnecessary commission-hungry intermediaries.
For the digitisation of assets and the widespread adoption of Security Tokens, there are still some key infrastructure issues that will need to be addressed, such as custody and insurance, as well as making the whole user experience friendlier. However, as we see global organisations like Facebook and Allianz, and governments like China, looking to issue digital assets, the way that the public and institutions can engage in Security Tokens is likely to become simpler and part of our everyday life.
It is possible to offer investors more choices and investments that better fit their risk profiles.