Digital Securities – or Security Tokens as they are often referred to, allow end-users to represent ownership in practically any asset class in the form of a cryptographic token. As such, the world of traditional securities as we know it could be in line for a significant sea-change – subsequently opening the doors to a more efficient, inclusive and comprehensive financial sphere.
For those that are still new to the potentialities of digital securities, here we discuss some of the key benefits of the phenomenon, and how these benefits can spearhead a new revolution in the traditional securities sector.
Issuance Over the Internet
The first key benefit is the issuance platform.
Today, when a company goes public, the issuance process is facilitated by several centralized exchanges. The issuer is subject and restricted to the local exchange rules and limitations. When it comes to private equity markets, traditionally, private companies and businesses are limited to available capital within their countries. In digital securities issued over the Blockchain, the power is concentrated with the issuer, and the internet itself opens up an available global investor pool.
Let’s take an analogy from the early days of the internet. Before the internet was available, content writers were limited to publishing their content in several centralized newspapers. If their content was not aligned with the newspaper’s policy, it could not be published. The creation of the internet gave content writers endless possibilities to publish their work. The internet led to the democratization of content and information.
Who benefitted from this new information revolution? Well… The content writers. Initially, the readers didn’t experience much change — they were still reading content. But eventually, the readers also benefited from this, as the information market became more efficient and less centralized.
It’s the same story with digital securities.
They allow companies to issue equity or other ownership rights over a new internet infrastructure we call the Blockchain. So now issuers are no longer limited to offering their securities in the local market where they were incorporated.
Trading on Multiple Exchanges
This leads to the second benefit of digital securities, which is trading on multiple exchanges.
It is true that today companies can issue their stock on two or even three exchanges. For example, the dual stocks that are listed on the Tel Aviv Stock Exchange and Nasdaq. The problem is that each exchange has its own settlement system and there is no one ledger to reconcile both.
Blockchain solves this problem and serves as a global, immutable, trusted ledger. So now, companies can structure their security offering over the internet, list their securities on multiple exchanges, and the Blockchain will reconcile everything.
And this is exactly what is already happening with Bitcoin. Today, Bitcoin can be traded on multiple exchanges across the globe, and everything is eventually reconciled on the global bitcoin ledger.
(Future) Benefits for Investors
This is not meant to confuse you — the immediate beneficiaries are companies, not investors. This is because most of the trading is anticipated to happen in centralized exchanges with trusted custodians; so, for the investors, the process would be quite the same. If we go back to my analogy of the early days of the internet, as the market evolves and becomes more efficient, the investors will certainly benefit from this change. Those benefits will come in the form of:
Access To Global Investment Opportunities
The current framework surrounding the traditional securities space is that some marketplaces can be difficult to reach for certain investors. This is especially pertinent in the emerging markets segment, whereby investors often require direct contact in order to facilitate a trade.
Digital securities and their respective technologies can create a global investment space that is open to all. This is further supported by the phenomenon ability of issue token over the internet, via a safe, secure and seamless ecosystem.
Increased Liquidity In Private Company Shares
As private companies do not have their shares traded on public stock markets, their exposure to a wide pool of investors is severely limited. As no marketplace exists for investors to buy and sell their respective shares, this results in low levels of liquidity in the underlying asset.
Moreover, and as noted above, smaller companies are often forced to take to secure funding via Venture Capital firms, or with a private angel investor. Either way, although from the perspective of the company looking to raise finance this potentially achieves the overarching goal, at the other end of the spectrum this alienates investors that do not have access to such funding channels.
Digital securities can allow even the smallest of organizations to raise capital, subsequently attracting larger pools of liquidity. Moreover, if regulation permits it, funding can be made available to a much wider audience, subsequently covering investors of all sizes.
The current state of play in the traditional financial arena is that securities can only be traded during certain hours of the day. As such, the ability to trade a certain marketplace is often limited to the geographical timeframe of the trader in question.
On the contrary, due the borderless nature of the underlying Blockchain, digital securities can be traded on 24/7 basis.
Fractional Ownership Of Assets
Perhaps one of the most understated benefits to the digitization of securities is that the phenomenon can facilitate the fractionization of assets. Think about investing in the development of a new hotel. The only way you would be able to enter the investment is if you were injecting large amounts of capital. And the only way you would be able to exit the investment is if the hotel was sold in its entirety.
Digital securities have the capacity to fractionize any asset class, not only meaning that exposure is open to investors of all sizes, but this also allows security holders to exit their trade on the open marketplace with ease.
Ownership of Assets
There is often a grey area when its comes to ownership in the traditional securities industry. Think about purchasing a number of blue-chip stocks. Although in theory, you are the beneficial owner of the underlying stocks, in the vast majority of cases these will be in the possession of a third party broker or dealer.
As the Blockchain allows digital securities to be held in a decentralized manner, beneficial owners are always in possession of the assets that they own. However, and perhaps more likely looking at the future of digital securities, investors will often prefer to have their assets stored by a highly secure centralized custodian. Either way, options do exist.
As we noted earlier, the buying and selling of traditional securities must often go through a third party broker. Although this will still be a fundamental requirement to service investors, digital securities have the potential to reduce the number of intermediaries involved in the end-to-end transaction process.
Furthermore, as digital securities have the capacity to be issued over the internet, this subsequently reduces the current over-reliance on a paper-based system. Taking this in to account, alongside a seamless distribution process, those investing in digital securities can benefit from reduced fees.
Benefits of Digital Securities Over Traditional Securities – The Verdict?
In summary, the emergence of digital securities could create a new sea-change for the traditional financial arena. Whether it’s fractionalization, increased exposure to emerging markets or peer-to-peer ownership, it could be argued that these benefits can be reaped by both the investor and the investee. However, the digital securities phenomenon is still in its absolute infancy and thus, certain challenges and roadblocks will no doubt present himself – especially from a regulatory perspective.