In 2021, the modern economic landscape will already begin to change. The growth of cryptocurrencies and decentralized finance (DeFi) has been part of the discussion for years, but the reality of how this will affect securities trading is finally being recognized. An increasing number of securities are now being digitized, aided by distributed ledger technology (DLT), which provides the tools necessary to enable faster, cheaper and ultimately safer markets regardless of the type of asset.
Digital stocks offer an opportunity
DLT is poised to transform financial markets by both introducing innovative new types of products and changing how the underlying infrastructure works. The dematerialization of the public securities market has been going on for years, yet the bulk of the $ 6.5 trillion private securities market remains opaque, inefficient and illiquid. Digital stocks offer the opportunity to digitize trillions of dollars in assets and create a brand new global ecosystem.
This will then have a significant impact on the public markets by facilitating the introduction of many alternative assets that would otherwise be unlisted, such as: B. Private equity or non-bankable assets. It also reduces costs for both issuers and their customers. Smart financial institutions are already providing customers with easier access to these products through digital securities. What really sweetens the business is that using this technology cuts an average of 40% in the cost of issuing, post-trading settlement and maintaining assets.
Given that digital stocks can represent any traditional good – stocks, debt, real estate, natural resources, and infrastructure – it’s easy to see why this is such a promising trend. All of this was achieved through a process called “tokenization” made possible thanks to blockchain technology. The recent interest in non-fungible tokens in the media and entertainment industry is a good example.
Tokenization and its benefits
Traditionally, most private securities transactions have been conducted with certificates of ownership. Thanks to blockchain technology and “smart contracts”, which are basically decentralized code, it is not very difficult to “tokenize” virtually any security. Using programs called “oracles,” the resulting token can be tied to the real value of the underlying asset. Now the same benefits associated with trading cryptocurrencies can be applied to virtually any stock or even commodity.
This offers a tremendous advantage to companies using this new technology. Providing brokerage, trading and custody services should now be significantly cheaper as many of these processes are handled through smart contracts. Billing can be done practically immediately and again with minimal control. Another advantage is that DLTs can enable a high degree of interoperability between different markets, as the underlying infrastructure should be largely the same. This improved access to and easy transfer of digitized assets has the potential to dramatically increase the liquidity of once illiquid products.
Finally, and perhaps most importantly, blockchain enables a level of security, authenticity and transparency that was previously difficult or impossible to offer these companies. Blockchain transactions are immutable, which means that fraud is hardly possible and the full history of all activities is available to both counterparties and regulators. As long as the assets are properly tokenized, traders can have complete confidence in the accuracy of their portfolio at all times.
The way to offer digital securities
For this to be a practical solution, companies need access to systems that make all of these steps simple and easy. One option for a company would be to develop a tokenization platform in-house. However, doing so could take years and entail significant upfront costs, regulatory and compliance hurdles, and identifying the most appropriate technology for your current and future needs.
An alternative option would be for a company to use an existing third-party platform. There are already quite a few all-in-one tokenization suites available from companies like DASL, an out-of-the-box, production-ready, and robust financial application designed specifically for asset creation. These types of systems are already designed for all the functions required for tokenization and trading, especially regulatory compliance, which can be a real headache in this market.
While there are a number of different security token platforms that choose to work with a Corda-powered platform, a distributed ledger specifically designed to meet the needs of highly regulated institutions not only ensures the longevity of your offering, but provides you with it too a secure platform, extensible, turnkey solution supported by industry experts.
The exponential pace of asset digitization offers immense opportunities to reshape capital markets. Regardless of how a company enters, digital securities open the door to a whole new breed of securities global market, one that resembles the efficiency of cryptocurrencies, but still uses tangible assets as a foundation. Ultimately, it is uncertain how soon this technology will be introduced, but it looks like the way forward. As more companies realize the potential benefits and step on board, any company that doesn’t may be left behind. Fortunately, the tools required are readily available, and with a little training there is no reason a company cannot get involved right away.
About the author
Richard Crook is the former Head of Emerging Technology at Royal Bank of Scotland. He has over 20 years of experience leading teams to achieve maximum business advantage through technology solutions for the largest financial services institutions. He is now the founder of LAB577As a software company in the field of tension between financial services and emerging technology, he and his team have been focusing on digital asset shared ledgers since September 2018.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.
