The Potential Of Blockchain in Equity Markets

Advancements in blockchain technology have made their way into the equity markets. Today, many countries are looking to dematerialize, transitioning from paper securities to on-chain tokenized securities, or security tokens. Widespread dematerialization solves issues that both investors and issuers face with traditional markets, maximizing investors’ access to opportunities and issuers’ access to funding.

When listing on traditional exchanges, issuers experience several pain-points that eat into their funding potential. After exhausting private funding channels, many growth-stage or mid-market companies lack the funds or size necessary to IPO, barring them from raising funds publicly. This is partly due to excess floating costs, or processing costs that companies incur when issuing new equity – these costs include but are not limited to banking and legal fees, accounting and audit fees, exchange listing fees, and administrative fees.

Investors deal with high transaction costs, paying handling charges to intermediaries. Retail investors are especially limited, as they are restricted from alternative and private markets. A digital securities model, through tokenization and smart contract-enforced processes, could enable retail investors access to these markets, granting them the opportunity to invest in a wider suite of products. Further, thanks to automation, retail investors could enjoy faster settlement times with reduced fees, and 24/7 access to markets.

In turn, issuers access a wider investor base. Also, by removing unnecessary intermediaries, security tokens reduce issuance costs and processing times, giving more companies the opportunity to IPO and raise funds. Lastly, by harnessing the power of smart contracts, accounting, tax, and compliance reporting can be simplified.

Regulatory bodies worldwide see the benefits of dematerialization too, citing the efficient creation and management of securities, with many countries looking to fully dematerialize their financial markets. Blockchain and smart contracts can be used to simplify and optimize regulation compliance while increasing market fairness and accessibility. Here’s what John Clayton, Chairman of the Securities and Exchange Commission (SEC) in the United States, has to say about digital securities issuance:

“We’re willing to try that; our door is wide open. If you want to show how to tokenize the ETF product in a way that adds efficiency, we want to meet with you, we want to facilitate that”.

India dematerialized its assets in March of 2019, after the Securities and Exchange Board of India (SEBI) banned transactions involving physical certificate securities. In China, the Securities and Futures Commission (SFX) and the Hong Kong Exchange (HKEX) are looking to dematerialize securities in Hong Kong within the year. In Europe, the European Securities and Markets Authority (CSDR) is requiring all securities to be dematerialized by January 2025. The UK, though having left the EU, still plans to dematerialize by 2025.

Heading the dematerialization trend, some companies have chosen to go public via Security Token Offerings (STOs), the digital to-market counterpart to Initial Public Offerings (IPOs). Here are some notable examples:

• tZERO (Issuance in October of 2018 | $134m raised): is a blockchain platform for the creation and trading of digital securities.
• The World Bank (Issuance in August of 2019 | $108m raised): provides loans and grants to developing countries.
• St. Regis Aspen (Issuance in January of 2018 | $18m raised): a luxury resort nested at the base of Aspen Mountain, Colorado, USA.
• SPiCE VC (Issuance in March of 2018 | $10m raised): Manages a fund made up of high-potential blockchain startups.

The market for STO issuance is showing strong signs of growth – the issuance volume of asset-backed security tokens is expected to reach USD ~2 trillion by 2030, rapidly rising at a compound annual growth rate of nearly 60%. This growth is driven by both regulatory bodies, and the digital securities ecosystem itself. As regulatory bodies support dematerialization, more licensed players are expected to join the space, improving the reputation of digital securities markets and drawing investors.

However, current exchanges – traditional exchanges like the NYSE, cryptocurrency exchanges like Binance, and blockchain exchanges like tZERO – each face unique challenges in filling this demand. Traditional exchanges, while high in licensing and regulatory compliance, are held back by legacy systems. Cryptocurrency exchanges and blockchain exchanges, while high in technological ability, are typically lacking in licensing and regulatory compliance.

This leaves an industry whitespace for security token exchanges with high licensing and digital capabilities. Fusang, Asia’s first fully licensed digital securities exchange, is positioned favorably to fill that space. Fusang offers on-chain digitization of all real-world assets, including shares, bonds, and funds. Thanks to their comprehensive licensing, all global investors – retail, accredited, and institutional alike – are able to participate. For listers, this means a vastly greater potential for fundraising when compared to other platforms.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.