Faster, Cheaper, Easier and More Secure
Let’s do a short catch-up on blockchain-based securities. The digitization of securities has been coined with many terms: Initial Security Offering (ISO), Security Token Offering (STO), Digital Asset Security (DAS), Smart Security Offering (SSO), Digital Security Offering (DSO) and more.
These terms are all used interchangeably to refer to a tokenized asset that is designed to comply with rules and regulations in one or more regions. Tokenization is the process of converting the rights and interests, in and to an asset, into a digital token on a blockchain. The token represents a digital, programmable, uncertificated ownership in an asset or company.
While the terms vary, the leading companies in security tokenization are of one mind and voice. They boast that flexible tokenization technology allows for the digitization, fractionalization and globalization of individual assets allowing for lower costs of capital formation, lower investment minimums, higher numbers of participants, reduced liquidity premiums and greatly increased market depth. The security benefits provided by transparent, blockchain-secured ledgers will prevent innumerable database or human errors that often lead to massive losses. The combination of benefits depend on an individual offering’s choice of regulation.
Incremental or Exponential Growth?
Jump in the time machine: the creation of the New York Stock Exchange (NYSE) in 1817. In 1971, the emergence of the spreadsheet and electronic trading with the creation of Nasdaq and a subsequent race of incremental technological improvement. Roughly 20 years ago, brokers on Wall Street talked about “T5,” a leap in progress for clearing trade transactions in just five days. Presently, we are at T2 in the traditional system, in which trade transactions are cleared within two days. Now, with the implementation of blockchain technology into trading systems, we can clear these trade transactions in just seconds without the risk of the human error prevalent in our current system, a system driven and validated by the reconciliation of simple databases held by each major party involved in a trade.
Let’s paint a picture. The U.S. stock market capitalization is currently $34 trillion, compared with the rest of the world's $44 trillion capitalization. The U.S. is 43 percent of world market value, but it houses only 17 percent of the world’s stocks. Aggregate global wealth rose by $14 trillion, to $317 trillion, in 2018. The Global Private Equity Markets are currently valued at just over $70 trillion, while gold sits at $8 trillion and global real estate sits at $228 trillion, not to mention the global derivatives market. The effect of blockchain technology and tokenized securities will gradually migrate these markets into a better system.
Imagine, across all of these key financial sectors, the amount of value lost to a fragmented business, inefficient systems, hindered liquidity, human error or just a simple lack of access.
The IPO Has Been Redefined and Wall Street Is Catching on Fast
In 2017, the Initial Coin Offering (ICO) flooded the scene with incredible success, raising billions for blockchain and cryptocurrency projects. The ICO experienced so much success that it became evident to regulators that this market needed immediate attention. Over the last two years, regulators have entered the main stage. Quickly, the issuers of these ICOs scrambled to either justify their position as “not a security” or file retroactive exemptions with the U.S. Securities and Exchange Commission (SEC) and other regulators around the world. Throughout 2018 this served the industry by cleaning up the rampant stampede that resulted in the scams and chaff being cut out and in turn allowing for a new compliant, results-driven mindset to take hold with leaders and innovators in the industry.
The digital securities offerings we see today have emerged on the radar of nearly every major player in the financial world. Apart from the ICO, the STO is a clear redirect toward more compliance and thus security offered to the company and its investors. This evolution in capital formation has already created new opportunities for companies, issuers and broker-dealers to build financial products in new ways and reach more investors than ever before. The ability to bring secondary market trading with a higher level of liquidity from expanded access will forever change the way securities are built.
William Hinman, director of the SEC’s Division of Corporation Finance, on June 14, 2018, at the Yahoo Finance All Markets Summit made one of the most important speeches on blockchain to date, declaring that “tokens from a network at least as decentralized as the Bitcoin and Ethereum networks were on June 14, 2018 are not securities.”
We follow the guidance from this speech as the “Hinman Standard,” an informal direction on what is “sufficiently decentralized.” This informal standard, along with the U.S. Supreme Court’s Howey Test (1946) that was designed to determine what is or is not an “investment contract,” currently provides the clearest framework for these companies and networks today.
For any network, token or application to fall safely within regulations, it must be determined whether it is sufficiently decentralized by these standards. If it is not, or if it will not be in the near future, then it falls under the SEC’s securities jurisdictions.
So ... What Can Tokenized Securities Do for You?
Tokenization is no incremental improvement to an existing system. The benefits are exponential in effect.
Whether you are an asset issuer, company seeking capital, investor looking for strong potential or just a consumer curious about how the shifting landscape will inevitably affect your bottom line, tokenized securities leap our economic footing into a more stable, efficient and reliable position on every meaningful front.
A tokenized economy is an inevitable eventuality, and those shaping the technology today will affect all of us tomorrow. Whether the regulators stifle innovation or enable it could immensely affect any given nation’s position in the global financial markets likely for generations. It is my belief that a tokenized, blockchain-driven economy will be safer, more accessible, transparent and more cost efficient than the systems we rely on today. This will have a crucial effect on not just companies but on individuals’ equality and wealth opportunities.