Digital securities – also known as security tokens – are stocks, bonds, funds and other financial securities that take the form of tokens on a blockchain rather than physical certificates or some other form. The use of blockchain technology as a foundation upon which securities are built, managed, and traded is important because it endows digital securities with features that give them advantages over traditional securities. These include greater accessibility and transparency.
In many countries, digital securities (and the venues where they are bought and sold) are also regulated, with all the legitimacy and credibility this entails. The ADDX platform, for example, is regulated by the Monetary Authority of Singapore (MAS).
Advantages Of Security Tokens
Accessibility And Cost
Because of the nature of the technology underpinning it, digital securities allows investors access a far broader array of opportunities at far lower prices than previously widely available. ADDX, for example, provides accredited investors with access to opportunities like private equity, hedge funds, private debt and more. All of these were previously out of reach to all but the extremely wealthy and well-connected professional investors.
One key way digital securities improve accessibility is by their ability to be fractionalised, or broken down into smaller pieces. Let us look at hedge funds, which can normally cost hundreds of thousands to millions of dollars to buy into under legacy systems, as an example. By fractionalising shares of these funds, it is possible to make the minimum investment size S$10,000 or even less.
Another way digital securities provide investors with greater accessibility is through reduction of costs and expanded capability. For example, why don’t hedge fund managers commonly allow thousands or even tens of thousands of investors to buy into their funds? This would, after all, bring the managers far more capital to execute their investment strategies. The answer, quite simply, is that they don’t because they generally lack the ability to.
Hedge funds, like many other types of digital assets, very often rely on manual and outdated processes and procedures which makes serving users on a mass scale difficult-to-impossible. By issuing the fund via digital tokens, however, many of these processes and procedures can be automated and streamlined, dramatically reducing costs while expanding accessibility. In addition, since issuances, trading, and management of security tokens are executed on a blockchain, the need for third parties and the costly infrastructures they use to verify and oversee transactions is eliminated. This opens the market to new players like ADDX, resulting in more competition.
Blockchain improves upon the status quo in private capital markets by eliminating the need for intermediaries to track ownership of securities. It does this by distributing the ledger of securities transactions and ownership across a number of nodes, with all nodes agreeing to a consensus mechanism for making updates to the ledger. The ledger itself is immutable and cannot be changed once a transaction has been recorded. This provides not only the transparency needed to keep everyone honest, but it also provides the redundancy needed to ensure mistakes aren’t made. The result is a single source of truth that all parties can rely on.
The final critical piece of the puzzle when it comes to blockchain-supported securities management is the use of smart contracts to bring added functionality, or programmability, to the securities. This allows us to, at the point of issuance, “bake in” compliance to regulation or other trade restrictions. For example, consider the following regulations that are in place for many private securities:
- A maximum of 99 individual holders at any given time
- Each holder must be an accredited investor
- No individual has more than 10% of the total supply
Using legacy securities management systems, ensuring compliance to these regulations was costly and ineffective, which made it difficult to create an efficient and transparent secondary market for private capital market securities. This limitation has meant that private securities fundamentally lack liquidity. With blockchain-supported tokenised securities, however, the securities can be programmed from the start to adhere to regulations like those listed above. When, for example, someone attempts to transfer to the 100th person, the transfer will be automatically declined. Similarly, if a transfer would result in one person holding more than 10% of the total supply, it too would be automatically declined. Further, a tokenised securities platform could easily build a whitelist of accredited investors, thereby creating a secondary market for private securities. Finally, programmability makes it possible to automate other restrictions and features to the securities. Examples include:
- Locking up trading for the first year
- Paying dividends
- Enforcing different share classes
- Providing additional utility to holders such as discounts for real-world services
Regulation And Digital Securities
Securities are, by definition, regulated assets and this increasingly includes digital securities. The Monetary Authority of Singapore, for example, clarified that it will regulate such products in 2017. This offers investors both legal and regulatory clarity as well as assurance that they are dealing in legitimate financial products.
ADDX is your entry to private market investing. It is a proprietary platform that lets you invest from USD 10,000 in unicorns, pre-IPO companies, hedge funds, and other opportunities that traditionally require millions or more to enter. ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors.