The current crisis has increased the need for accelerated automation that would lead to increased efficiency, reduced costs and, counterintuitively, increased revenues. This can only come from a paradigm shift and STOs might be the answer.
By Hirander Misra, Chairman, GMEX Group & SECDEX Group and Jessica.T.Naga, Managing Director of Digital Associates and Partner of Digital Partners Network
Distributed ledger technology (DLT) is undoubtedly revolutionising capital markets. It is, however, important to cut through the hype and bluster of misinformation and promote the use of blockchain in value-added ways.
So, the questions we seek to address here are whether security tokens are a multi-trillion dollar opportunity, and how can they be made more trustworthy for investors, and at the same time lever on crisis induced opportunity.
What are STOs?
A STO is the process of raising finance by way of selling issued security tokens to investors. Simplistically, a security token is a cryptographic representation of (or fraction of) a traditional share of a corporate entity. There can, of course, be many variants to the rights and obligations packaged in a security token, associated with the underlying traditional share. The security token’s presence on a blockchain gives it many more features than a stock certificate. Smart contract systems can incorporate regulations within the token itself.
Are STOs really gaining traction globally?
There is exponential growth in the digital assets market. A World Economic Forum survey predicted that 10% of Global GDP will be stored on blockchain technology by 2027 with a value of USD 24 trillion. In March 2019, Cisco published a report predicting that 10% of global GDP will be stored on blockchain by 2027. Deloitte also tweeted in May 2017 that 10% of global GDP will be on blockchain by 2025.
What top 10 benefits do STOs provide?
Here are some of the key advantages that tokenisation can offer companies and investors when undertaken on properly regulated digital exchanges, with post trade services offered by regulated digital custodians:
1. Creating a cryptographic token that is unique and immutable, through the use of blockchain technology, creates more transparency.
2. It allows traditional share ownership of a company to be reflected digitally in a blockchain registry with ease of access for shareholders.
3. The use of blockchain reduces administrative inefficiencies and settlement delays by allowing the almost instantaneous transfer of tokens, and therefore renders secondary trading, through the speed of transfer, more secure.
4. It promotes cost effective secondary trading, through a flattening of the structure, as fewer intermediaries are required to facilitate the movement of tokens.
5. The tracking of movement of tokens becomes much easier and more reliable through the use of blockchain technology, as there is no need to trust one centralised party.
6. It allows wider syndication of investors through fractional ownership and therefore increases liquidity.
7. It promotes administrative efficiency through automation of processes relating to corporate actions, KYC, AML and CFT. These rules can prevent someone who isn’t qualified from buying the token.
8. It enables people to be more creative, in terms of what can be tokenised, to allow capital raise or to create value. It is possible, for example, to bundle rights and perks within tokens that have no or low intrinsic financial value, but would have a high value to potential shareholders, such as Fan Tokens.
9. Tokenisation presents opportunities to unlock value from traditionally idle or illiquid assets such as real estate.
10. Digital assets are programmable and, through smart contracts, help include corporate events, like ex-dividend and cum-dividend date, and proxy voting. They can also allow for seamless asset transfer between nodes, and across jurisdictions, aligned with regulatory approvals.
Finally, we should not forget the marketing benefits of tokenisation to demonstrate innovation.
How can STOs realise their potential?
In light of the surge in STOs, numerous jurisdictions have introduced a legislative and regulatory framework for digital assets. This makes for a promising start to help STOs realise their potential. Regulation is key to unlocking their potential and protecting investors so they can invest with trust and confidence, which unregulated exchange offerings cannot achieve.
When choosing the right digital securities exchange or marketplace, issuers and investors should look at four key aspects:
1. Technology that is both traditional and digital, so that it bridges the gap between the centralised current financial world and the decentralised finance (DeFI) opportunities.
2. The experience of the legal and compliance team, and associated framework.
3. The team’s capital markets expertise.
4. The strength of the products.
With the above in mind, regulated STOs offered on regulated exchanges should be better structured, with more opportunity and lower costs than traditional Initial Public Offerings (IPOs). Unfortunately, in most cases, that is not so, because services, such as legal, finance, technology provision and issuance activities, are all carried out in a disparate fashion, leading to increased cost and even more intermediaries than in traditional markets. Exchanges and digital custodians need to offer an all-round regulated solution to cover all elements of the value chain. This includes token issuance, legal structuring, financial valuations through state of the art technology, as well as the opportunity to safely keep the tokenised assets within secure digital custodians as part of a cohesive single aggregated service offering.
Moreover, with increasing asset tokenisation, capital markets have shown a booming appetite for integrating digital assets into wealth management portfolios. Institutional investors are increasingly investing in digital assets and require custodians to deliver exchange custody, self-custody, or third-party management of digital asset accounts.
All this leads us to firmly believe that STOs are one of the more significant ways of using DLT in FinTech, both in scope and in social impact, with this already starting to happen in regulated environments. Whilst we are only at the start of the mainstream STO journey, the road to discovery and innovation lies ahead of us to create positive change and revolutionise the way that we do things.
Hirander has expertise in extensive electronic trading and FinTech spanning 25 years, with successful syndication to investors and substantial exits. He is the Chairman & CEO of GMEX Group and its climate fintech platform-as-a-service ZERO13, which won the COP 28 UAE TechSprint for the use of blockchain to scale climate finance. He is one of the Top 10 influential business leaders of blockchain technology in the UK All Party Parliamentary Group report. He is also featured in LATTICE80’s Top 100 influencer list for the UN Sustainable Development Goals agenda for pioneering blockchain technology solutions. Hirander was also recognised as the Most Influential CEO 2024 – UK (Carbon Credits) by CEO Monthly, a digital magazine published by AI Global Media.
Previously he was the co-founder and Chief Operating Officer of Chi-X Europe Limited, instrumental in taking the company from concept to successful launch. At the time of his departure in February 2010, Chi-X Europe was the second largest equities trading venue in Europe, just behind the LSE Group, and was subsequently sold to Bats Global Markets (now part of CBOE Global Markets) for $365M.
