The status of the “Digital Securities” Industry

June 30, 2022
Posted in Article

The status of the “Digital Securities” Industry

The future of Capital Markets

CAPITAL MARKET 2.0 – A brief recap of where we stand in the actual development of this specific era, where assets are digitized, traded and managed globally, in an easy, secure and regulatory compliant way.

We, at ASSETERA identified 3 different stages, whereas stage 1 has been completed. Now we are right in the middle of stage 2 and we will see stage 3 professional CAPITAL MARKET 2.0 in place by end of 2025.

STAGE 1 – Blockchain Technology

Blockchain technology was mentioned first time in 2008 to serve as the public transaction ledger of the cryptocurrency bitcoin. Similarly important is the evolution of “Tokenization”, being defined as the process of converting value into a digital token which is usable on a blockchain application. Tokenization is the process of replacing sensitive data with a unique identification symbol that retains all the essential information about the data without compromising its security.

The advantages of blockchain technology and hence tokenization are improved security and privacy, decentralized structure, reduced costs, speed, traceability, immutability, transparency and individual control of data.

Technology and building trusted infrastructure has been the focus of stage 1. During the last years, investment funds have invested heavily in technology companies building the next internet – blockchain based infrastructure. By that, an industry has been built over the last decade and created the basis of the next step in the development of CAPITAL MARKETS 2.0.

STAGE 2 – Regulation, building a market infrastructure based on blockchain technology.

Since 2018, regulators around the world got heavily involved and engaged in understanding recent market developments. The aim of the European Union Commission is to create a harmonized digital asset market. It does this, for example, by introducing the MARKETS IN CRYPTO-ASSETS regulation (MiCA) and a pilot regime for market infrastructures based on distributed ledger technology, the DLT PILOT REGIME coming into force March 2023.

The security token market is evolving dynamically and can still be considered to be in its infancy phase. Projections forecast a continuous growth within the next years up to a total market volume of more than 900 billion Euro by 2026 in Europe alone. This can only happen, with a clear regulatory framework given. See Assetera’s pilot regime summary: https://bit.ly/3y5gY7t

STAGE 3 – Business & Market Operation

Usually, everyone reduces the key performance indicators of digital security exchanges to liquidity. Of course, liquidity is an important element. However, equally important are the following facts:

  • attracting institutional clients to enter the market
  • that issuers/asset manager can easily have access to a platform (end-2-end, prime and secondary)
  • being offered a tool to tokenize security token in a few steps
  • increased interest of market making
  • the type of financial instruments
  • attractive segments – ESG, Real Estate, Commodities, SMEs, etc. and
  • certainly the token economics

For institutional clients, it is easier to engage with and invest in digital securities because the underlying – at least in most cases – is already known by means of implementing traditional well-know financial instruments.

Beside market development every regulated financial institution need to comply with KYC/AML measures, product governance, the type financial instrument that can be offered to a specific type of client and which not, please read: https://bit.ly/3HQrv9N and several other constraints like trading, clearing, settlement an custody of digital securities elementary important to offer these alternative investments to institutional and private clients.

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