What opportunities do digital securities bring to private capital markets? Below you will find a reflection from BlockStart’s Ecosystem Partner LAB577
At LAB577 we are convinced that global digital securities ecosystems will bring public market benefits to private markets. Basically, the adoption of digital securities and supporting infrastructure provides the secondary trading function currently missing in private markets.
Before we can go any deeper into the how and why, we probably need to start with some definitions of the terms (feel free to skim over these if you know the terminology).
Digital securities are financial securities represented on a distributed ledger.
The definition of securities varies depending on where you are in the world. In general, a security is a tradeable, regulatory compliant financial asset. Securities are financial instruments traded in the capital markets. Securities represent ownership or rights to income. Ownership is often referred to as equity. Stocks, bonds, and loans are other examples of securities.
Digital securities are financial assets represented on a blockchain or distributed ledger technology (DLT).
Global Digital Securities Ecosystem
There is a growing global ecosystem for digital securities. Important market players include security issuers (entities listing their own asset, or their clients’ asset as a digital security), digital exchanges (providers of trading venues), investors, tech providers, and regulators. Look at Rare Cask Holdings for an example of an issuer; they’ve released a tradeable digital security representing tokenized ownership of their whiskey barrels. Or ABE.io who have created a regulated digital securities exchange . We are seeing a growing number of individual and institutional investors providing capital to these projects.
So, the global digital securities ecosystem includes all the players who are making the issuance, trading, and settlement of digital securities a reality.
Public & Private Markets
Asset Manager Aberdeen Standard provides a good explanation of the current state of private markets:
“Private markets refer to investments not traded on a public exchange or market. In the past they were often considered too hard to access, opaque or niche for traditional investors. Now, private markets are valued and accepted as an attractive means to diversify a portfolio and achieve enhanced long-term return potential.”
We can think of public markets as stock exchanges (although traditional exchanges do trade more than just stocks). Private markets are where non-publicly listed assets are traded. Raising capital in private markets is complicated and the process is more opaque than in public markets.
Secondary trading is any trading of an asset after its first sale – in public markets an IPO or other public listing is the primary trade and everything after that is considered secondary trading. Public exchanges enable secondary trading while, today, private markets do not have the same mechanisms. That is where blockchain-enabled digital securities help.
The fusion of traditional securities markets and digital assets will drive the development of the capital markets over the next decade. Private markets continue to grow at the expense of public ones.
The Opportunity for Digital Securities
The dematerialization of the public securities market nears completion but the majority of the $6.5trn private securities market remains opaque, inefficient, and illiquid. Digital securities offer the opportunity to digitize the ownership of trillions of dollars in assets and create a new global digital securities ecosystem.
Astute financial institutions are offering their clients easier access to these private markets using digital securities while reducing, on average 40%, the cost of issuance, post-trade settlement and asset servicing.
Digital securities can represent any asset – equity, debt, real-estate, natural resources and infrastructure.
Growing Market Interest In Digital Securities
The rise of digital securities is the next innovative wave in blockchain after the initial explosion of cryptocurrencies. Digital assets, including digital securities, will fundamentally change the nature of financial services and how it is consumed by businesses across many industries.
The ability to represent securities on a digital system using blockchain or distributed ledger technology is creating new markets for previously illiquid assets and reducing risk and cost in post-trade systems.
Digital securities boost market efficiency by enabling end-to-end solutions combining trading, settlement, and custody services across the value chain into one seamless offering, thereby unlocking liquidity in previously illiquid markets.
Article provided by LAB577, the creators of DASL.
DASL is an adaptable evergreen technology solution to enable the future of financial services. It offers a production-ready, robust, finance grade application which can be used for tokenization of any type of underlying asset – a complete, hosted solution for issuance, portfolio management, trading and settlement of digital securities. Supported and maintained by the LAB577 team, a team with over 80 years of combined experience building and maintaining trading and risk systems in tier 1 financial institutions. Find out more here.