The digital asset class everyone at the Christmas dinner table wish they knew about (no, not NFTs)
This Christmas, as Mariah Carey once again fills our homes, many will take their first steps into the metaverse, purchase their first crypto, or learn that there is a thriving market for $250k digital primate art – and no you can’t just screenshot them.
My goal with this article however is to keep you even one step ahead of your NFT savvy uncle who listens to Gary Vee on TikTok.
Brief 2021 recap: Cryptocurrency had its meteoric rise to fame and NFTs entered into the running for the face of digital assets. Nearly $30 billion were spent on NFTs and Crypto stayed above a trillion dollar market cap since January.
Both NFTs and Crypto succeeded for various reasons but fundamentally they exist because of blockchain’s ability to bring near bullet-proof level verification and security to the age of the internet. For the first time ever, scarcity can exist on the web.
What you won’t hear about at the dinner table this Christmas however, is how blockchain has been brought into the securities market as well. Though this may not sound as exciting as the latest pup themed crypto, I am here to tell you that it’s cooler than CorgiCoin (yes, that’s a thing).
We’ll cover the top five reasons why security tokens (STOs) will be the talk of the holidays sooner than you may think.
Before we jump into why digitizing securities is the inevitable way forward, let’s set the stage by mentioning the solvable pain points currently experienced by users of the traditional securities markets:
Restricted access – If you buy or sell stocks, you have a foreshortened window in which you can perform these transactions. Both major US exchanges, the New York Stock Exchange (NYSE) and the Nasdaq, are in New York and are open Monday through Friday from 9:30 a.m. to 4 p.m. EST. Trading can happen outside of these hours with pre-market and after-hours access but fees tend to be higher and liquidity lower.
Restricted participation – It is not uncommon for single share prices to get prohibitively expensive reaching into thousands of dollars, therefore precluding a majority of retail investors. Fractional trading has tried solving this problem but still deals with its own host of complications: shareholder rights, tax issues, fees adding up, illiquidity, etc.
Restricted settlement – When trading stocks, settlement usually occurs two business days after the day the order executes, or “T+2”, meaning the trade date plus two days. Unfortunately, almost nothing in the world of finance done on paper happens “NOW”.
The good news is that these institutional inefficiencies can only exist for so long as digital securities gain adoption and blockchain tech showcases its true potential in the SEC compliant realm.
According to the Quinlan report published in September, Cracking the Code: The Evolution of Digital Assets to the mainstream, there are models confidently projecting a security token issuance volume of over $4 trillion and a trade volume of over $160 trillion by 2030, with a huge uptick coming after 2025 due to regulatory pressures.
Okay, we made it. Here’s the stuff you’ll one-up your uncle with at Christmas dinner. Why security tokens will win this decade:
- Easier to access
Access to a digital asset broker-dealer like tZero is 365 days a year, 24 hours a day. By comparison, Nasdaq is open for trading 253 days this year at 6.5 hours a day – 7000 less available trading hours than tZero. More uptime means more access in more timezones.
- Easier to participate
Digital assets like security tokens or cryptocurrencies are divisible and can be fractionalized into very small quantities. For example, a single Bitcoin is worth about $50k but it can be broken down into a unit that is worth less than 1/50th of a penny called a Satoshi. Roughly 25% of the S&P 500 are companies that trade in the $200-$5000 / share range. These higher minimum investment amounts limit access to the retail buyer who make up a fluctuating 20-25% of the market. Furthermore, fractionalization happens without the assistance of humans!
- Easier to settle
No need for third party intermediaries such as a transfer agent or a clearinghouse to verify transactions. This is all handled by blockchain. This means near instantaneous settlement for all transactions. No more waiting periods. Turns out computers are faster than humans.
- Easier to manage
No more paper. Securities today are done on paper. The paper is then made digital but the traditional market is ultimately based on paper. Because of this, there is an ever-increasing movement toward government regulation that would shift the tides to a purely digital environment. The Securities and Exchange Board of India kicked this off by ending all physical certificates in 2019. The European Securities and Markets Authority is now doing the same by restricting all issuance after 2023 to digital and terminating all paper contracts by 2025. This creates a golden opportunity for blockchain supported securities to hit the spotlight.
- Easier to report
In order to remain compliant, financial institutions need to undergo reporting that pulls from all parties involved during trades executed and the subsequent verification processes. Each institution does this differently with different documentation methods leaving a glaring lack of uniformity for regulators. Security tokens create a simple, standardized, and secure ledger for reporting, creating a more efficient solution for both the private and public sectors.
If your uncle really knows his stuff, this is what he’ll ask next:
“Sure that makes sense, but how do companies go about creating security tokens for their shareholders and is this happening today? And if so, which companies?”
Great question, Uncle. *thumbs up*
In order to either conduct a private or public offering with security tokens, companies must work with a digital securities platform like Deal Box to create an SEC compliant fundraise or to prepare for listing on an Alternative Trading System (ATS) like tZero, where you can find many of the largest publicly traded security token offerings.
For privately listed offerings, Deal Box also serves as a digital securities marketplace for accredited investors to find highly-vetted forward thinking companies who understand the value of blockchain and what it brings to our legacy version of the internet.
For example, one of the premiere listings on the Deal Box marketplace is Total Network Services (TNS), a company who created the world’s first blockchain-enabled service for telecom supply chain security, device management, and software licensing that is currently being piloted by members of the Telecommunication Industry Association.
So who will win next Christmas, your uncle’s NFTs or your STOs?
It is because of innovative companies like Total Network Services that you can confidently tell your uncle that though he may one day make millions on NFTs like Logan Paul, you’ll be giving him a run for his crypto with your newly discovered foresight into the future of stocks.
Read about Thomas: “This FinTech Veteran Is Making Cryptocurrency Startup Funding Legitimate“; connect on LinkedIn and Instagram.