A worldwide market
About $250 billion in stocks and other securities are traded on financial markets every day. Despite their ability to accommodate high-speed digital trading, markets are still fundamentally the same as they were hundreds of years ago. They are highly insulated from each other and are poorly interconnected, mainly relying on third-party brokerages to execute trades on behalf of users. For example, if you buy a stock on one exchange, it’s difficult or impossible to sell it on another, since most stocks aren’t listed on multiple exchanges.
This centralization means liquidity is low (liquidity almost always increases when stocks are listed on multiple exchanges) and access is constrained by trading hours and broker policies. Each stock market operates as a gatekeeper that determines who, how, and when people can trade. Further, issuing an IPO on a US stock exchange costs upwards of $1.5 million in legal, underwriting, and other required fees for investment banking and accountancy services and can take up to 18 months to complete. Security Tokenization looks to completely disrupt this system.
Security Tokenization looks to completely disrupt this system.
The rise of tokenization
Tokenization is the use of a token to represent ownership of an asset. For example, a token can represent a dollar or euro, but also a property title, a claim to receive loan payments, rewards points, or a month’s worth of streaming media services. It can also represent expertise, ideas or IP. One cryptocurrency token can also represent another cryptocurrency token, as with wrapped XEM on the Ethereum chain. Blockchain platforms track and manage these tokens with high security, reliability and low cost. In 2020, tokenization has been surging in popularity on various DeFi platforms, as users trade and stake tokenized USD, ETH, and derivative assets.
Leapfrogging walled-off stock markets, blockchain networks allow trading between any tokens with interconnected worldwide marketplaces, and direct peer-to-peer trading. But until recently, it hasn’t been possible to trade securities on-chain.
STOs, or Security Token Offerings, are changing that. They are one of the most anticipated tokenization use cases in the industry.
Regulation and compliance
One reason stock markets have remained centralized is to ensure regulatory compliance.
Every country has regulations covering who is allowed to own various types of assets, and with whom they can trade. There are valid reasons for these laws. They give countries the power to shut off income to rival nations and to protect their own citizens and industries from too much risk exposure.
Common regulations require traders to be KYC-approved, (Know Your Customer), and is a way to ensure a real person is on the other end of any potential fraud or violations. KYC approval as a service is becoming more widespread, so it’s frequently possible for companies to outsource KYC compliance.
Symbol is ideally placed to support Security token issuance.
Symbol is ideally placed to support Security token issuance. According to Wong Liang Zan, CTO of Propine, Symbol provides a comprehensive set of features that cover 90% of the needs for security token issuance.
Restrictions enable automated compliance
Symbol has the built-in ability to create tokens, but more importantly, Symbol also has a built-in ability to set custom restrictions for those tokens. Using a simple dashboard you can create security tokens and make them freely tradable, or tradable only between certain specified accounts. You can specify what kind of criteria each token’s restrictions apply to. This means you can have tokens that are compliant with regulations in many jurisdictions at once. For example, citizens of country A with $50,000 yearly income AND citizens of country B with 700+ credit rating may own this token and freely trade with one another.
Once these tokens are created, compliance requires no further effort from the issuer. These trading restrictions are automatically enforced with the same reliability as the best smart contracts.
Restrictions on Symbol tokens represent an easy way to create a KYC-only STO marketplace. For example, anyone who is KYC-approved can freely trade the STO token with other KYC-approved users. As the industry moves toward greater interconnectedness, this is likely to become common practice.
Hybrid blockchain configurations
Hybrid blockchain solutions combine the best features of a private blockchain and a public blockchain. A hybrid chain solution allows a company to operate most of their business logic on a private chain. This lets them make unlimited transactions and database updates without paying transaction fees, and allows them to have control over how their data is managed. The public chain is used to periodically record the net result of the private chain transactions. Tokens are configured to move freely or in a restricted manner between public and private sections of the hybrid chain network.
Hybrid chains are highly useful in STOs since they give the issuing company great flexibility in how their tokens are managed. Symbol is also purpose-built for hybrid chain configurations.
STOs – a hint of the fintech future
DeFi applications have exploded in popularity, and demonstrate the surging interest and demand for interconnected financial services on blockchain. However, DeFi apps can only progress so far though since they are fundamentally anonymous and open to all. This doesn’t work for most businesses raising capital.
Security tokens will bridge the gap between companies that want to raise capital, investors that want to invest in known businesses, and regulators that require compliance. When this happens, it will likely make DeFi look small by comparison.
With its built in features, Symbol has everything needed to get us to a more democratic and efficient way of raising capital and investing.