Private Securities on Blockchain are the Next Big Thing

By Nathan Jacobs Published on Mar. 02, 2020

People treat blockchains like magic.

They think it can drive their cars and do their household work.

But is it true??

Of course not at all.

Blockchains are merely a new form of data-structure which can have various characteristics. Most importantly, it can only do what you have designed for...

For example:

Bitcoin's blockchain is designed for censorship-resistant value transfer without any intermediary where bitcoin as a token has monetary value.

On the other hand, Ethereum's blockchain is designed to execute lines of codes (smart contracts) in a decentralized and censorship-resistant way.

Having said that, blockchains could do a lot provided they are understood and designed well from the ground up. That's why they have the potential of bringing efficiency to various friction points that we face across different industry verticals.

One such vertical is the securities market.

The securities market is also known as the financial market where securities such as bonds, stocks, derivatives, and other financial instruments are bought and sold.

Under this umbrella, we have private securities for which blockchain is especially attractive.

For those of you who don't know, private securities are also financial instruments like stocks and bonds, but they are only bought and sold between vetted private entities.

Due to this limitation of being offered and received by private entities, private securities often have problems like less liquidity, high settlement risks, manual asset servicing, investor’s interest locking, etc.

But not anymore.

With blockchain, you can solve these problems by issuing and managing securities on the blockchain. The process of issuing securities on the blockchain is called STO (Security Token Offerings), and such securities are called security tokens.

Benefits Of Issuing Securities On The Blockchain

Private Securities on Blockchain are the Next Big Thing 1

(Source: Cryptoslate)

1. Compliance Ready

Regulators like SEC guard private securities in the US and similar regulatory entities in other countries. These regulators specify who can own a particular type of private security. For example, in the US, only accredited investors can hold private securities. So such compliances can be easily met using security tokens that leverage blockchain tech.

2. High Liquidity

Since security tokens are cryptographic tokens that can be programmed for compliance on a blockchain, they naturally become more liquid. Also, the addresses of these tokens can be verified easily through an efficient KYC trail on the blockchain and thus investors can coordinate between them through an ATS (alternative trading system) or security token exchange.

3. Efficient Cap Table Management

If you ask an issuer of the private security at any given point in time who owns how many private securities of their private company, they will have a hard time telling you the exact details. This type of cap table management in the private securities realm will become more transparent and readily available with the blockchain.

4. Global Trading

Right now if an investor from China needs to buy or sell private securities in the US, that investor will be required to go through a very cumbersome process. In short, we don't trade securities globally in the real sense of the word.

But with blockchain-powered compliance and KYC, this cumbersome process of onboarding and collaborating between global investors can be made frictionless.

5. 24/7 Trading

Currently, financial markets across the globe work in fragmented time zones and there are genuinely no global markets.

But with blockchain, various markets around the world will be able to collaborate easily and make the trading process accessible all the time.

6. Cost Reduction

Currently, without blockchain, private securities require a lot of manual intervention for settlement, allocation, closing, underwriting, and compliance.

This requires a lot of investment in human resources in the middle and back offices of investment banks. But now with securities tokens powered by blockchain, all this can be done through smart contracts.

7. Instantaneous Settlements & Scalable

Gone are the days of T+2 or T+3 with the legacy system.

Now with blockchains, you can design near-instantaneous settlement systems and consensus mechanisms which will help in an efficient settlement.

That's why it is apt to say that this vertical having blockchain infrastructure can help save millions of dollars for investment banks as well as investors. And the security token offering industry is expected to be a $10 trillion industry by 2020.

Nathan is an independent Security Analyst with over thirteen years of experience in advising global corporations to reduce cyber risk through innovative cyberwarfare. He helps businesses and individuals to gauge the actual impact of cyber risk by writing on topics such as cyber defense, cryptography, and blockchain.

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