One of the key advantages of tokenisation is the rapid settlement of trades since exchanges for tokenised securities are open 24/7. Tokenised securities also allow for fractional ownership, which can easily replace the antiquated mutual funds business
This is not all. There are many other benefits of tokenisation, and we explore some of those below:
INCREASED LIQUIDITY
Tokenised exchanges attract higher liquidity because they allow investors to tap liquidity from previously untapped resources from the world over. One great example of this is Liquidshare, a fintech founded by eight major European financial institutions that ConsenSys helped set up. Liquidshare created security tokens for private companies that did not have the efficiencies of listed stock exchanges. Such previously untapped sources of liquidity are available without walled gardens, restriction on working hours, public holidays or weekends, or dependency on the payment of fiat currencies only available at set times through intermediary banks.
INCREASED GEOGRAPHICAL ACCESS
Tokenisation allows investors to access liquidity in geographies outside their domicile. Currently, any investor needs to have an account with a broker or custodian banks in the country where they want to trade shares on that country’s stock exchange. This increases the cost of investments for a foreign retail investor. Additionally, the processes of settling trades through a custodian are slow and complex. Since the tokenisation of financial securities removes the need for an intermediary, any person with an Internet connection can buy and sell tokenised securities, no matter where they are located.
REDUCED OPERATIONAL COSTS
Smart contracts are a key feature of the Ethereum blockchain service, and they ensure that the terms of a transaction are programmed into the code of the transaction. Smart contracts for tokenised exchanges ensure that all the responsibilities of a central securities depository (CSD) are programmed into the trade, facilitating the execution of corporate actions such as payment of dividends to shareholders, or payment of interest to bondholders. This reduces the operational costs of servicing these transactions.
AUTOMATED COMPLIANCE
An open-source ledger, one of the key features of blockchain, ensures that everyone can see the same version of the ledger in real time. The ledger is immutable, and transparent, which allows the issuer to see in real time who is transacting in their securities. The ability to track transactions in real time has always been one of the requirements by issuers in legacy financial markets and very few in the traditional financial markets have been able to offer this functionality. The CSDs that do not have ‘name on register’ functionality and rely on nominee accounts, in particular, do not have this facility. This leads to reduced transparency in traditional financial markets.
Since the ledger, where tokenised transactions are recorded, is open-source, issuers as well as auditors see the same version of the ledger. This allows the audit of the ledger to be conducted in real-time, which increases the ability of regulators to ensure the integrity of the transactions.
FINANCIAL INCLUSION
Issuing tokenised securities leads to lower direct costs, both to the issuer and the investor. This leads to financial inclusion as the barrier to entry to investments is lower in crypto markets when compared with traditional financial markets.
INTEROPERABILITY
Ethereum standards make the exchange of value over the internet as simple and easy, as the exchange of information. This concept is known as the Internet of Value. As the Internet of Value is public and permissionless, the interoperability between many new asset classes will become a reality. We call this the money lego and the composability achieved through the open-source nature of the decentralised finance (DeFi) protocols. This is impossible in the legacy financial markets, being another reason why changes will become inevitable.
NEW ASSET CLASSES
Tokenisation is bringing new asset classes such as art, real estate, collectables, and new forms of money into the market. This allows CSDs to offer investors custody services of all these new asset classes.
Author
Monica Singer CA (SA), South African Lead, Senior Strategy for ConsenSys
