This is the second of a two-part article series on security token offerings. In part one of the series, we looked at the advantages and disadvantages of STOs with the backdrop of the disappointment with ICOs. The second part elaborates what these tokenized securities mean for the capital markets. What will be its impact and what are the hurdles in its way?
Global capital markets are still recovering from the 2008 crisis: with it, the regulatory demands have added more lines of defense. In this challenging environment, capital markets still fund 65% of the US economy1, therefore the dependency on capital markets cannot be ignored.
A typical trade lifecycle is besieged with numerous issues and challenges in today’s world, some of them are related to checks and balances at various stages, for instance:
Some of the issues highlighted above are mitigated with the advent of blockchain technology and others will be addressed through STOs.
STOs offer two blanket advantages: i. Timing ii. Speed.
The Clearing and Settlement of Trades now conforms to T+3 standard. With STOs and smart contract technology, this will occur in real time basis. The need for clearing and settlement systems will go away.
All the supplementary support services like reconciliation will be a thing of the past.The reporting aspect maybe built in smart contracts to generate client/transaction reports on a real time basis.
Due to regulatory requirements still in flux, there is a deep reluctance in the role of market players like custodians, broker dealers. However, the basic tenets of holding and protecting customer’s assets (in this case STOs) is not going to be lost. Recent alliance between Coinbase Custody and TokenSoft Global Markets3(acting as a Broker – dealer) has led to a strong foundation institutional grade security, financial controls and auditability.
Transfer Agents will have a limited role to play as the need to store dividend or corporate actions items and other reporting needs could easily be embedded in smart contracts.
Recordkeeping will be a challenge as the fund accounting aspect will remain significant in STO environment. The integration with fund accounting systems is to be explored and how that will impact global updates on real time/batch basis.
Due to efficiency in clearing and settlement operations, the depository services and maintaining counterparty risk will go away. This will reduce investments in resources increasing efficiency and profitability many folds.
It is significant to note that South Korea’s leading Blockchain research centers – Coinone Research Center and Chain Partners CP Research have determined that STOs will be a huge success in crypto industry with STO market estimated to grow to $2 trillion dollars by 20304. However, one needs to bear in mind that too much regulation would hamper the progress and create hurdles, and too less regulations will give away trust in digital coins with no return in future. Therefore, SEC needs to work on a robust guideline that will promote STO business with minimal risk for the investors at large.
From an IT transformation standpoint, the opportunity is infinite. Banks’ technology landscape will require a relook with focus on more automation and digitizing of data management. There will be a need to build interfaces to pull data using STO protocols. This will require niche skillsets.
2019 and beyond looks more exciting for STOs as banks and other ancillary firms study the impact on its business and technology.
Here are the immediate opinion on trends for the next 3 years:
The best is yet to come!
1. www.sifma.org – SIFMA 2018 Outlook: Trends in the Capital Markets
Principal Consultant, Securities and Capital Markets, Wipro
Abdemanaf brings in 17 years of Domain Consulting experience covering investment banking and investment management space in UK and US. He has been on advisory roles covering Business Analysis, Process Analysis, Data Analysis and Machine Learning programs. Currently, he is focused on Securities Token, Blockchain and can be reached at Abdemanaf.email@example.com