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Future Investments: Mega Trend Tokenized Securities Trading

Many experts consider tokenized securities a potential killer application of blockchain technology. It is well known that the legacy securities trading and clearing systems are decades old and highly inefficient. The settlement of securities transactions today can actually take days, cause high costs and is completely intransparent. These delayed settlements contradict the idea of real-time trading. Especially in North America, with its antiquated transfer agent systems, there is a lot of room for efficiency improvement. Actually, transfer agents as middlemen in securities transactions can easily be replaced by blockchain concepts.

Replacing Transfer Agents

Deploying blockchains for the trading and clearing of securities transactions results in a decentralized and immutable public ledger for all participants. Including supervisory and financial authorities. Participating issuers, banks, brokers, and traders can rely on the blockchain as an efficient and transparent clearing backbone.

Tokenized securities, including shares of stock and bonds, can eliminate friction and create efficiencies in capital markets. Even though tokenized shares do not eliminate many all types of errors that are symptomatic of a system of third-party intermediaries to manage and control shareholder databases, it’s a big step forward. If shares are registered on a distributed ledger, investors, and issuers would be able to interact directly. Property rights would be crystal clear. Proxy voting would be transparent and always accurate (read this Harvard Law School article on the subject).

The so-called Delaware Blockchain Law, for example, went into effect in July 2017 and eliminated the requirement of a central authority to maintain the stock ledger. A Delaware corporation may issue shares and maintain its stock ledger on a blockchain through smart contract functionality without the need for a corporate secretary or transfer agent.

Pilot Project DX.Exchange

The Israeli DX.Exchange project is a first step on the way towards a tokenizing securities environment. The DX.Exchange project offers a promising approach as it addresses both the regulatory and the technical-organizational perspective. It is not yet clear whether the project will be a success, but DX.Exchange is for sure an interesting pilot project. Essentially, the project tries to combine the two worlds “blockchain” and “securities”.

DX Exchange - Tokenization of securities

It’s our understanding that the basic idea of DX.Exchange is to tokenize existing stocks traded on NASDAQ in the first place. To achieve that the platform works with a financial instrument called Digital Stocks (DS) developed and operated by CySEC-regulated broker MPS MarketPlace Securities Ltd. These DS are┬átokenized via the generation of ECR-20 Tokens. The regulated broker MPS Marketplace Securities will purchase real-world stocks in correlation with tokens bought by DX.Exchange traders. The securities depots with MPS are consequently mirrored in the online wallets of DX.Exchange.

Hence, the DX Exchange tokens are used as a proxy for stocks for trading purposes. The idea, as well as the concept, are striking. In practice, however, it needs to be sure that each token trade actually is backed and reflected by the actual assets trade done by MPS. MPS MarketPlace will hold the stocks on behalf of the DX.Exchange token owners and will keep them in segregated accounts and depots as requested by law. Moreover, it obviously offers the regulatory umbrella for the trading with security tokens.

The DX.Exchange project may be considered a first pilot project to test the vision of a tokenized securities trading environment.

[to be continued]

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