How Tokenisation can Digitally Transform and Revive Stock Exchanges
In recent years, there has been a wave of new approaches for emerging businesses and enterprises to raise capital. No longer are institutions just dependent on the stock markets as a means of fundraising towards bolstering their business. Where there traditionally was an IPO, today there are several avenues for enterprises to explore, including private equity, venture capital, crowdfunding, and more.
The conventional stock market as we know is losing its sheen, as a result of liquidity concerns, compliance requirements, barriers to entry, and more. Traditional stock exchanges from around the world are seeing a downfall in interest and fortune, and are losing their importance as a gauge of a country’s GDP and economic health. In many developed economies, delistings have begun to outnumber listings and stock exchanges are struggling to survive, with several of them even merging to sustain themselves in the fast-evolving capital markets today.
It’s time for stock markets to embrace digital transformation, craft innovative new products and radically improve the marketplaces’ customer experience. Adopting new business models along with emerging technologies can act as a catalyst to springboard stock markets into the digital era. One such approach is with the use of tokenisation, powered by blockchain technology. Distributed ledger technology can revolutionize the stock exchange experience on both fronts enhancing external capabilities as well as bringing efficiencies to a host of internal processes. Here’s how:
Tokens could be used to digitally represent various primary asset classes – equity, debt, real estate, commodities, etc – as well as futures and a host of other financial derivatives. These tokenised securities offer a whole host of benefits to customers and can be used for new market offerings as well as be applied to existing products. They empower stock exchanges with the ability to swiftly bring new asset classes to market, lower entry barriers and craft vibrant secondary markets for previously illiquid assets. On the internal front they also help lower the costs of operations, minimize inter-party reconciliations and provide for improved settlement times by orders of magnitude when compared to the current T+x.
Unlike the existing systems, which require several intermediaries to process transactions and facilitate settlements, moving back and forth a number of times, a digital system powered by a distributed ledger, would automate the processes while providing for improved levels of visibility and awareness, in real-time, to all participants in the network.
On the customer front, tokenisation of securities will allow exchanges to put various new real-world assets into fractional ownership on the blockchain using smart contracts while also effortlessly creating all new forms of tradable derivatives and other offerings around the same. This will swiftly result in creating a credible new marketplace place for asset owners with increased access to capital on a global scale as well as attract new-age digital savvy investors, thereby, unlocking enormous pools of liquidity in the system.
With multiple parties using a common immutable ledger, the use of a blockchain can help eliminate the digital identity challenge, provide for enhanced security and facilitate comprehensive reporting to comply with relevant regulations.
Replacing any aging, legacy systems that stock exchanges run will be a herculean task. But having a blockchain-powered platform running alongside the existing trading system could be a good way to get started. An end-to-end system would allow for the issuance, management and trading of tokenised securities in real time. This would comprise of an integrated tokenisation platform to put assets into fractional ownership, digitally representing them on the blockchain, make the same available for public issue and then facilitate the active trading of the asset with a liquid trade book, order book and an efficient matching engine. The entire system would need to be underpinned with scalable user registration and KYC processes, robust security and comprehensive compliance related tracking and reporting mechanisms.
Tokenising securities and digitally representing assets will have a profound impact on financial markets. And, stock exchanges can play a pivotal role. Around the world, leading exchanges such as NASDAQ, London Stock Exchange and SIX Swiss Exchange are already exploring ways to leverage tokenised securities to transform their operations. Newer exchanges like the Gibraltar Stock Exchange are already a step ahead, having begun the process to allow financial firms to list blockchain-based securities, while the operator of the stock exchange in Seychelles recently became the world first national stock exchange to list a tokenised security.
Given their licensed central position in the highly regulated world of finance, stock exchanges have a unique opportunity to adopt emerging business models and technologies, get back to the forefront of innovation and lead in the digital transformation of capital markets.