The great tokenization of capital markets



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We are currently witnessing the next level digitization of Wall Street as securities are “symbolized” into virtual representations of value. If you think this is all about Bitcoin, you are wrong. Soros Fund Management CEO Dawn Fitzpatrick recently told a Bloomberg audience that her $ 6 billion fund has Bitcoin, but it’s far less interesting than the use cases she sees for distributed finance. (Challenge).

DeFi refers to the shadow financial system built on smart contracts on blockchain, replicating a wide range of existing financial products, with much less friction and costs. A recent study by the Frankfurt School of Finance & Management predicts an annual growth in security token supply (STO) in Europe of 81%, surpassing the volume of the cryptocurrency market by 2026.

The day-to-day work of the IRO will undoubtedly change with the advent of tokenization, as well as the makeup of investor bases, but the net effect could be a washout. IROs can free up time as administration and the number of intermediaries are reduced, but the management and marketing of the investor community can pose new challenges.

A security token is a digital representation of a real-world asset, such as a company’s stock, a bond, or a gold bar. Being tokenized means it’s issued on blockchain and represents ownership, a share in profits, legal protection, and shareholder rights. While the ownership of physical assets is managed by a transfer agent or issuance platform, digital asset shares can be traded freely by eligible investors anywhere in the world, providing much easier and more ownership. streamlined.

Security tokens can offer automated interjurisdictional compliance, optimized clearing and settlement processes, compliant recording, and other parts of a regulated transaction, all on an immutable, transparent and secure global blockchain ledger. Managing capitalization tables, notifications to shareholders, voting, dividend distribution and auditing could all be made easier, evangelists say.

As of August 2021, more than 100 issuers representing the financial services, technology and real estate industries had a combined market capitalization of $ 1.1 billion, with an average daily trading volume of $ 7 million, according to STOMarket.com. Businesses want to stay private longer, and want a simpler way to attract a new, larger group of investors and cash. Private markets were worth $ 2.9 billion in 2019 and are expected to reach $ 14 billion by 2023, according to the World Trade Federation.

Some companies like the simplified accounting, tax and investor communications offered by blockchain. Some appreciate the increased inclusiveness, which allows retail investors to benefit from higher returns in the private market as well as split buying and faster trade execution. This indicates more public offerings, a broader investor base and an increased need for IRO.

In the United States, Blockstack raised $ 23 million through the first A + STO settlement in 2019. This set a precedent for the sale of immediately tradable tokens by unaccredited investors, who could trade in secondary markets that now offer also more regulatory clarity.

In 2020, Arca Labs began trading its digital security ArCoin, representing shares of its US Treasury fund. Also last year, INX, a Gibraltar-based crypto-trading exchange, launched its token, becoming the very first security token IPO with a full SEC qualified prospectus. It currently has 7,542 investors and a market capitalization of $ 371 million.

In April 2021, the SEC qualified an offer as A + regulation for Exodus, marking the first U.S.-based issuing company. He raised $ 75 million from 6,800 individual investors. Entoro Capital recently announced the first non-fungible artwork token offered as collateral.

According to analyst Quinlan & Associates, we are at the “market testing” stage and larger-scale institutional adoption will follow. It forecasts global trading volumes of listed security tokens to grow at $ 162.7 billion, with $ 4 billion in global issuance, or 27.4% of the market share of all securities, by 2030 .

Future IR practices could be borrowed from the blockchain world. The proliferation of Ask me Anything sessions and new tools like Telegram, Reddit, and Discord have all proven to be popular places where Gen Z retail investors can gather information about the coins and tokens they buy.

Either way, IROs will need to become experts in token economics, as a savvy crowd of retail investors want to dig deep to understand how this affects an investment. Will influencer programs with key opinion leaders and investor community building dominate their outreach activities? Will there be an arbitrage between the price of the token and the value of the company on a traditional exchange?

If your current IR job is a bit calm and predictable, tokenizing titles might make your future job just the opposite.

Linda Montgomery is a Toronto-based Financial Technology and Digital Assets Marketing Director and IR Professional

This is an article from the Winter 2021 issue of RI Magazine. Click here to access the digital magazine.

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