Network effects as an opportunity for financial markets
13.09.2022 • Просмотров:

Network effects as an opportunity for financial markets

By Decimal

The securities token market is still very small, especially compared to the global cryptocurrency market, the size of which, according to Coinmarketrate.com, is more than a trillion dollars.

But the market capitalization of all security tokens is growing rapidly, since the beginning of the year it has more than doubled and in August it exceeded $1 billion for the first time. At the moment, it amounts to 17.7 billion US dollars.

Source: stomarket.com

Unlike the cryptocurrency market, this growth is primarily due not to an increase in prices, but to an increase in the number of assets displayed on the blockchain.

Clear regulation is an advantage

One of the factors that has so far hindered development in this area has been unclear legislation. But since June 2021, there is no longer any doubt that issuers can issue securities on the blockchain without worrying about lengthy special approvals with the supervisory authority. The Law on Electronic Securities (eWpG), adopted by the European Union in June, created a valid legal framework for issuing on the blockchain, and at the same time became a standard and guideline for similar legislation in other (European) jurisdictions.

The issue on the blockchain will initially be allowed for debt capital (debt securities), but will soon be extended to mutual certificates of investment funds. The Federal Ministries of Justice and Finance have already submitted a corresponding draft resolution on the shares of crypto funds.

Tokenization on a public blockchain, accessible and visible to everyone, is a sub-process of a larger transformation process, namely the digitalization of financial markets.

The Law on Electronic Securities also strengthens the role of blockchain in the context of securities administration. A cryptographic registry, such as a blockchain, is directly established by the legislator as a way to document owners, transactions or restrictions on the disposal of securities, and in this sense acts as a registry. This can significantly simplify or reduce the cost of administration for the issuer, since the blockchain fulfills the technical requirements for maintaining a register of cryptocurrency securities.

Additional advantages are lower post-trading costs (settlement and storage), the ability to trade tokens, as well as transparency and accessibility of the registry for third parties.

A fixed coupon bond as a relatively simple structured security occupies a special position here, and is considered an entry-level security in the world of tokenization. It is already being released in purely digital form as part of numerous pilot projects, including on the blockchain or in the crypto registry.

The fact that these are not just pilot projects, but more and more financial platforms are switching to Bloxxon’s tokenization solution (in some cases without even advertising it to the end customer) shows us that this is no longer just a hype, but a strategic decision for a purely digital future. Accordingly, we expect that the demand for tokenized debt securities will continue to grow in the fourth quarter of 2022, as well as in early 2023.

In general, innovations in the field of emission illustrate an interesting trend: tokenization, on a public blockchain that is accessible and visible to everyone, is just another step in a larger, global transformation process. We are talking about the digitalization of financial markets.

Many experts expect that this process, which accompanied us throughout the 2020s – 2022s and beyond), is no longer a question of whether Apple, Nvidia and Daimler shares will be traded and transferred on the blockchain, but only when. The more individual projects are successfully implemented, the greater the market capitalization and the associated “network effects” of tokenization.

The possibility of interaction between security tokens and cryptocurrencies

In particular, these network effects are that activities such as trading and lending are fueled by the number and variety of traded instruments. Thus, the volume of issue and the number of tokens issued inevitably increases the potential of secondary markets with deep liquidity, where new tokens can be traded 24 hours a day for seven days.

The fact that we are only at the beginning of a potentially longer path to efficient and liquid secondary markets, and that many types of securities (for example, fund units, stocks and bonds with a longer maturity) are still only in general terms covered by the tokenization trend, should inspire us with optimism about the sustainability of this trend.

Considering the numerous possibilities of tokenization, one of the most interesting developments is the possible interaction between securities tokens, on the one hand, and cryptocurrencies such as Bitcoin, Ethereum, Cardano, etc., on the other. The further the tokenization process progresses and the easier it is to transfer a token from one blockchain protocol to another, the greater the potential for fruitful interaction between cryptocurrencies, on the one hand, and digital securities, on the other.

For example, you can imagine a hybrid stablecoin, that is, a token whose exchange rate is pegged 1:1 to the dollar, euro or yen, and the foreign exchange reserve consists partly of debt securities issued by large, trustworthy companies (for example, Dax companies), and partly of cryptocurrencies such as Bitcoin and Ethereum.

Similarly, debt securities can also play a role in decentralized finance (DeFi) markets. DeFi markets are blockchain-based applications (often Ethereum) that promise users easy and non-bureaucratic access to financial services such as loans, savings plans, or interest income without requiring a central authority or oversight.

Thus, in a few years, the consumer will be able to borrow funds directly on the DeFi market, and in return leave their bond tokens as collateral under the contract. A special feature here will be that for the first time a sufficient number of virtually risk-free financial instruments will be available in these markets, which is a novelty for a market environment accustomed to high risk premiums.

Summarizing

From these considerations, as well as from the publicly expressed skepticism of some competitors mentioned at the beginning, a differentiated picture emerges. The emergence of attractive secondary markets for securities tokens is not a foregone conclusion, but depends on a number of factors:

  • availability of modern trading platforms with sufficient liquidity, connected to the most important blockchain protocols and cryptocurrency exchanges,
  • demand for unhindered and cost-effective exchange and lending operations with securities tokens,
  • implementation of relevant tokenization projects in leading global companies,
  • innovation-friendly legislation and administrative practice,
  • extension of legislation to other types of securities.

The transformation of the financial world through tokenization still has some hurdles ahead, but the journey promises to be exciting.