Blockchain technology is changing the way we invest. Not only does it offer investors new asset classes like cryptocurrency, but it’s also altering the way we look at traditional investments like securities.
Learn more about what makes digital securities different from traditional securities and the benefits of investing in this new asset type.
What are digital securities?
Digital securities are the same kind of traditional financial securities investors are familiar with, but they are digitally represented on a blockchain.
The blockchain is a decentralized, peer-to-peer system that processes transactions through digital units of exchange. Payments involving digital securities are processed through a private network of computers linked through a shared ledger. Each transaction is simultaneously recorded in a “blockchain” on each computer that updates and informs all accounts. The blockchain serves as a secure, reliable and unequivocal distributed ledger and obviates the need for any central authority to maintain such records.
Investors in digital securities possess digital tokens that represent fractions of ownership. Some of the most common forms of digital securities include:
- Equity: Digital tokens serve as digital representations of ownership of particular assets, such as a stake in a private or public company. This is the most popular type of security token.
- Bond: Bond security tokens offer investors a fixed income over a predetermined time period. Digital bonds also allow the issuer to raise capital in a way that’s quicker and more convenient than traditional securities.
- Real estate: With blockchain, digital tokens can represent fractions of ownership of physical property, which is how they become digital securities. While a physical property itself is not a security, real estate-related assets, such as equity or debt, are securities. Tokenization can also extend to debt assets, such as rent.
- Commodity: Commodity-related assets, such as gold and oil futures can be tokenized as digital securities.
Note: Bitcoin is not a digital security, but rather a digital currency, in part because of its decentralized nature. However, the U.S. Securities and Exchange Commission classifies other cryptocurrencies as digital securities.
Benefits of investing in digital securities
Access to a global pool of investors
The greater access that an asset has to the market, the greater the number of potential investors it reaches. With digital securities, the investor can access the securities results, which helps in boosting liquidity levels. This provides for a wider (global) audience, creating increased liquidity opportunities—which has always been a barrier to certain asset classes, such as private placements and real estate.
When a digital share register is linked into a blockchain, it automatically gets the power to reach the blockchain’s global franchise, which in turn creates the potential for a secondary market. This is particularly helpful with private placement shares that have historically been illiquid and have included long-term lock-up periods (5–10 years).
If an initial investor needs liquidity during this period, it has historically been very difficult to find like-minded individuals; with the blockchain solution, it would be as simple as expressing an interest in selling shares and letting the blockchain “smart contract” find similar verified investors that can adhere to the specific security requirements.
Round-the-clock and global trading
Digital securities can be traded and settled through blockchains, which are always open for business. This creates opportunities to trade 24/7 and to reach a global community al through one platform. Investors can trade digital securities globally with near real-time settlement through a much more efficient and transparent process.
More opportunities for diversification
Digital securities offer investors fractional ownership of liquid and illiquid assets like private securities and real estate. This unlocks access to a variety of private assets typically only available to larger financial institutions and ultra-high net worth investors while lowering the minimum investment size for a wider base of accredited investors.
This system also offers the benefit of generating liquidity and viable markets for previously illiquid securities with low or no trading volumes.
Greater transparency and trust
Digital securities bring greater transparency in asset ownership and record-keeping in the digital registry. Blockchain’s distributed ledger makes the investment process much more transparent than when working with traditional brokerages. The blockchain can store all transaction records, from the onboarding process to the transfer of securities.
Investors can rest assured that their data was not tampered with throughout the offering, greatly reducing susceptibility to fraud, misappropriation and negligence.
Smart contracts are immutable once deployed on a blockchain and govern how digital securities can be bought and sold. This allows for compliance to be coded directly into the token and ensures that only KYC/AML-approved individuals can hold and trade specific digital securities.
An endless number of smart contracts can be linked together to specify eligibility rules and to enforce regulations, making digital securities easier to adapt to the different regulatory controls in the various financial jurisdictions. This is particularly helpful with cross-jurisdictional security issues.
Considering investing in digital securities?
Digital securities are a new way to invest in a traditional asset class—but with added benefits. Adding digital securities to your portfolio can give you greater access to new markets and asset types and increase diversification.
Learn how you can invest in digital securities—contact Securrency Capital.