The True Power of Security Tokens - Bitbond

Saher Zoabi
25.02.2021
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At the time of publication, the global crypto market cap is at a volume of 1.60 trillion USD, cryptomarkets are booming in part due to increased numbers of  institutional investors investing in crypto assets.

Consequently, the attention on blockchain technology and Distributed Ledger Technology (DLT) is like never before. The benefits of new blockchain-based assets such as security tokens are proving their high efficiencies and an increasing number of companies are considering the use and implementation of such technology to improve their processes. 

Traditional processes in Capital Markets are highly inefficient. Blockchain technology and security tokens help to solve pain points that issuers and financial institutions face in regards to transfer, settlement and custody of assets. 

At Bitbond we specialize in providing blockchain solutions for banks. In this article, we will attempt to answer some of the most frequently asked questions, namely: How do security tokens improve inefficient processes in Capital Markets? Why are security tokens so revolutionary? What is needed to drive further adoption of security tokens and DLT?

Security tokens revolutionize capital markets in 4 major aspects

1. Security tokens enable greater liquidity, transparency and efficiency

  • Greater transferability for illiquid, intangible, and soft assets
  • Increased efficiency and cost-effectiveness
  • Increased transparency through the use of DLT

These can be considered the most recognized benefits of security tokens today. When assets can be traded in a frictionless ecosystem without intermediaries, this will naturally increase their liquidity. Security tokens are blockchain-native, its trading can be executed automatically with predetermined conditions thanks to the smart contracts feature. Consequently, the need for middlemen decreases admin processes and leads to a cost-effective faster deal execution.

Transparency is another important aspect. With security tokens, the owner’s information, rights, legal agreements can be embedded directly into the digital asset in an immutable way, this increases the level of security and trust.

2. Security tokens enable cross-border transferability

  • Significantly more efficient cross-border transfer of assets

DLT was designed to be frictionless, trustless and borderless by default. Cross-border financial transactions are traditionally heavily regulated, it has always been expensive and inefficient. Smart contracts can be programmed to be self-compliant in respect of relevant jurisdictions, transactions would then be executed only when certain conditions and requirements are met.

For instance, this can be utilized for the receipts of payments, automatic issuance of contracts, restricted ownership rights and so on. This spreads the cost of execution, which traditionally requires qualified third parties across the market to ensure compliance. Security tokens have this compliance layer already built-in through smart contracts. 

3. Security tokens enable more efficient payment

  • Seamless transferability of fractional ownership
  • Instant Delivery vs Payment settlement, reducing counterparty risk

Security tokens enable more efficient division and transferability of assets. Tokenized assets can be sliced down into tens of millions of fractions which would not be limited by fiat currency. Profit sharing is at the core of security tokens, therefore, automatic and real-time updates on transactions are in high demand, this is easily achieved with DLT.

Moreover, the payment settlement process as it currently is, has significant inefficiencies that raises the risk for the parties involved. It can happen that 1 of the parties in a transaction defaults during the settlement period which leads to non-delivery of the asset. Using blockchain, you can tokenize fiat currencies like euro and create a digital version of it that runs on DLT (e.g. Stablecoins or Central Bank Digital Currency). When 2 assets issued on the same ledger are exchanged, a so-called atomic swap mechanism occurs, it is a simultaneous instant transfer of the assets to the designated owner’s account. In blockchain terms, the security token and stablecoin are instantly exchanged between wallets. You can learn more about stablecoins with this case study.

4. Security tokens enables built-in compliance and security

  • Greater compliance with regulations 
  • Traceability, security and accountability are drastically improved through automation 
  • Enhanced corporate governance

Events such as fundraising, due diligence, shares transfers rely mainly on third parties in terms of consultation and actual execution. Security tokens address this inefficiency with pre-coded criteria in smart contracts. Automated features make sure all parties have fulfilled their contractual requirements before releasing funds. Traditionally, this part of the process would be manually expedited by an escrow or settlement agent, therefore increasing friction and inefficiency. 

Security tokens leave an immutable trace on everything that happens, it naturally provides better traceability, transparency and accountability. It makes fraudulent intentions harder. The register is updated simultaneously across all network participants, the ledger acts as the single source of information which enables accurate live reporting of the asset’s performance. 

Security tokens offer disruptive value to capital markets. Learn more about security tokens and tokenization in capital markets in this presentation by Radoslav Albrecht, Bitbond Founder & CEO:

How to drive further adoption of security tokens?

Regulations recently introduced facilitate the implementation of blockchain-based solutions

2020 was an important year for the blockchain industry. Many governments acted on their interest in the utilization of blockchain tech products. Germany introduced a comprehensive set of regulations and draft legislation for electronic securities, the EU launched the Markets in Crypto-assets (MiCA), making it easier for institutions to implement blockchain based solutions in their processes. Public authorities and financial institutions are realizing the benefits of crypto assets like security tokens and the efficiency gains they offer to ensure financial inclusion.

Consequently, more players will enter the ecosystem and more products will be developed using blockchain.  We’re definitely still at the start of widespread adoption of DLT across the financial and non-financial sector. 

Financial institutions require highly reliable blockchain tech vendors

With further adoption of blockchain technology, highly regulated entities like banks have strict compliance requirements they must adhere to. Tech vendors that provide their services to institutions such as banks, undergo extensive and complex due diligence before being accepted as a whitelable provider. Therefore, to drive further adoption, blockchain SaaS companies like Bitbond need to have extensive experience in developing compliant tech products. 

Bitbond delivers the bond of trust between banks and blockchain technology

In 2019, Bitbond issued the first security token in German, it was a tokenized bond (BB1) issued on the Stellar protocol. It was groundbreaking as it was the first of its kind to be issued under German Law with a securities prospectus approved by the German Financial Authority (BaFin). 

Thanks to Bitbond’s compliant technology dedicated to the issuance, custody and settlements of security tokens, Bitbond was able to autonomously handle the issuance process across all its value chain without having to rely on intermediaries such as Central Securities Depository.

Bitbond is currently catering blockchain solutions to several institutions such as the DAX30 company Vonovia; Standard Chartered Bank; and Bankhaus von der Heydt. Bitbond’s mission is to empower banks and corporations with customizable, easily integrated blockchain white-label tech products designated to the tokenization, custody and settlement of assets. 

Conclusion

Recent developments in regulations for the blockchain ecosystem is increasing the demand for compliant blockchain tech products. The industry is headed towards maturity and a new age for our global financial system is nearing. Blockchain-based security tokens and other crypto assets enable a much more cost-effective, time saving means to handle and transact assets across financial markets.

Highly regulated institutions require experienced tech vendors that they can easily onboard, understanding traditional legacy technology is also very important in order to ensure the seamless implementation of blockchain solutions on existing core banking technology.

If you’re interested in learning how issuing security tokens and tokenization can improve your business, please make sure to contact us on our website or via email [email protected]. We are happy to answer any questions you may have.

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