Tokenize Now with Token Tool<\/a><\/div>\n<\/div>\n\n\n\nBlockchain based tokens are radically fungible through the use of public and permissionless distributed ledger technology. Their independence from third parties offers global and instant settlement at minimal costs.<\/p>\n\n\n\n
The 3 Advantages of issuing tokenized securities <\/h2>\n\n\n\n1. Issuance of tokenized securities<\/h3>\n\n\n\n Issuing a traditional security requires at least 5 different parties to be involved in the whole process of issuance:<\/p>\n\n\n\n
\nOne or several investors,<\/li>\n\n\n\n The related investor Bank,<\/li>\n\n\n\n The issuer,<\/li>\n\n\n\n The payment agent (usually covered by the issuer bank). Its role is to channel payments between issuers and investors.<\/li>\n\n\n\n Clearing house also known as the Central Securities Depository (CSD)<\/a> which is responsible for holding securities in order to easily transfer ownership.<\/li>\n<\/ul>\n\n\n\nThe involvement of a CSD, contributes to a time lag between parties, additional costs, and provides an individual entity with central power. It is the registrar responsible of tracking ownership. <\/p>\n\n\n\n
Blockchain, or DLT, spare us from such role played by the CSD. It records ownership automatically alongside enabling instant transfers at very minimal costs.<\/p>\n\n\n\n
The flow of preparing a transaction and involving all stakeholders for the issuance is remarkably complex and inefficient as it can take up to a couple of months. <\/p>\n\n\n\n
Bitbond\u2019s tokenization platform<\/a> enables effortless creation of tokenized securities<\/a> and their distribution to investors. Contact us<\/a> if you would like to learn more on leveraging Bitbond technology.<\/p>\n\n\n\nThe image below describes the process flow of issuing a traditional security vs a tokenized security.<\/p>\n\n\n\n <\/figure>\n\n\n\nAs we can see, issuing tokenized securities bring radical improvements to the process for issuers and the investor. The need for intermediaries is eliminated and\/or reduced in the process. <\/p>\n\n\n\n
Paired with fiat-denominated stablecoins<\/a>, tokenized securities enable settlement payments to be executed instantly & automatically, the process is described as a token swap. Unnecessary complexities in the issuance process are eliminated, resulting in faster issuance, alongside a drastic reduction of issuance costs.<\/p>\n\n\n\nTokenized securities allow global transferability of tokens which, as mentioned previously, provides access to an international investor base. Instant real-time settlement is a key feature of tokenized securities as they eliminate settlement risk for all parties involved. <\/p>\n\n\n\n
The advantages of issuing tokenized securities are clear, offering a more efficient and cost-effective procedure.<\/p>\n\n\n\n
In blockchain, a wallet<\/a> is the application in charge of holding the assets.<\/p>\n\n\n\nHowever, there are also third party custody services available for investors and institutions, which in Germany require a crypto custody license as of January 2020.<\/p>\n\n\n\n
2. Custody of tokenized securities<\/h3>\n\n\n\n Custody is an important aspect in securities as it ensures their safekeeping from theft or loss<\/a>.<\/p>\n\n\n\nIn the traditional set up, custodians are usually large and reputable financial institutions (e.g. JP Morgan Chase, BNY Mellon) as they often hold assets worth billions of dollars. Other than safekeeping of assets, custodians often provide additional services such as transaction settlements, dividend and interest payments, tax support, and foreign exchange. <\/p>\n\n\n\n
However, these services can come with hefty fees alongside the costly custodial fees.<\/p>\n\n\n\n
Defining ownership of funds along with ensuring a secure and fast transfer of assets upon trading via a centralized system requires time. The process involves more or less the same number of players as described previously in this article. <\/p>\n\n\n\n
We pointed out that tokenization allows for the elimination of CSD as the decentralized ledger replaces the idea of a centrally managed registrar to keep track of ownership. The ledger takes out this function by recording all transactions automatically and irreversibly.<\/p>\n\n\n\n
Blockchain technology, solves the ownership traceability issue by allowing secure and instant transfer of assets digitally without the need for third party validation. This is completed through the use of a digital wallet which allows sending and receiving digital assets via highly secure encrypted communication. <\/p>\n\n\n\n
The wallet is the equivalent of an investor\u2019s bank account, where they would deposit their funds.<\/p>\n\n\n\n
Handling digital wallets comes with great responsibility. A public key is issued to which you receive funds, and the private key is the password that gives access to these funds. <\/p>\n\n\n\n
Just like securities are stored in highly secured vaults managed by banks, tokenized securities are stored in such wallets, therefore respective key management is of high importance, especially when storing millions and billions worth of funds.<\/p>\n\n\n\n
Therefore, demand for third party custody services are on the rise, mainly by big institutions that are getting more and more involved in the cryptocurrency and digital assets space. This article<\/a> by Dr. Karl-Michael Henneking clearly explains how licensed third party custody services can contribute to greater institutional adoption of crypto assets and tokenized securities.<\/p>\n\n\n\nBitbond\u2019s digital asset custody platform<\/strong> can easily be integrated with digital asset custody products of the biggest institutional-grade Key Management Software (KMS) providers such as Fireblocks<\/a>. The platform enables Issuers and Investors to store, transfer and trade these digital assets in a both secure and user-friendly way.<\/p>\n\n\n\nKMS replaces private keys with Multi Party Computation (MPC) which is controlled with so-called shares. <\/p>\n\n\n\n
The representatives of the custodian (\u201cApprovers\u201d) need to co-sign withdrawal transactions of wallet users exceeding certain transaction limits to mitigate theft risks. The shares are stored locally on the devices of Approvers (e.g. laptop or desktop computers, mobile phones) from where Approvers co-sign withdrawal transactions.<\/p>\n\n\n\n
Investors can access and use their custody wallet via a web-based interface. The custody wallet can be credited with stablecoins to invest in security token offerings conducted via the Platform.<\/p>\n\n\n\n
After submitting an order to an offering, the stablecoins are exchanged with the respective tokenized securities in a delivery vs payment transaction upon issuance of the tokens. <\/p>\n\n\n\n
Investors also receive coupon payments into their custody wallet which they can either redeem to fiat currency or use to invest in further offerings. Additionally, Investors can transfer and trade their tokenized securities from their wallet.<\/p>\n\n\n\n
3. Settlement and payments in the tokenized securities context<\/h3>\n\n\n\n It is very important to understand that having payments settled on-chain is also necessary to unleash the full potential of tokenized assets. On-chain payments allow for instant delivery vs payment (DvP) transactions, the asset and the coin are directly exchanged within the protocol. This eliminates counter party risk.<\/p>\n\n\n\n
To simplify it, completing payments on the ledger is indispensable as it ensures instant delivery of assets upon investment. Not only does this save a tremendous amount of time and reduces costs imposed by intermediaries, it also provides the asset seller (issuer) with the benefits of reducing risk of not receiving the funds invested to almost 0 and vice versa. <\/p>\n\n\n\n
Investing in securities requires handling money transactions for the settlement process and any other form of payments that need to take place, such as coupon \/ interest payouts. In Europe, the common settlement period for most securities is 2 business days after the day of a transaction<\/a> (T+2). <\/p>\n\n\n\nThis means that the issuer must deliver the security\u2019s certificate in exchange for the investor\u2019s payment within that settlement period. Historically, this process was paper based where the investor would hand in the security\u2019s certificate in exchange for cash or a check. Nowadays, it is completed through electronic fund transfer (EFT). An EFT is basically a transfer of money from one bank account to another electronically, commonly known through SWIFT.<\/p>\n\n\n\n
Tokenization now paves the road for so-called stablecoins<\/a> to be introduced. Stablecoins are e-money that are backed by assets or fiat currency, they are \u201c<\/em><\/strong>Tokenized funds<\/em><\/strong><\/a>\u201d (…) backed by funds (i.e. commercial money, e-money or central bank money) which an issuer or custodian holds for safekeeping; this implies that there is a commitment to ensuring that tokenized funds can be redeemed in full<\/em><\/strong>. The use of stablecoins allow instant settlement of investments and payments automatically & globally.<\/p>\n\n\n\nBitbond\u2019s stablecoin issuance platform allows for the issuance of fiat-backed e-money used for on-chain payments, including primary investments, coupon payments, trading and bond repayments. In secondary trades, on-chain payments allow for instant Delivery vs. Payment (DvP) , thereby eliminating settlement risk of transactions.<\/p>\n\n\n\n
Issuers receive the funds raised from their offering in the form of stable coin payments into their wallet. Coupon payments are debited from their wallets and paid out to Investor wallets automatically. A fiat-backed stable coin (i.e. e-money or digital cash) is used within the platform for the following process steps:<\/p>\n\n\n\n