The Capital Markets Inefficiencies and How Tokenization Could Transform Them

by | Oct 11, 2020 | Industry | 0 comments

Capital markets act as vehicles of transferring savings and investments between capital suppliers and those interested in them. These wealth-channelling marketplaces, which started in the 17th Century at the Amsterdam Stock Exchange, are obsolete, ineffective, and charge high transaction costs. 

Tokenization can transform capital markets by reinventing issuance and trading strategies to enhance market depth, restructure regulatory adherence, and incorporate markets that are currently disjointed. The tokenization of capital markets will benefit all market participants. 

The State of Capital Markets

The private market faces burdensome laws created to ensure that investors and issuers act appropriately. Though these regulations are essential in guaranteeing the market’s lawful running, they can be extremely challenging to adhere to and fulfil. This creates rent-seeking third parties and frictions that hinder the liquidity pool’s issuance and trading of securities. For example, there are more than 12 million recognized investors in the US for a $1.5 trillion asset class that transacts with a prolonged settlement period because of a long and ineffective compliance process. 

The capital market industry has been in dire need of a game-changer for long. This has not transpired, although, and consequently, we have been bound to put up with an awkward monolith that has lingered relatively unchanged for long. With the invention of tokenization, however, this model is ripe for transformation. 

The Benefits of Tokenizing Capital Markets

Tokenization is the representation of an asset in the form of a blockchain security token. Security tokens can be likened to traditional security (bonds and stocks) and are backed by real-world assets (like equity and bonds), representing ownership that guarantees rights. 

Blockchain security tokens differ from traditional shares because ownership and regulation can be programmed, creating rules that are automatically executed. Programmability enables security tokens to transform the existing capital markets and realize the value that was formerly unreachable. 

The ease of use and accessibility will characterize the upcoming capital markets. If widely embraced, tokenization can reduce engagement with capital markets, just like purchasing or selling a product through Amazon. Security tokens bring several benefits to the traditional capital markets.

Liquidity

Security tokens enable the automation of the validation process. This will significantly reduce settlement periods that usually take two days in public markets and several weeks in the private markets. Besides, security tokens make the process of monitoring investors cheaper and easier, therefore, enabling fractional ownership of assets. 

Automated Compliance

Manual inspection of compliance consumes more time and resources. Consequently, this raises expenses for both investors and regulators. Smart contracts can be encoded with programmable logic about investor validation (KYC/AML), regulatory standards (Reg D, Reg A, Reg CF, or Reg S) and trading model (Peer-to-Peer or decentralized marketplaces). Automation reduces costs for issuers because of the cost-effective management of contracts and the room for watchdogs to implement pre-determined rules. 

Interoperability 

Security tokens enable the transfer of assets just as we send money or emails. Blockchain facilitates the transfer of tokens under a mutual protocol in an environment where the exchange of market value is locked. The owner of an Uber share could, for example, freely move the share from their wallet to a colleague’s wallet in a P2P transaction. 

Increased liquidity, automated compliance, and interoperability bring greater depth to secondary markets for the securities by minimizing friction. Minimal friction implies a more accessible and profitable trading experience. 

Tokenizer Blockchain Banking Platform

The Tokenizer is a blockchain investment banking system that champions accessible, transparent, and safe financial services. We believe that everyone deserves equal access to investment and fundraising opportunities. That is why we are democratizing access to capital for investors and fundraisers by making investing and fundraising efficient, safe, and accessible to everyone.

Are you in need of raising funds or investing in security tokens? Apply to raise funds through Tokenizer by filling this application form. If you want to invest in security tokens, sign up for a Tokenizer Investment Account today, and if you want to liquidate and trade-in Asset-Backed Tokens, we have a decentralized exchange designed for you! You can also contact us to order a metallic crypto card at $149 only.

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