Security Tokens Provide New Efficiency To Previously Paper-Based Transactions

Smart contract technology is transforming the securities business. This technology, which is best known for its role in cryptocurrency and blockchains, is now moving distributed ledger into new fields. While it’s only recently that smart contract technology came about, it enables investors to invest and trade across multiple Etherium virtual machines (EVMs) and non-EVM chains, including Polygon, Solana, NEAR, and others.

This shift in the industry began with founding of DEFYCA, a digital securities firm in Luxembourg that offers a fully digital investment experience for investors, issuers, and funds, including fully digital securities and cash flows. The company operates on public blockchains with Avalanche as their treasury chain. What’s new about these securities is that they are represented by security tokens, which allow fast and inexpensive trading.

"One of the main advantages of tokenized platforms is the increased efficiency and cost savings," said Pat Hourigan, CEO and Co-Founder of DEFYCA. "Settlement can be as low as a few cents, regardless of the value of the security being traded. These types of benefits have caught the attention of major players in the market, such as BlackRock, who have expressed interest in tokenization."

Security tokens offer a number of benefits over traditional securities. In addition to increased efficiency and cost savings, they offer increased liquidity as they can be easily traded on various digital asset exchanges. This means that investors can buy and sell their tokens quickly, providing more flexibility in the market. Hourigan said that previously, security tokens were never considered with respect to a full digital investment experience for banks, issuers, and funds, because they have consistently been paper-based institutions.

Security Tokens

Security tokens also have the potential to greatly reduce the costs associated with traditional securities. The use of smart contracts and blockchain technology can automate many of the processes involved in trading securities, leading to cost savings for both investors and issuers.

In addition, security tokens provide increased transparency and security. Because security tokens are built on blockchain technology, all transactions are recorded on a secure and transparent ledger. This allows for greater visibility into the ownership and movement of securities, reducing the risk of fraud and errors.

According to Hourigan, the technology behind security tokenization allows for increased efficiency and speed in the financial industry. "The idea is that you now have a single venue, where you can come in, you can list your credit fund, and you can list all of your debt portfolios, and they are instantly rated," he said. "It will take moments for that to happen." This streamlined process allows for faster investment opportunities and reduces the time it takes for investors to commit funds from their own bank accounts. In addition, the use of blockchain technology and smart contracts allows for the automation of many processes involved in trading securities, leading to cost savings for both investors and issuers.

Regulatory Issues

Because of the lack of regulatory clarity and infrastructure, the market has yet to fully embrace security tokenization. DEFYCA has worked closely with regulators in Luxembourg to ensure compliance and provide a clear framework for their business. Hourigan said he believes that as more jurisdictions provide guidance and clarity on security tokens, the market will start to see wider adoption.

"Another hurdle for security tokens is the lack of infrastructure and liquidity," said Hourigan. "Many investors are hesitant to enter the market due to the lack of liquidity, as they may not be able to easily sell their tokens." He said that DEFYCA is working to address this issue by building out the necessary infrastructure and partnerships to increase liquidity in the market.

Despite these challenges, Hourigan said he is confident in the future of security tokens and the role they will play in the market. "We see a future where investors, issuers, and funds can trade across jurisdictions frictionlessly, thanks to the increased efficiency and cost savings of tokenized platforms," he said. "As more players enter the market and regulatory clarity is established, we can expect to see wider adoption of security tokens in the near future."

Security tokenization has the potential to greatly improve efficiency and reduce costs in the finance industry. Major players in the market, such as BlackRock, are said to be taking notice of the benefits offered by tokenized platforms.

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