Digital Securities (Security Token) Market Trends in August｜The Importance of the Secondary Market in the Digital Capital Market
This week, exchange-related news was released in various countries, suggesting a growing interest in the secondary market.
I will explain the exchange business in China and the United Kingdom, and the public offering STO (Digital IPO) in the United States.
In Japan, Securitize has announced that it will provide real estate security token apps to real estate companies, and digitization of the capital markets of each country is progressing.
Infrastructure development such as exchanges and issuing platforms is considered to be important for the development of the digital securities (security token) market.
United Kingdom: Archax is European Digital securities Exchange
In the digital securities (security token) market, the market capitalization has exceeded $600 million, and the ecosystem is expanding mainly in the United States. To date, many STOs have been implemented in compliance with the US SEC registration exemption regulation “Regulation.”
It is expected to be popularized from the viewpoint of streamlining fund procurement using blockchain technology and protecting investors from investment fraud caused by crypto assets, which became a major social problem around 2017–2018, and improving the market health.
On the other hand, in many countries other than the United States, there are no STO-compliant laws in place, and in many countries strict laws are in place to protect the conventional order of the securities market.
Therefore, it is thought that the creation of more use cases, such as issuing and managing securities on the blockchain as well as raising funds, will lead to the development of the market.
In such a market environment, “Archax” in the UK has been approved by the Financial Conduct Authority (FCA) and announced the opening of the digital stock exchange.
“Corda” is used for the exchange blockchain system.
Under the supervision of the Financial Conduct Authority (FCA), there are great expectations for future development as the first digital stock exchange regulated as “SME Growth Market”.
In the US, there are already ATS-approved digital stock exchanges, broker dealers, and issuing platforms with licenses for transfer agents, which have supported the expansion of the ecosystem.
In Europe, Germany has been undertaking full-scale efforts since 2019, including real estate digital securities projects approved by the regulatory authority Bafin and financing.
“Archax” plans to expand 35 digital securities projects in the future, and further expansion of the market is expected.
While the secondary market for digital securities is evolving, the creation of the Financial Conduct Authority (FCA)-approved digital stock exchange in Europe is very important for market development.
USA: INX to implement IPO (public offering STO) for the first time in the US capital market
“INX Ltd.” has announced the implementation of a public offering STO registered with the SEC (US Securities and Exchange Commission).
This time, “INX Ltd.” plans to raise 111 million dollars by issuing 130,000,000 INX tokens (digital securities) in compliance with ERC20.
This is the first IPO (public offering STO) in the form of securities (stocks) issued on the blockchain for the first time in the US capital market, and it is said that the offering will start next week from August 24.
In recent years, it has been reported successively in the United States that unlisted corporations have become public companies through SPAC (Special Purpose Purpose Company).
How to streamline the IPO process using blockchain technology and how to issue tokens (digital securities) to investors and pay dividends using smart contracts?
I think it is important that the use cases of “INX Ltd.” IPOs (publicly offered STOs) are spread worldwide, regardless of the success or failure of financing.
It is also thought that the digitization of stock exchanges will be promoted and that the stock market will be formed in correspondence with the blockchain.
On the other hand, there are many uncertain points about whether publicly funded financing that actually utilizes blockchain technology will spread as an IPO (or digital IPO).
In the “RISK FACTORS” section of Form F-1 of “INX Ltd.”, it is stated that the business environment is in a risky state.
We are a recently formed company established under the laws of Gibraltar with minimal activity and no historical operating results.
In their report dated April 23, 2020 our independent auditors stated that our financial statements for the year ended December 31, 2019 were prepared assuming that we would continue as a going concern and they expressed substantial doubt about our ability to continue as a going concern.
Since our date of inception in September 2017, we have incurred a loss from operations and as of December 31, 2019, we have an accumulated deficit of $8,336,000. In addition to the accumulated deficit, we have entered into contractual arrangements committing us to future expenses, including the repayment of loans, as well as significant contingent obligations which are not currently reflected on our balance sheet.
How do investors value a $111 million funding plan by a “no historical operating results-going concern-accumulated deficit of $8,336,000” company?
It will also be an important event in the digital securities (security token) market.
INX Ltd. plans to license US broker-dealers and register as an ATS if they have raised a minimum offer of $7,500,000.
After tZERO and Open finance network, ATS (alternative trading system) is likely to emerge in the US digital securities (security token) market.
It is true that even digital securities (security token) exchanges that have already been launched are reducing salaries due to concerns over financial deterioration.
I have some doubts regarding the future potential of the companies that will acquire each license in the future to gain a market advantage. (And why is there an accumulated deficit of $8,336,000 with no historical operating results?)
It was an IPO after two years of discussion, so I would like to confirm the details of the SEC’s decision, but it can be said that it is a somewhat challenging initiative from the viewpoint of investor protection.
STOs that comply with the SEC registration exemption Regulation were limited to institutional investors and a small number of general investors.
It is thought that the publicly offered STO case registered with the SEC will lead to the activation of the market as a new initiative.
China Capital Market and Digital Asset Exchange
Interest in digital assets is growing in China as well.
Xiao Gang, a former chairman of the China Securities Regulatory Commission, said the use of the latest technologies to support digital transformation will revolutionize the capital market ecosystem and investment landscape.
・Digitalization of assets
・Increased demand for digital asset transactions
・Adaptation to digitalization of exchanges
He says that the construction of “Digital China” and “Digital Economy” is progressing in China as well.
Various technologies are expected to be used to efficiently operate the capital market through digitalization.
The use of blockchain technology is advancing in terms of immediate settlement of securities on exchanges and management and sharing of data.
In the United States, there are cases in which a startup company with an ATS license develops an exchange business.
In Asia as well, the digital stock exchange is being operated in Singapore after a demonstration using the sandbox system.
It is expected that Japanese companies will use digital technology to revitalize the capital market, such as plans to digitalize Japanese real estate and realize cross-border transactions.
In Thailand, there are also cases in which an exchange handled by a company that has a track record of issuing digital securities in the United States is approved by the Thai SEC.
With increasing interest in digital assets such as Bitcoin and DeFI, it can be said that the securities market is making steady progress toward digitalization.
Things have changed a few years ago when many people were wary of digital assets, and many investors are entering the market.
Xiao Gang also points out the challenges in the early days.
・Conventional organizational structure that is difficult to adapt to digital
・ Delay in development of related laws and regulations
・Strengthen digital infrastructure
While crypto asset trading is prohibited in China, efforts have been made to create a sounder market, such as the issuance of securities on the blockchain by financial institutions.
The government is taking the lead in promoting the introduction of blockchain technology into the industrial field, such as the enforcement of cryptography.
From the perspective of the transformation of the currency system due to the spread of the digital yuan, the impact on the capital market is considered to be extremely large.
There have been cases in the past where digital assets have caused a great deal of confusion in the capital market due to the lack of compliance with conventional financial systems and the ambiguous laws and regulations.
However, the advantages of quick and efficient transactions on digital asset exchanges and significant reduction in compliance costs will continue to promote the formation of the digital capital market.
In the United States, trading volume of preferred stock (digital securities) of NASDAQ-listed companies on the digital stock exchanges is increasing, although there are few stocks. Even in the development of ecosystems in each country, the formation of secondary markets may lead to future market development.
The number of cases where Chinese startups utilizing the latest technology are conducting IPOs in the United States and Hong Kong have also increased rapidly over the past decade.
In developing the capital market in the future, it can be said that it is very important to develop investors by expanding the ecosystem of digital assets and respond to digital technology in the entire market.
Although the development of digital asset exchanges in China is still unclear, the exchange business, such as digital RMB securities settlement, will bring great potential to the formation of the digital capital market.
I published an article last week about Overstock, Republic and Polymath, and this week featured the secondary market.
In many cases, each player has been discussing with regulatory authorities about two years ago, and blockchain is being introduced in the trading market.
To be honest, I think the market will be formed if NASDAQ-listed companies and investment banks issue digital securities (preferred stocks, profit distribution rights) and can trade on tZERO.
So, it is also important to realize a more efficient and safe trading system on the blockchain while at the same time protecting the order of the traditional capital markets, such as protecting investors.
With an exchange, the capital market develops, with the aim of becoming a large-scale financing and public company.
However, it seems that a company with a large amount of debt raises funds from a general investor a little like an ICO.
INX’s IPO is a very challenging initiative and will attract a lot of attention as a public offering STO.
At the same time, it is necessary to invest in consideration of the fact that auditing is a “going concern” from the viewpoint of investor protection.