UK Security Token (Digital Securities) Exchange Business Outlook and Legal Regulations
In this issue, I will explain “Law regulations and exchange business prospects concerning security tokens in the United Kingdom” and consider the efforts of “Archax”.
The Financial Conduct Authority (FCA) is a UK regulator who oversees the digitalization of securities using blockchain technology in a neutral position.
In Japan, strict legislation is in place to improve the efficiency of fund procurement using digital technology, such as the disclosure requirements for stocks and corporate bonds required under the revised Financial Instruments and Exchange Act.
・Provision of real estate STO related services
・Issuance of digital asset bonds by major financial groups
・In-house demonstration of unique financial products such as asparagus tokens
・Tokyo’s real estate-backed digital securities exchange listing plan
・Establishment of Cayman corporation and implementation of STO in compliance with US SEC exemption regulation D
Cases of legal frameworks different from the revised Financial Instruments and Exchange Act have been announced one after another, and the digitization of assets that have not been securitized under the name “Digital Securities” has been receiving a great deal of attention in Japan.
Last month in the UK, “Archax” announced the opening of a security token exchange.
Since it is the first exchange business in the world to be approved by the Financial Conduct Authority (FCA), there are high expectations for revitalizing the European market.
UK Security Token Law Regulations
In the United Kingdom, tokens are backed by “share” or “debenture” and are defined as “Specified investment” if it has similar characteristics.
The FCA also oversees the possibility that a token may be defined as “Specified investment” under UK legislation even if it is considered a security with limited transferability under MiFID.
By submitting a prospectus, “transferable security” is disclosed and transactions are authorized. Therefore, as in Japan and the United States, there are certain disclosure rules for issuing and trading security tokens.
In the United States, STOs that comply with the SEC registration exemption regulation are common, and by setting limits on the number of investors and the amount of funds raised, a legal framework has been established that facilitates financing in private placement markets.
In Japan, discussions are being held toward the establishment of a law on security tokens, such as the submission of a request form by the New Economic Federation in 2019 toward the establishment of a legal framework with reference to the United States.
・UK prospectus exemption system
1 When provided only to “qualified investors” (professional investors)
2 For less than 150 people per country in the European Economic Area (EEA)
3 If the minimum investment is 100,000 euros
4 If the security token/transferable securities offered is capped at €100,000
5 Only in the UK and the total amount raised is less than €8 million
There are exemptions in the UK that do not require the prospectus to be published.
Therefore, when raising funds by issuing security tokens in the UK, it is considered that issuing companies often set a target amount of less than €8 million to implement STO more smoothly.
Monex Group CEO Matsumoto points out that Japan has a big difference in the STO market from the United States, and it can be said that legal regulations are an important factor in developing the security token market.
It is also necessary for the development of the market to promote the utilization of digital technology in the financing market, such as experimental efforts by small amount recruitment.
Medium- to long-term efforts such as reviewing legal regulations through demonstrations will lead to the formation of security token markets in each country.
It is also necessary for the development of the market to promote the utilization of digital technology in the financing market, such as experimental efforts with a small amount of financing.
Medium- to long-term efforts such as reviewing legal regulations through demonstrations will lead to the formation of the security token market in each country.
Security Token Exchange Business Outlook
When considering the security token exchange business, it can be said that it is important to increase the transaction volume, number of listings, and increase profits from commissions.
・Improve liquidity of private equity investment
・Develop new digital emerging markets utilizing blockchain technology
・Transaction of assets that have not been securitized until now
It is said that the security token exchange will bring the above-mentioned advantages, but due to the small market size, listing of more stocks and increasing transaction volume are in an important phase.
In order to do so, first of all, it is necessary for each country to have legal arrangements that enable companies to actively implement STO in the primary.
However, it can be considered that the maturity of the capital market of a country is largely responsible for the construction of a secondary market for private equity.
In tZERO, which operates ATS in the United States, it has been confirmed that the trading volume of listed security tokens (preferred stocks) increased due to the rapid growth of the parent company, Nasdaq-listed company “OverStock”.
The issuance of security tokens by listed companies, which are expected to grow, will also support the expansion of the market.
Recently, interest in the digital asset market has increased, with Goldman Sachs making an announcement suggesting the issuance of its own token.
There have also been reports of decentralized exchange Uniswap surpassing the 24-hour trading volume of Coinbase, a major US crypto asset exchange.
The spread of security tokens is expected to form a new emerging market in the securities market, and various STOs are being developed in the United States to create a market with more flexibility.
Tokenization of revenue sharing rights in compliance with laws and regulations (US crowdfunding PF “Republic”): Creation of tokenization cases for various rights as well as stocks and corporate bonds
Connection to Defi Market: RealT Real Estate Token Transaction Cases compliant with RegS in US LCC Scheme at Uniswap
As mentioned at the beginning, even in Japan, where relatively strict laws and regulations have been established, the demonstration of tokenization of various rights is being actively conducted.
In such a market environment, it is considered that the opening of an exchange will promote the future development of the security token market, including providing a place to pursue new possibilities.
Digital Securities (Security Token) Exchange “Archax” Initiatives
Digital Securities (Security Token) Exchange “Archax” Initiatives “Archax” has been approved by the FCA as a digital security (security token) exchange and custodian, and has been working on the formation of a global financial market that connects institutional investors and the digital asset market.
At the same time, since it was approved as “FCA cryptoasset registration” which was introduced from this year for the purpose of complying with 5MLD, the activity as VASP (Cryptographic Asset Service Provider) is also permitted.
Members with extensive experience in traditional financial markets are participating.
The exchange system uses the R3 Corda blockchain and functions as an MTF (Multilateral Trading System) in the SME growth market.
With permission of Brokerage permissions, it is expected to play an important role in the UK market as the “first regulated digital securities (security token) exchange”.
Archax is said to have a pipeline of 35 digital securities projects already in place, and has made various efforts since the announcement of the digital stock exchange for institutional investors in June 2018.
August 2018: Partnership with Custom House to provide KYC/AML services
September 2018: Partnership with Aquis Matching Engine / Surveillance
February 2019: Investment from SPiCE VC
March 2019: Partnership with Quod Financial to build order management and routing system
March 2019: Tokeny and tie-up for security token transaction cooperation
April 2019: Partnering with ClearBank to use banking services
June 2019: Collaboration with Smartlands for security token transaction cooperation
July 2019: Partnering with Globacap to form security token trading market
July 2019: Launch of digital asset custody service with Unbound Tech
October 2019: Partnership with blockchain stock registration agency High Castle
October 2019: R3 Corda blockchain adopted as trading platform
January 2020: Alliance with VALK (ex-Value on Chain)
February 2020: Partnership with Polymath to support ST20 protocol compliant tokens August
2020: Approved as digital custodian (security token) exchange and custodian by FCA
August 2020: Alliance with Algorand to develop “smart financial products”
Of particular note is the partnership with Algorand. “Composition of new financial products (digital assets) by utilizing technology compatible with DeFi”
(Stable coins, liquid alternatives, lending etc,,)
Cooperation with the DeFi market is expected to further expand the functions of conventional digital securities (security token) exchanges, and there are great expectations for the integration of digital assets as a whole.
Algorand has excellent technical ability to solve the blockchain trilemma, and has been adopted in the blockchain infrastructure that will play a role in the era of blockchain 3.0 along with projects such as Tezos and Chainlink.
Collaboration with “Algorand” will bring new possibilities to the digital asset market.
There are already private equity exchanges such as the NASDAQ Private Market in the United States, and both investors and companies are enjoying the benefits of increased liquidity.
However, compared to the United States, the capital markets themselves are smaller in other countries, so it may be necessary to build and expand the private equity market itself.
In the past, it was assumed that the existence of security token exchanges would increase the liquidity of the private equity market and stimulate transactions.
However, in reality, the market is gradual from the standpoint that companies cannot enjoy the benefits of legal regulation and the digitization of stocks and profit distribution rights and trading in secondary.
While the security token exchange is responsible for digitizing securities, it also has the advantage of attracting investors from the crypto asset market.
The possibility was sufficient to attract many investors, but it has been considered difficult to create a market with high degree of freedom because the assets collateralized are securities.
The new approach to digital assets through the collaboration between “Archax” and “Algorand” will bring new possibilities to the traditional security token exchange business.
Based in London, which is the financial center of Europe, there are high expectations for future initiatives as a driving force that supports the formation of a good market.