Crypto Depository Receipts are emerging as replacements for the traditional approach to paper bonds, paper shares, and in-person corporate voting.
While abundant information about the benefits to the investor have been widely communicated, there is a dearth of information that communicates the benefits to the issuers. As an issuer, what benefit do you have for tokenizing a security?
This article serves as an informational guide to the issuer benefits in the use of CDRs and native issuance.
What Makes CDRs and Native Issuance So Effective?
The CDR is a securitized, digital representation of an underlying share (or bond). Each CDR is securitized and backed one-for-one by a share or bond held by the custodian. The owner of the CDR has legal ownership to an underlying security held in a depository bank on their behalf. Mechanically, it is similar to a currency-backed stable coin. What benefits does it have to the issuer?
Benefits for Issuers
In addition to the benefits that CDRs and native issuance provide to the investor, through companies such as the startup CDRX, issuers also receive benefits that were otherwise unavailable before blockchain. They include:
- Operational and administrative cost reduction
- Increasing asset liquidity. (Imagine putting your rental properties in the palm of your hands?)
- Asset servicing efficiencies
- Significant efficiency gains in cash distribution (dividends and coupon payments)
Operational Cost Reduction
Operational cost reduction is the largest benefit for issuers. Using CDRs and native issuance, that number can be reduced to less than $1bn by 2022. The two costs that will be significantly reduced are listings and corporate actions, which cost upwards of $10bn per year. Part of these reductions are direct costs savings and part are due to the elimination of corporate actions that are no longer required (eg. share splits). There is a market demand for operating cost reduction.
A second benefit of using CDRs and native issuance is that the issuer benefits from significant improvements in asset servicing: including ownership transfers, maintenance, and record keeping moving to an administration free blockchain. Ownership transfer speeds can be improved by upwards of 96%, an improvement from the two to three-day window that is now industry standard.
Immutable Record of Ownership
Ownership maintenance will be conducted on a blockchain that serves as the immutable record of ownership. CDRs and native issuance will significantly reduce the unnecessary amount of required resources for ownership-related administration and maintenance.
The third benefit that CDRs and native issuance provide for issuers is the distribution of dividends and coupon payments. Issuers incur millions of dollars in bank fees just to send cash distributions to thousands or millions of stakeholders, in addition to the payment itself. This is in addition to the printing, mailing, and error handling costs associated with any large-scale shareholder communication. However, through CDRs and native issuance, there will be automated distribution through smart contracts. This saves large issuers millions on each and every communique/payment, eliminating expensive and wasteful administrative costs.
These benefits are transformative for the issuer’s operational staffing levels, compliance costs, budget and time. Between the provision of operational cost reduction, improvements in asset servicing, and digitalization of cash distributions, CDRs and native issuance are a highly compelling advance for issuers and will become a mainstay for years to come.