The Digital Age of Securities
A new way to think about investments on the blockchain.
2017 was a banner year for ICOs and cryptocurrency tokens. Unfortunately, many of these ICOs raised capital as utility tokens, with no adherence to United States security laws.
This bad behavior has led to an array of SEC subpeonas and enforcement actions. The strong regulatory response is being encouraged by good actors and should cause a drastic slowdown in the number of ICOs for 2018 and beyond.
Entrepreneurs still need to raise capital though. Rather than abandon token-based fundraising, there will be a seismic shift to what many refer to as “Security Token Offerings.” These security tokens are merely token offerings conducted in a regulatory compliant way.
While this perspective has elements of truth to it, I will take the rest of this piece to suggest a different framework. A framework that clearly describes what is happening, while attempting to put this shift in historical context. My hope is that this can serve as a guiding light for individuals across the crypto and financial communities.
Investments on the Blockchain
Simply, a security is a tradable financial asset. These securities were previously presented in a physical paper certificate that represented ownership in an asset. When an asset owner wanted to sell their ownership stake, they traded the physical certificate for currency with another entity or individual.
Obviously this Analog Age of Securities sounds archaic and inefficient. Over the years different individuals and organizations have attempted to bring securities, and the subsequent trading of securities, into the digital world.
It wasn’t until the late 1980s and early 1990s that electronic certificates and trading began to be used in a material way. This new process removed the need for stock brokers to stand on the trading floor and yell bids & asks at each other. It made the financial system more efficient. It increased the number of people who could participate. And it ultimately removed a select group of middlemen from the process.
This switch from paper security certificates to electronic security certificates was previously referenced as a digital shift. I disagree.
The digital world as we know it today, both the infrastructure and applications, was not available yet. Rather than call the period from ~1990 to now a digital period, I refer to it as the Electronic Age of Securities.
The Electronic Age has captured the minds of Wall Street and brought many benefits. Almost every security is currently held in electronic form and transacted on an electronic system. Majority of security holders never touch a physical paper certificate. The financial system looks more modern than ever before.
Technology waits on no one though. As Wall Street firms took the last 20–30 years to adapt to the Electronic Age, technology has continued to improve at an exponential rate. The most valuable advancement comes in the form of blockchain, a distributed digital ledger that empowers decentralized peer-to-peer transactions in a publicly transparent way.
As in previous decades, the advent of new technology brings a new age of securities and trading. Blockchain is the foundation for the Digital Age of Securities.
This Digital Age removes more middlemen, creates more efficiencies, and increases the amount of people who can participate. At the heart of this technological shift are two components: digital shares (Security Tokens) and decentralized exchanges.
Security Tokens are true digital shares that allow for fractional ownership, instantaneous transaction settlement, and regulatory compliant ownership. Previously, if a single share of Apple was trading at $100, an individual could not own the share if they only had $50. Today, digital shares would allow that individual to own 0.5 Apple shares (fractional ownership). The purchase of that Apple equity share would be executed near-instantaneously on the blockchain, if and only if, the buyer and seller were both within the regulatory guidelines for transacting that security. This regulatory compliance check is also done near-instantaneously with blockchain protocols.
If the ownership and trading of these new digital shares looks different, we also need new platforms to empower and service these transactions. Enter a decentralized exchange (DEX).
Decentralized exchanges are a new technology that allow users on a distributed ledger to transact with each other, in a regulatory compliant manner, without reliance on a centralized authority (single point of failure). These exchanges take the power and responsibility out of the hands of brokerages & investment banks, and place it back in the hands of the individual buyers and sellers.
By removing the middleman in a trade, DEXs create a more efficient financial system, while decreasing the costs of transacting. Additionally, without the need for a single authority to support and approve each transaction, more individuals are able to transact with each other — a true democratization of access to the global financial system.
The financial system will look very different when we have digital shares and decentralized exchanges. Individuals will not be subjected to “Hours of Operations” from centralized authorities & markets. They will not be subjected to archaic technology or legacy inefficiencies. They will be given their time back. They will be given their freedom back.
This transformation from the Electronic Age to the Digital Age won’t happen over night. It will take 10–20 years until the majority of financial securities are transacted on the blockchain. When it happens, individuals will finally be empowered to transact when they want, with who they want, in a fully regulatory compliant way.
A new era is upon us. The freedom it brings will disrupt old models and make way for new ones. It will ultimately lead to the largest shift of wealth in our lifetime.
Security Tokens are merely digital shares. Decentralized exchanges are better conduits of financial transactions.
Welcome to the Digital Age of Securities.
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