By Mike Rogers, CPA, Digital Asset Advisor
There are many exciting parallels between today’s emerging digital assets market and the development of railroads in the 1800’s. The Industrial Revolution allowed people to live differently, more efficiently, and participate in an increasingly global marketplace. Railroads replaced canals and horse-drawn carriages, and new possibilities for travel, trade and transactions exploded.
Similarly, we are seeing an explosion of new possibilities in the financial services industry today. Paper-based transactions are being replaced by the digitization of money and security transfers. We are still in the process of finding the most efficient solutions to keep pace with emerging consumer demands, technological possibilities, and the need for inerrant security.
In his book, The Story of the Blockchain, Omid Malekan reflects that this digitization is “not nearly as efficient as a native digital system, in the same way that ripping an Audio CD and emailing an mp3 to your friend is not as efficient as sharing a playlist on Spotify.” The existing financial system, originally designed for paper transactions, was later digitized for the Internet. Unfortunately, we now have an inefficient patchwork of system and security upgrades, leading to mounting compliance costs and diminishing user trust.
Today, the time between transaction and settlement leaves participants exposed to both credit risk and settlement risk until the settlement date arrives. Financial markets stagnated on a “T+3” settlement cycle for over twenty years, until the SEC implemented a “T+2” settlement cycle on March 22, 2017. The SEC has acknowledged that “unsettled trades pose risks to our financial markets, especially when market prices plunge and trading volumes soar. The longer the period from trade execution to settlement, the greater the risk that securities firms and investors hit by sizable losses would be unable to pay for their transactions.”
The global financial system experienced the consequences of settlement risk during the 2008 financial crisis. After Lehman Brothers filed for bankruptcy on September 15, 2008, international credit markets screeched to a halt, amid fears that Lehman was unable to honor its obligations.
For a more comprehensive understanding of digital securities, we recommend reading the following:
The Security Token Thesis by Stephen McKeon
The Official Guide To Tokenized Securities by Anthony Pompliano
Prepare Yourself! The Security Token Tsunami Is About To Hit by Lou Kerner
Digital securities will likely become the preferred instrument for financial transactions in the future. However, the complexities of trading and safely maintaining digital assets should not be underestimated: the mechanics of this revolution are varied and vast. Like a traditional railroad track, which consist of rails, fasteners, railroad, and ballast, the digital security track is made up of issuance platforms, exchanges, liquidity providers, hybrid structures, etc.
Augmate’s next two articles will profile the leading digital security exchanges, tZERO and Open Finance.
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