A Paradigm Shift in the Affairs of Capital Markets
Transparency, accountability & liquidity — blockchain providing benefits to businesses & investors
The finance industry is undergoing some of its most radical and progressive changes in history and those who leverage these developments will be at the forefront of the next era.
For many, blockchain technology has been exclusively linked to cryptocurrencies, but things are changing. The core technologies utilised by cryptocurrencies are about to bring fantastic opportunities to broader traditional markets and benefit businesses and investors alike.
Shakespeare neatly summed up the current situation for capital markets in his play Julias Caesar:
“There is a tide in the affairs of men, Which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures.”
Brutus’ statement to Cassius has stood the test of time and capital markets now find themselves afloat on a flood driven by blockchain technology. At the dawn of these major shifts, it is incumbent upon us to identify the opportunities so that we may be able to take this flood towards fortune.
Although the ideals of fully decentralized capital markets are important, the reality is that it will be the implementation of blockchain in traditional capital markets that will drive investment and impetus for broader technological development and adoption.
Capital markets are currently estimated to be worth around $300 trillion and this figure does not include privately traded stocks, securities and derivatives! Comparably the cumulative market capitalization of cryptocurrencies is estimated to be below a quarter of a trillion dollars. This stark difference in volume makes it clear that the capital to drive blockchain development and implementation will be sourced from traditional markets.
With this impetus in mind, what value can blockchain add to traditional markets? By working within traditional frameworks such as know-your-customer (KYC) and anti-money-laundering (AML) rules, blockchain is able to reduce friction in capital markets in a number of interesting ways.
Security tokens are the blockchain equivalent of stocks and do not require an agent to trade or store. They can be stored in an individual’s wallet and continuously traded around the world from a device connected to the internet. This in itself represents a reduction in costs and an improvement in the speed of trades. Furthermore and thanks to traditional governance within capital markets, in the event of theft security tokens can be returned to their original owners.
Tokenizing of capital markets will bring improvements in liquidity and accessibility. Most investment currently is often limited to individuals with high levels of income. Because tokens are more easily fractionalized than traditional securities they open the world of investing to more people as they become more affordable.
Further benefits will be delivered to companies wishing to raise liquidity. The traditional method of listing a business on a stock exchange through an IPO will soon be replaced by the Security Token Offering (STO). This will allow more companies to raise liquidity from the market and reduce the friction and costs associated with that process. Traditional financial services for an IPO are expensive and take time. The streamlining of this process will make many of the gatekeepers to this process obsolete.
A Federal Reserve survey in 2019 estimated that around 55% of Americans owned stocks. As tokenization becomes more widespread it is predicted that there will be more participants in the market and therefore greater liquidity in the marketplace. The opportunities to invest will be shared with a larger portion of the community and bring opportunities for passive income streams to more families.
Perhaps the greatest benefits of using blockchain to tokenize capital markets will be increased transparency and enhanced accountability. Many of the problems with traditional capital markets have been attributed to manipulation and corruption. The blockchain promises to tackle these problems as transactions are recorded and immutable. Once a token is purchased by an investor the ownership of that token cannot be erased or manipulated.
These plethora of benefits and opportunities which are as yet unidentified are opening the market up and benefiting more people. The blockchain promises to bring opportunities, liquidity and benefits to businesses and individuals alike and future developments will be fascinating to observe.
The future is brilliant, the future is blockchain!
Sonata Capital is registered in the Labuan International Business & Financial Centre, and invests in companies successfully exploiting the vast opportunities of the digital economy.
100% of the equity in our funds have been tokenised, and will be listed on digital securities exchanges in Labuan and elsewhere. The equity of Sonata Capital Ltd (LL16076) has also been tokenised, and the rights to the equity is represented by the SONATA security token issued on the Ethereum network.
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