Blockchain Meets Wall Street: The NYSE–Securitize Initiative

         By Abhishek Reddy

The financial system provided by the world is changing, and blockchain technology is advancing quickly, creating the demand for faster and more efficient markets. The NYSE, a subsidiary of the Intercontinental Exchange (ICE), has entered into a partnership with Securitize to create a token-based platform for digital securities. This is the first step to changing the way we develop, trade and settle capital markets. 

What Does Tokenization Mean in Capital Markets? 

Tokenization may be defined as the process of taking a real-world asset (such as an equity, bond, or ETF) and converting it into a digitally based token represented on a blockchain. The token will give the owner rights to the underlying asset, just as a traditional security does, but the token will be traded on a decentralized digital infrastructure. 

Today, the clearing and settling of securities generally requires an intermediary (or middleman) for the transactions to occur. Tokenization on a blockchain gives the buyer and seller the ability to transact directly with each other. This change will dramatically reduce the time it takes to clear and settle a security transaction, as well as eliminate much of the operational inefficiencies in the current types of financial systems. 

Source: Bitbond 

NYSE Collaboration:

Collaborating with the NYSE, Securitize plans to create a long-term partnership to establish an “Infrastructure” Digital Trading Platform for Tokenization of Securities and Trading of Digital Securities. As the first digital transfer agent, Securitize will be responsible for developing and maintaining blockchain securities for corporations and Explore-Tor ETF Issuers. 

Transfer agents traditionally provide the following functions for shareholders: maintaining records; processing ownership changes; assisting Corporations with dividend payments; and managing corporate actions. By digitising the transfer agent function through Blockchain, Securitize will be able to automate, standardise, and add transparency and efficiency to this function. 

The partnership will also develop a Digital Infrastructure for Transfer Agents, including the creation of regulatory, operational, and technological standards. In order to maintain compliance with applicable regulations and provide institutional-grade infrastructure as digital financial services continue to evolve rapidly and market volatility increases, it is critical that we create these standards. 

Key Features of the Tokenized Platform 

Ongoing Trading 

Whereas the traditional stock exchange is only opened for business at certain hours, this new platform will allow for continual trading around the clock. As the platform will cater to a truly global investor jurisdiction, multiple time zones can impact trading globally. 

Immediate Finishing of Trades 

By virtue of the use of blockchain technology you are able to perform trades and have them immediately settled upon completion, therefore eliminating the traditional trade cycle of T+1 or T+2. By doing so you can further mitigate risk to both the parties involved in the transaction and over time create greater liquidity. 

Stablecoins 

Transactions on the platform can be made with stablecoins (which typically are pegged to fiat currency, e.g. U.S. dollar).  Utilizing stablecoins allows for faster payment execution and greater flexibility. 

Tokenization Creates Fractional Ownership and Access 

Tokenization of securities allows for division of securities into smaller units allowing investors to purchase fractional shares at a lower entry point and democratizing access to the capital markets. 

Increased Transparency and Security 

The use of the immutable blockchain ledger ensures that all transactions are transparently recorded and; therefore, the chances of fraudulent activity are lessened as well as enhancing the overall auditability of all transactions. 

Possibility and Potential Impact 

Tokenised securities offer many business opportunities. 

Market Efficiency 

With tokenised securities, you no longer have to rely on intermediaries, meaning that you can settle transactions on a real-time basis. This will dramatically reduce your costs and improve your efficiency. 

Global Access 

Tokenised securities can be traded 24/7 with fractional ownership and provide an opportunity for retail investors to invest in a more inclusive manner. You can now invest from anywhere in the world. 

New Financial Products that are Innovative 

Tokenised securities allow for the creation of new asset classes and hybrid investment products, which will enhance diversification for investors. 

Increased Liquidity 

With continuous trading, decreased barriers to enter the market and improved market participation, there will be a significant increase in liquidity. 

Challenges and Risks 

In spite of its potential, there are several challenges associated with transitioning to tokenized markets: 

Regulatory Uncertainty 

As regulatory framework around tokenized securities continues to evolve, it remains a complicated landscape to navigate relating to existing securities laws in conjunction with new technologies 

Technological Risks 

The blockchain infrastructure will need to be robust, secure and scalable to accommodate the demands that global financial markets will place on them. 

Adoption by Markets 

Both institutional and retail market adoption will depend on trust, usability and perceived benefits of tokenized systems as compared to traditional systems.

Custody/Verification of the Assets 

Identifying the accurate representation of the underlying asset and providing the secure custody of the asset is crucial to maintaining investor confidence. 

Looking to the Future 

According to Lynn Martin, President of NYSE, it will be critical to maintain trust, transparency and investor protection as the adoption and evolution of tokenization occurs in the capital markets. 

The extent to which this partnership succeeds will be determined by the functionality of the NYSE-Securitize platform as it relates to regulatory compliance and market integrity—if done correctly, it may serve as the prototype for the evolution of the global capital markets. 

Source: Blocsys 

Conclusion 

The creation of this NYSE-Securitize partnership marks one of the most important steps in the ongoing digitization of capital market transactions. By using blockchain technology to tokenize securities, the goal is to design a more efficient, transparent and accessible financial system. As traditional exchanges move to incorporate more digital capabilities, the lines between traditional and decentralized finance are becoming less distinct. A platform for trading tokenized securities could change fundamentally the way that trades are made, settled and investments occur—and usher in a new era of global finance. In conclusion, this was not simply a technological enhancement of how capital markets will operate in a digital environment; it also represents a strategic vision of how capital markets will operate going forward.