The financial markets are increasingly driven by technology. For one, marketplaces benefit from lightning-fast transactions that enable near-instant settlement of funds. This also enables traders to make analyses and decisions based on up-to-date information and trends.
Financial markets are also evolving and innovating in terms of technologies and applications. This includes the use of digital platforms as a means of investing in securities and raising capital.
This opens up the capital markets to more participation across borders. “Investing in projects and secondary trading will break-down the jurisdictional barrier on a global basis,” says Aaron Tsai, Founder and Chief Capitalist at MAS Capital Inc. and MAS Capital Universal Exchange (MASEx), a global trading platform for multiple asset categories, including stock, real estate, commodities, FOREX, and digital assets.
There are challenges in establishing trust and utilization in digital securities, however. The safety of assets and the existence of decentralized trading platforms are big propagators that can lead to the success of digital platforms. The largest hurdle at this time is ensuring compliance with securities regulations and legislation.
“Cross jurisdiction transfers and secondary trading creates regulatory uncertainty and risks for trading platforms that operate in multiple jurisdictions. Regulations--or lack of regulations--in many jurisdictions is another challenge. In the U.S., for example, issuers rely on the old securities laws that regulate the offerings of traditional securities,” Aaron Tsai adds.
Meanwhile, on the other side of the spectrum are jurisdictions wherein there are either no regulations on digital assets or regulatory bans on the use of such instruments for investing.
Technology providers and regulators need to be in sync in order to achieve the desired innovations. And in the absence of such frameworks, it falls upon platform and solution providers to collaborate with regulators in establishing such rules, based on existing legislation for traditional investments.
According to Trevor Koverko, Co-founder and CEO at Polymath, a platform that digitalizes securities for trading, establishing a platform for digitizing securities can be challenging, due to the permissionless and pseudonymous nature of the blockchain. The challenge is when the technology does not reconcile with securities legislation. “One example is if you had certain laws that force you to restrict the transfer of an asset, and there was no way to enforce that programmatically because the dominant platform wasn't designed like that.”
Thus, regulators and digitized securities platforms need to work toward establishing new standards. “How can we work not just with the existing regulatory frameworks, but also distinct frameworks? How can we interface with them to digitize these securities?” Koverko adds.
One of the biggest benefits of digitized securities is in providing global access to capital and investments. It is an innovative approach that revolutionizes the industry with the ease of transfer globally, 24/7 trading on digital platforms and immediate settlement for the asset transfers.
This opens the possibility to trade in a variety of asset classes--not just limited to traditional securities. For example, investors from around the world can now buy a piece of commercial property in New York City without leaving his or her country. This can be done by trading digital securities that correspond to those properties on the trading platforms.
“There is a significant opportunity here for both technology-driven and traditional industries. To put things in perspective, in the U.S. alone, the National Association of Real Estate Investment Trusts has estimated the value of commercial real estate to be US$17 trillion, thus establishing the potential for growth in digitized securities in this industry,” says Kenny Au, Founder at Elevate Ventures, a Hong Kong-based technology ventures firm.
“Similar opportunities exist in other industries. Therefore, establishing the technology platform is only the beginning. What matters now is encouraging investors and users to take advantage of these innovative solutions and standards and to prevent any bottlenecks in innovation and decision-making,” adds Au.
Collaboration will require a change of perception toward regulation, especially with digital technologies that involve decentralizing control.
“The industry can benefit greatly from clear guidance given by regulators. Public bodies’ research and consultation can steer development and facilitate international collaboration,” says Frankie Tam, Counsel at Eversheds Sutherland, an international law firm that advises stakeholders in the digital finance ecosystem.
“We will see growth in the digital finance industry as regulated digital asset trading platforms come into operation to provide secondary markets and liquidity. Related infrastructure providers such as digital assets insurance, custody, as well as AML check providers will also become more sophisticated,” she adds.
This means having a more positive outlook on both the regulations and the regulators. Improved collaboration across stakeholders will ensure proper enforcement action, especially in ensuring the proper use of digital assets and digitized securities.
One thing is for sure: FinTech has already disrupted the existing financial system as we know today. Regulatory compliance further enhances the mainstream adoption of digital assets, digitized securities, and the use of digital trading platforms. Financial markets and financial systems are already seeing big changes underway, and improvements in regulation will contribute greatly to wider adoption.
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