How Blockchain Technology Will Improve Securities Markets

Much of the attention the blockchain and cryptocurrency markets received in 2017 and 2018 as waned as Bitcoin’s price has fallen about 75% from its …

Much of the attention the blockchain and cryptocurrency markets received in 2017 and 2018 as waned as Bitcoin’s price has fallen about 75% from its peak. One area within the space that is growing in favor despite the broader negativity is securitized tokens.

In this case, the word securitized refers to turning blockchain tokens into legally compliant securities rather than, as some of us with finance experience would naturally infer, a bundling of assets (or tokens) to be sold as securities.

The value of all publicly traded stocks is on the order of $300 trillion. That measure doesn’t include privately traded stocks or any other security, like bonds (which exceed stocks in value) and derivatives. Reversing the nomenclature, the business of tokenizing securities has the potential to be big business.

Still, one would ask why anyone would want their securities tokenized. The logic is one that seems to me to conflict with many of the principles espoused in the crypto community, where libertarian ideas about eliminating central banks and diminishing the role of government in financial markets are pervasive. The logic for tokenizing securities is to make securities more self-regulating.

Blockchain technology allows for smart contracts that can be used to prevent ordinary investors from purchasing securitized tokens that they are not qualified to own. They can incorporate compliance with complex, international know-your-customer (KYC) and anti-money-laundering (AML) rules.

So, the technology that at times has seemed to befuddle securities regulators, could now be used to with their blessing to help protect investors by enforcing securities laws.

Dan DoneyCredit: Securrency

Dan Doney, 48, is the founder, CEO and CTO of Securrency, a 100-person startup that has already raised more than $9 million that is focused on securitized tokens. He joined me for a discussion about his firm’s work in the space. Watch it in the video player at the top of this article.

Doney is passionate about seeing his technology improve the world. “Securrency’s mission is to deploy a global, unifying financial services infrastructure that pushes capital formation out to the edges of the global economy, reduces the cost of participation in the capital markets, and enhances global liquidity.”

Security tokens have the potential to address two problems in the securities markets, Doney says.

“First, we substantially reduce the cost to access the capital markets with user-friendly, efficient automated investment banking services,” he says. To be clear, Securrency is not an investment bank and doesn’t anticipate becoming one. Instead, it is a technology platform whose clients are investment banks.

“Second, we stimulate and substantially enhance global liquidity by underpinning the financial services infrastructure of the future, serving as the global unifying protocol, centered upon compliance, security, and universal interoperability.”

One key premise of the technology is that assets that have traditionally been illiquid could become marketable, as the technology addresses the challenges of tracking the ownership even of fractional interests as well as by preventing anyone who shouldn’t from owning the security token.

Matthew Sullivan, founder and CEO of QuantumRE Network, is using the technology in its offering. He recognized early that he would need what Securrency offers but initially had difficulty finding anyone with the complete toolset. His firm first found Securrency in April of 2018.

“Securrency provides a critical technology piece on QuantmRE’s offering, which is to provide an off-chain validation service that enables us to control the distribution of our asset-backed tokens,” Sullivan says. “With Securrency’s technology, we are able to ascertain the KYC and AML status of a prospective investor, issue securities tokens and track the change of ownership down to a fractional level.”

He adds, “Securrency is one of the few technology providers that has deployed a working platform that provides the solutions that these new markets need.”

One important new area of securities law is 2016’s Regulation Crowdfunding. Securrency is working on a partnership to allow for affordable offerings under these new rules that allow sales of securities to ordinary investors.

Sullivan shared an observation with me. “If one was to redesign the way that securities transactions are originated and settled, one would consider blockchain as the most likely foundation technology that would be used.”

It appears that Securrency has done just that.

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Bitcoin Futures Now Trading At Discount to Exchange Prices

As of writing, the global average or spot price calculated by CoinDesk’s Bitcoin Price Index (BPI) is currently $3,650 – up 16.9 percent from the low of …

Signs are emerging that the futures market may not be impressed by bitcoin’s recovery from 15-months lows in December – at press time, the cryptocurrency’s spot price is higher than the futures price.

As of writing, the global average or spot price calculated by CoinDesk’s Bitcoin Price Index (BPI) is currently $3,650 – up 16.9 percent from the low of $3,122 reached on December.

Meanwhile, futures contracts are trading below the spot price.

BTC futures

As seen above (CME chart), January futures are reporting a $20 discount (futures price-spot price). Further, contracts expiring in February, March and June are trading at a discount of $30, $40 and $80, respectively.

A futures contract is an agreement between two parties to buy or sell a something at a future specified price and date, allowing for investors to hedge or speculate on the performance of the underlying asset. Hence, BTC futures trading at a discount to spot price (also known as market inversion) is a clear indication that the participants are still bearish.

Put simply, bitcoin’s price in one month, two months and six months from now is expected to be lower than its current price. So, it could be argued that the bear market is alive and kicking.

The outlook would turn bullish if the futures start trading at a premium to spot price. Moreover, that is a classic trait of the bull market.

That said, an unprecedented rise in premium serves as a warning sign of market nearing a long-term top. For instance, BTC futures were carrying a staggering $2,000 premium over spot price in December 2017.

Disclosure: The author holds no cryptocurrency assets at the time of writing.

CME director of equity markets Tim McCourt via CoinDesk archives; Charts by Trading View

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