By Douglas Borthwick, CMO of INX Limited.
Before we dive into the future, we must first talk about the present. Until now, there were two separate stock markets in the United States. Public and private. Public securities typically trade on a national exchange, which makes them accessible to most investors through their brokerage accounts thanks to the infrastructure and many pipes built over the past decades. An investor can research the security and then simply trade it through their online brokerage account. There is little friction in transactions, but many intermediaries. Private titles, on the other hand, are more difficult to locate. In general, you should be an accredited investor and be constantly on the lookout, or be on a mailing list to see what opportunities exist. Few are traded on an exchange or ATS. Liquidity is lacking.
Since government securities are traded on national stock exchanges, they are only open for trading for a limited period during the day. In most cases, you should trade between 9:30 a.m. and 4:00 p.m. EST. The era dates back almost a century and reflects the commercial exchanges around the publication of information broadcast from the morning and evening newspapers. Closing time most likely dates back to when real people made trades on the stock exchange floors. As a title passes from one person to another, intermediaries called transfer agents note the movements so that issuers can discern ownership.
Private securities in general trade between accredited investors. Investors who have income or assets above a certain level. Because there is a limited audience, commerce is sporadic, limited and opaque.
Blockchain changes all that. And that may be why former SEC Chairman Jay Clayton said he could see all assets move to blockchain in the future.
Blockchain allows companies to digitize their emissions, creating a whole new playing field for public and private assets. This new playing field makes trade more efficient by eliminating the need for various middlemen. It enables a 24/7 trading market, fractional ownership and, for the first time, through the work of INX Limited, opens up private markets and seed funding to retail investors. It’s the future.
Admittedly, there is only one stream today, but we wholeheartedly believe that there will soon be a big migration from legacy markets to blockchain, and it has already started.
When private securities are digitized – or tokenized – they become more liquid. They can be traded around the clock; and listing on an ATS allows issuers to provide clarity and price discovery in a previously opaque market. Once tokenized, they can be held on a fractional basis, and depending on how the issuer has filed with the SEC, in some cases they can be traded by retail investors from IPO through secondary negotiation. Before these markets had significant lock-up periods led by their deposits. Now that is changing.
In the public market, there are already securities that have decided that blockchain is the future when it comes to efficiency, liquidity, and clarity. Overstock.com issued a tokenized version of its equity through a dividend payment to holders of their shares. While INX Limited became the first company in history to go public on the blockchain, allowing retail investors to invest in a pre-revenue company during their current IPO, makes it a ICO registered. This is a tremendous step forward for securities markets. Previously, retail investors did not have access to these opportunities, opportunities that were only available to accredited investors, private equity funds and venture capitalists.
By registering on the blockchain, companies find that they no longer rely on the services of numerous intermediaries. Ownership records are recorded on the blockchain and a capitalization table can be viewed in real time. Dividends and distributions can be paid directly to investors, without the need for intermediaries. With 24/7 trading and co-ownership, the investor base can expand from the United States to a global reach. Tokens in businesses can become affordable for everyone, regardless of income and time zone.
Regulators prefer blockchain since tokens can have smart contracts, designed to autonomously ensure that all owners of a security have passed AML and KYC checks. On the blockchain, a security can only change hands if both parties have whitelisted their digital wallets.
Generation Y is also on board. They grew up with next day delivery on Amazon and never understood why stock markets open and close, unlike currency and crypto markets. It seems a bit unfair that companies can issue PR on a Friday after the close and investors can’t trade their holdings until the following Monday. Tokenization fixes that.
The future of securities is now. With regulators, issuers, and consumers seeing all the benefits of tokenization, and with the path to tokenization now being lit by pioneers like INX Limited, it’s only a matter of time before this flow begins. turns into a torrent.