Securities Tokenization: How Blockchain Will Improve Stock Markets
What does tokenization mean?
First, let’s figure out what this term is. Asset tokenization is the process by which a physical asset is converted to digital or virtual, i.e. a token. Any object can act as a token: real estate and other property, copyright and intellectual property.
With this, everything is clear, but why is tokenization needed and what problem does it solve? Let’s find this out. With the help of tokenization, it is possible to remove confidential information that identifies clients of companies: banks, stock exchanges, brokers and other organizations. But that’s not all. Tokenization also solves another problem – complex, costly and time-consuming payment processes.
For example, when an investor buys a share on the exchange, information about the purchased security is recorded digitally in a depository – a company that stores information about which of the clients owns which shares. This, firstly, requires additional costs, and secondly, the process itself cannot be called fast.
The same applies to interbank transfers, this process can take up to 3 days. For the client, it boils down to the fact that he sends money, and then they come to the recipient. But between points A and B, there are many processes: verification, validation of a remittance, approval, and so on. This approach is ineffective in a digital world where milliseconds count.
For tokenized assets, all these processes are automated and can take no more than a couple of minutes. At the same time, the cost of services will also decrease: the owners of shares will no longer need a depository, because all records will be stored on the blockchain.
What will change for investors and traders?
From the point of view of an exchange player, nothing. The process of buying and selling tokenized shares will remain the same. The only difference is that the investor does not buy a share, but a digital asset – a token. And the blockchain will record who bought or sold at what price and how many shares.
Now let’s talk about the benefits of this approach: what it does for investors and how it will improve the stock markets.
On the crypto market, you can easily exchange one token for another: BTC for USDT, USDT for ETH and ETH for BTC. For example, let’s say you want to sell BTC and buy ETH. You do not need to first convert BTC to USDT, and then USDT to ETH – the investor can immediately buy the required asset by paying another.
It’s different with stocks: you can’t sell Tesla stock and buy Google stock. First, you will have to convert the existing shares into dollars, euros, rubles, etc., and only after that the purchase of other shares will become available. It is difficult, time consuming and costly. This happens due to the complexity of the procedure. Tokenization can change this, which ultimately will affect not only the trading of investors, but also the operation of the exchanges themselves.
Here are the benefits:
The work of stock exchanges will accelerate and the load on them will decrease: there will be fewer transactions, which means that less resources will be required to ensure the operation of stock exchanges.
The costs of servicing accounts will decrease. All complex processes will remain in the past, and digital blockchain technologies will take their place.
Full asset convertibility. Users do not have to look for sites where certain financial instruments are available – everything can be bought in one place. Imagine not having to sell shares and spend money on additional commissions to buy an apartment or a car. You can do this by paying with tokenized assets. In other words, it opens up the possibility of creating a global decentralized exchange market, where all assets and goods can be linked together.
Fast payment processing. Users of exchanges and brokers regularly face delays in deposits and withdrawals. Sometimes these delays are minor and only take a few minutes. But it also happens that requests are processed within a few hours or even days. This is inconvenient, especially if the client urgently needs money.
The current situation leads to the fact that the gap between wealthy investors and newcomers who cannot do without their funds is only growing. Tokenization will fix this and access to exchange instruments will become equally available to all clients.
What other problems can tokenization solve?
Tokenization can improve the efficiency of asset management such as stocks, ETFs, precious metals and commodities. The same applies to margin financing – all these processes will be simplified thanks to decentralized technologies.
Some large exchanges are already using blockchain technology for transactions: Nasdaq, ASX, New York Stock Exchange (NYSE) and others. Nasdaq became one of the first adopters of blockchain technology. This well-known exchange conducted the first private transactions using blockchain back in 2015.
The question is brewing: if stock exchanges have been interested in and even introduce decentralized solutions for so long, why have they not yet implemented the global application of this technology?
First, there is too much at stake. If the exchange is hacked or investors lose their funds due to some mistake, then the financial world will suffer slightly. In addition, exchanges are isolated from each other, and hacking one of them is unlikely to affect the work of the other.
But if any problems arise at a stock exchange, such as the NYSE or Nasdaq, the consequences will be catastrophic: funds, banks, brokers, large investors and many others interact with the exchanges.
Secondly, the problems of legal regulation of technology remain relevant: the blockchain has not yet passed mass adoption, and the states have not determined all the nuances of working with tokenized assets, with the exception of some countries. Now we can only consider the prospects for tokenization, but it is too early to talk about implementation.
Blockchain technology and tokenization solves the global challenges faced by players in the securities market. Cross-border payments, transfers, funding and asset management are processes that can be simplified and accelerated with asset tokenization. As a result, both platforms and their customers will only benefit from this.
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