Thursday, 17 October 2019

Blockchain is making it possible for anyone to buy shares in Apple and Facebook

Despite being championed as a decentralized form of money that puts individuals firmly in control of their own wealth, cryptocurrencies mostly remain the preserve of the super-rich and the super-nerdy. 1,000 Bitcoin wallets currently hold 35.18% of all Bitcoins, for example, and only a select few computer scientists understand the inner workings and machinations of blockchains.

Such inconvenient truths undermine the oft-repeated claim that blockchains will democratize wealth, largely by lowering barriers to entry in financial networks and by preventing central banks from devaluing money via inflation. Nonetheless, this prediction has moved one step closer to realization in recent months, with the emergence of tokenized stocks. While much has already been written about security tokens and how they’ll enable ICOs (initial coin offerings) to comply with securities legislation, tokenized stocks are a specific sub-category of security token that have only just become a reality. And they look set to make the financial world more accessible to millions people, in addition to having serious implications for global markets.

In contrast to a new cryptocurrency designed specifically to conform to securities legislation (i.e. a security token), tokenized stocks provide digitized versions of existing shares in established companies, such as Google, Facebook, or Apple. DX.Exchange, an EU-licensed corporation that has built its crypto-exchange platform using Nasdaq’s matching engine technology, began offering these “digital stocks” in January. Specifically, it offers Google, Tesla, and Amazon shares via a partnership with Cyprus-based MPS Marketplace Securities. As CEO Daniel Skowronski explained, these digital stocks are backed up one-for-one by real stocks in the corresponding company, which are held by MPS.

For example, Skowronski told me, “Every time a digital Apple share is purchased on DX.Exchange, MPS allocates or if needed purchases a real share of Apple Stock. Each Digital share is backed 1:1 by a real stock similar to how stable coins work.”

This is all simple enough, but what’s interesting and potentially radical about such digital stocks is that they permit customers to buy fractions of stocks in big companies. According to Skowronski, that’s because “MPS as the market maker for the Digital Stocks will always hold slightly more than what is needed by rounding up. So, if a trader purchases 0.25 of Tesla, then MPS will make sure one full share is covering the 0.25 Tesla digital share.”

This will open up trading to millions of people who wouldn’t otherwise be able to afford buying shares in Apple or Amazon. Indeed, DX.Exchange seems to be aggressively pushing this angle, because at the end of February it announced a new partnership with Perlin Network, a cloud-computing platform that harnesses underutilized computing power in smart devices in order to make supercomputing more accessible and affordable throughout the world. Through this partnership, DX aims to bring its digital stocks to such countries as Indonesia and India, where only as much as 2% of the population currently invest in shares (compared to just over 50% for Americans).

“As for the ‘bottom billion,’ this is where we believe the real disruption will be in the financial services,” Skowronski said. “By allowing access to, say, individuals in Indonesia and allowing them to purchase fractional shares, this enables them to have a chance to build and create wealth that is just not possible today.”

These are laudable aims, yet the question remains whether Indians and Indonesians (or people elsewhere in the developing world) can be fully integrated into financial markets like this, especially when internet penetration in these two nations remains at 25% and 30%, respectively. Skowronski, for his part, believes that most of the ‘bottom billion’ will be capable of purchasing digital stocks, even without enjoying the kind of internet access evident in the developed world.

“Under our regulations we make it as simple as possible for clients to open an account. Once the account is open, they will be able to invest as little as $10 into digital stocks such as Amazon or Google,” he said. “When you multiply that by millions of people, that is real wealth being created that wasn’t available before, and although that might not seem like a lot to the Western world, it’s a fortune in developing countries.”

There’s still a lack of evidence as to whether microfinance programs are truly effective in lifting poorer individuals out of poverty, yet DX.Exchange asserts that its tokenized stocks will bring more benefits than increasing financial inclusion. The company also underscores that it offers the same access benefits to the wealthy.

“Berkshire Hathaway (BRK) is trading over $300K a share,” for example, Skowronski explained. “For even the wealthy this is a stock that would be hard to obtain a single share. But now, anyone can own a piece.”

One significant side effect of tokenized stocks is that they could change the fundamental nature of global stock markets and how they behave, by opening them up to round-the-clock trading.

“Digital stocks can be traded in off-market hours seven days a week,” said Skowronski. And the cost of trading digital versions of stocks will be significantly cheaper, since person-to-person trades circumvent the need to go through a broker. “We believe that in a few years everything will become digitized. It is happening today and DX will continue to innovate and push the boundaries to disrupt the market.”

DX.Exchange may be the first platform to offer tokenized versions of shares in big companies, but it won’t be the last. Other companies are positioning themselves to offer something very similar. BlockState is a Switzerland-based platform that, having obtained licensing in September, offers the ability to tokenize the shares of any Swiss company. It also lets customers tokenize any financial asset, and this year it’s planning to launch a range of digital management products for the financial industry, including smart contract-based services for managing bonds and derivatives. As its co-founder and managing director Paul Claudius said, the tokenization of shares “will change the face of financial markets, making it easier to understand the market and get involved from a usability standpoint.”

Another new company in this area is Hg Exchange, launched in January by Taiwanese exchange MaiCoin and Singaporean blockchain platform Zilliqa. Like DX.Exchange, it will be building a service to allow big companies like Uber and Airbnb to tokenize their shares, opening them up for purchase by a much wider pool of potential investors.

Similarly, Vanbex, a blockchain services firm headquartered in Canada, has a subsidiary called Etherparty that’s in the process of launching Rocket 2.0, a platform that will enable companies to tokenize their shares. As with BlockState and DX.Exchange, Vanbex Group founder Lisa Cheng believes the tokenization of traditional shares will lower entry barriers. She told me tokenization will also eventually remove much of the unnecessary baggage and costs that come with trading.

“Tokenization of shares will actually disrupt a lot of the tertiary businesses that exist today, namely shareholder services and registrars,” she said. “Rocket has incorporated shareholder tracking so that at any time issuers can view who is holding its stock and at what allocations. As well, Rocket is planning to release dividends and voting functions — shareholder rights that have historically needed shareholder service companies to help facilitate can now be done on the blockchain in a much more efficient and transparent manner.”

Cheng also said companies can use Rocket 2.0 to set lock up periods for their shares and that compliance is embedded into the platform, in that shares are only transferred to approved and accredited investors. More significantly, the use of smart contracts in automating the issuance of tokenized shares could radically change global stock markets by making it easier for investors and traders in one country to buy shares in a company based in another.

“Anyone that wants to buy LG shares [today], for example, would have to work with a broker who has a license in that [the South Korea] market,” Cheng said. “The need to use a broker dealer to purchase or sell shares occurred because, historically, investors and issuers needed an agent to paper the transaction and ensure things were handled appropriately. The system these agents established of record keeping and checks and balances, is able to be better served today with electronic systems that incorporate these rules and governance processes without ambiguity.”

By removing the necessity of legacy checks and balances, systems like Rocket 2.0 and DX.Exchange will make it easier to trade shares in companies based overseas. And this, in theory at least, could change the rhythms and dynamics of international stock markets, making them active around the clock, rather than only between 9.00 am and 5.00 pm local time.

This development could potentially have downsides. Warren Lorenz is the managing director of trading strategies and operations at Tennessee-based Amplify Exchange, which is building a hybrid cryptocurrency trading platform that mixes elements of decentralized and centralized exchanges. He worries that round-the-clock markets could destabilize global financial systems and make them less accessible for smaller traders.

“In terms of negatives, allowing markets for tokens tied to equities to stay open 24/7 would likely diminish liquidity and make assets more volatile,” he said. “In traditional markets, having an eight-hour trading window each day gives market participants time to digest information both in pre-market and after-hours; this helps the market make more rational decisions. If all markets transitioned to 24/7, we’d see a massive increase in algorithmic trading, which would hurt the less sophisticated retail audience.”

While other figures within the crypto industry acknowledge these risks, they also affirm that the use of smart contracts and other blockchain technologies will combine to reduce overall volatility. “Current markets are also de facto trading 24/7 via futures and global exchanges,” argued BlockState’s Paul Claudius. “We see the increased liquidity as a compensating factor for market volatility. In addition, the potential for digitally integrated compliance measures and bridges to regulatory bodies can be a stabilizing force for the markets.”

In other words, the ability to encode regulations into blockchain platforms and smart contracts will help to moderate the behavior of markets. “Similar to the integration with market players, we view the technological connection to regulatory bodies and provision of transparent reporting data as key in the path to success for this technology,” Claudius added.

This hypothetical interconnection between tokenization platforms and regulations would likely demand that regulators do as much to innovate as blockchain companies. It would also demand innovation on the part of markets and stock exchanges. And here it’s interesting to note that some commentators believe the growth of round-the-clock exchanges might, in the long term, result in the emergence of a single global stock market.

This is what Lisa Cheng suspects. A single global stock exchange is “realistically the only way we could have a 24-hour securities market,” she said, adding that a global exchange overseen by a single authority would be the only way to enforce regulation fairly for all traders (regardless of where they are) and halt trading during times of excessive volatility.

“The reason is that securities markets today are restricted by geography and consequently the working hours of that geography. Yes, this could potentially be a volatile exchange as markets wake up and others go to bed, as we see today with the cryptocurrency market. The answer to that is, this global securities exchange would have to halt trading on some securities if they want to control volatility. For example, if a mining facility in Antarctica is trading, but overnight there’s a huge iceberg that breaks off and the mining facility sinks into the ocean, only those markets awake at the time of the news would be able to trade on that information.”

Of course, all of this speculation remains largely at the hypothetical stage, given that the likes of Rocket 2.0, DX.Exchange, and BlockState are either very new or haven’t even launched yet. As such, neither they nor other tokenization platforms have had much chance to make a real impact. However, they’re all confident they eventually will.


source: venturebeat.com 
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