Understanding Tokenised Securities - Bitfinex blog
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Understanding Tokenised Securities

Tokenised securities represent an important evolution, merging the reliability of traditional investment instruments with the efficiency and flexibility of digital assets. Today we’ll look into how these digital assets embody traditional securities like stocks, bonds, and derivatives, yet offer enhanced features such as instant settlement, global accessibility, and increased transparency. Let’s demystify the concept of tokenised securities, exploring their regulatory environment, operational mechanics, and the transformative potential they hold for reshaping investment paradigms in the era of digital assets.

What are Securities in Traditional Finance?

Traditional securities in legacy financial markets represent a broad category of tradable financial assets that can include shares, debentures, warrants, and structured products. These securities are fundamental in providing businesses with avenues to raise capital through primary markets, like initial public offerings (IPOs), where securities are sold directly to investors. In secondary markets, these securities are traded between investors without providing direct funding to the issuer, thus offering liquidity, which is a critical aspect allowing investors to buy and sell securities with relative ease.

Equity securities, like shares, are perhaps the most well-known type of securities, conferring ownership in a company. Shareholders benefit from voting rights and potentially earning dividends, which are portions of a company’s profit distributed to shareholders. The value of equity securities can fluctuate based on market conditions and company performance, providing opportunities for capital gains if shares are sold at a higher price than they were bought. However, shareholders also bear the risk of capital loss, especially if the company underperforms or goes bankrupt, in which case the loss can equate to the total investment.

On the other hand, debt securities, such as debentures, represent loans made by investors to issuers, typically corporate or governmental entities, and are characterised by predetermined interest payments and repayment schedules. Unlike equity securities, the returns on debentures are generally fixed, accruing interest to the holder until the maturity date, at which point the initial investment is repaid. These types of securities are often considered safer than equities because they offer regular income through interest payments and principal security, barring issuer default.

Finally, other types of securities include warrants and structured products. Warrants provide the holder the right to purchase the company’s stock at a specific price before expiration, potentially offering high returns if the company’s stock price exceeds the exercise price of the warrant. Structured products, complex instruments typically built to include derivatives, can be tailored to meet specific risk-return objectives, often linked to the performance of one or more underlying assets. While they can offer higher returns and customised investment solutions, they also carry higher risks and are more suited to sophisticated investors. These various securities types cater to a range of investment strategies and risk tolerances, playing pivotal roles in the financial markets.

How Do Tokenized Securities Differ From Traditional Security Offerings

Traditional securities, such as stocks, bonds, and derivatives, have long been foundational elements of the global financial system. These instruments are issued in paper or electronic form and are typically traded on centralised exchanges under stringent regulatory oversight. Traditional securities are mediated by several intermediaries, including brokers, clearinghouses, and custodians, which can introduce delays and increase transaction costs. The ownership and transfer of these securities are recorded in registries that are maintained by trusted entities, and transactions are often subject to time-consuming processes like settlement and clearing which can take several days.

Tokenised securities, on the other hand, represent a digital transformation of these traditional assets, leveraging digital asset infrastructure to create and issue securities in the form of tokens that can be traded on a distributed ledger. This digital format inherently reduces the need for intermediaries by allowing peer-to-peer transactions that can settle almost instantaneously. Blockchain facilitates a transparent transaction history and ownership record that is verifiable in real-time by all network participants, can enforce compliance features via programmability, thus enhancing the security and reducing the possibility of fraud. Tokenised securities streamline operations and potentially lower costs by automating several processes through smart contracts, which execute predefined conditions without manual intervention.

One of the main advantages of tokenised securities is their ability to democratise access to capital markets. By fractionalizing assets into smaller denominations through tokens, issuers can lower the minimum investment thresholds, thereby opening up investment opportunities to a broader audience that may have been excluded from participating in traditional securities due to high entry costs. Moreover, the global nature of blockchain networks allows for cross-border transactions with fewer restrictions and without the need for currency conversion, providing a truly international market reach and diversification.

Despite these monumental advantages, tokenised securities also introduce new challenges, primarily revolving around regulatory compliance, which has not kept up with the advance in technology. The decentralised and borderless nature of blockchains complicates the enforcement of jurisdiction-specific regulations, including anti-money laundering (AML) and know-your-customer (KYC) standards. Regulators are still adapting to these technologies, and as a result, the legal landscape for tokenised securities remains a work in progress. Investors and issuers must navigate this evolving regulatory framework to fully harness the benefits of tokenised securities while ensuring compliance and protecting investor rights in this new digital frontier.

The Digitisation of Securities Markets is Just Getting Started

Bitfinex Securities is at the forefront of transforming the global financial markets by pioneering the digitisation of legacy securities through its digital securities trading platform. As an early innovator in this space, Bitfinex Securities has initiated several key tokenised securities offerings, marking a significant leap in bridging traditional finance with the digital economy. 

The offerings onBitfinex Securities leverage its’ sophisticated technology to provide issuers with a regulated, efficient, and global avenue for capital raising. By doing so, it enables small and medium-sized enterprises to access global capital markets more easily, offering these entities a seamless onboarding experience and exposure to a wide pool of international investors.

Bitfinex Securities has strategically chosen the Liquid Network as its technological platform for the issuance of tokenized securities, capitalising on its status as a Bitcoin sidechain. This choice leverages the inherent security features, reliability, and liquidity of the Bitcoin network, which are essential for fostering trust and stability in the emerging field of digital financial instruments. The Liquid Network enhances these attributes by providing additional features such as faster transaction times and improved confidentiality, which are crucial for the operational demands of modern securities trading. This alignment helps ensure that Bitfinex Securities can offer its clients a robust and efficient trading experience, while maintaining rigorous compliance with regulatory standards.

Bitfinex Securities’ initiatives are setting a strong precedent for the future of digital financial markets, underlining Bitfinex Securities’ commitment to innovation and its role in shaping a new era of financial inclusivity. By continually integrating traditional financial mechanisms with blockchain technology, Bitfinex Securities is not just facilitating a shift in how securities are issued and traded but is also enhancing the overall efficiency, transparency, and accessibility of global capital markets.