2021 Predictions For The Digital Securities Market

Blockchain, News, Opinion | February 3, 2021 By:

2020 will go down as the year of the stablecoin, DeFi, and Bitcoin. But the story that will be missing from 2020 is the advances made in a particular subsection of the crypto ecosystem: the digital securities market. The digital securities market has quietly been rebuilding itself after the failed STOs of 2018. We’ve seen major developments in 2020 including Arca’s own launch of the first ‘40 Act fund to issue digital shares. Though there have been major strides in developing the digital securities ecosystem we believe that there the digital security space will grow in the 2021 in the following ways: 

Below are our predictions for the digital security space for 2021:

Continued adoption of blockchain into traditional flows: For the past five years or more, the majority of the largest global banks have been exploring the impact that blockchain can have on traditional finance.  A majority of the “tier one” banks have established blockchain labs and engaged in internal proof-of-concepts. The first, China Construction Bank issuing bonds on blockchain was just the beginning. Until recently, the majority of the banking pilots have been internal. In 2021, we predict several large and influential names will reveal internal multi-party projects have been in development thus reinforcing that blockchain and security tokens are here for good. 

Foundational growth in all elements of Digital Securities.  Much like the Digital Assets space, large scale investments are coming to the digital securities industry.  INX recently completed the first Digital Security IPO while earlier in the year, TZero successfully completed the issuance of its Digital Voting Series A-1 Preferred Stock (“Series A-1”) (OSTKO) digital dividend in May. Both of these initiatives have brought an influx of new capital and new investors into the digital securities market. This influx will lead to better infrastructure for:

  • Additional Token Issuances: More mainstream assets will be tokenized leading to increased attention for digital securities 
  • Secondary Market Trading: Companies will launch the trading solutions with regulators leading to increased volumes
  • Maturation of Products: As products continue to evolve to add additional and improved features, the utility functions of digital securities will increase

Digital Securities will help us Reimagine Treasury Management – With low interest rates, exit of LIBOR and many looming geopolitical, regulatory and economic uncertainties,  several publicly traded companies will come forth to either buy digital assets or will reveal that they already have digital assets in their treasury. MicroStrategy’s initial purchase of 350m in BTC assets will cause others to review existing policies and investigate digital assets.  Due to the volatility and technical elements associated with storage and transferability, Bitcoin may not be the answer for many companies. There are, however, digital securities that can mitigate many of these risks and maybe a sound starting point for many corporate treasurers.

Integration of Real World Assets into DeFi.  Decentralized Finance has been flourishing all year, despite suffering from several notable volatility related ‘blips’, triggering liquidations.  One of the stabilizing factors, and something that can help to mitigate volatility risks, will be the inclusion of “real world” assets into DeFi.  Most notably for lending protocols, “real world” assets can help ensure that loans don’t fall under the required collateralization levels. Using Maker as an example, one could pledge a real world asset for DAI collateral helping to stabilize the entire system. 

Anti Money Laundering (AML) & Know Your Customer (KYC) Becoming Increasing more important. The blurring of lines between digital securities and other crypto currencies has been eroding for several years.  Over the coming year, AML/KYC will become increasingly important within the entire digital asset ecosystem and will no longer be something required for just digital securities.  As more and more companies and governments demand AML/KYC, digital securities will become more and more attractive and the differentiation between traditional cryptocurrencies and securities will diminish. 

As most of the attention from the media and people on the sidelines is focused mainly on price, many of us are keeping our heads down and trying to make the critical improvements in the digital securities ecosystem that will allow for innovation to happen faster.  We at Arca are part of that mission, and wish everyone a successful 2021.