Crypto-Securities and the Democratization Of Investing – Opinion

Investing, Opinion, Regulation | November 23, 2018 By:

The investing world has long been ruled by rules. These parameters have defined how and why assets are created and how they transact, with authorities holding the keys to the kingdom.

The authorities of traditional finance have made their negative opinions (and misunderstandings) loudly heard as crypto has gained in mainstream interest and use, and understandably so; their own existence is coming into question.

Issuing and trading programmable currencies on the blockchain challenges much of what we’ve been taught about money and the financial system. Supported by blockchain technology, value no longer requires intermediation. Value can be transferred, tracked, and traded without third-party involvement. This advance in how value is defined and how it behaves represents an enormous shift towards the democratization of investing – of wealth creation.

Until now, capital markets and stock exchanges have experienced technological advances that increased their service, reach, and volume. But blockchain disrupts that advancement, routing control over the movement of money and assets away from institutions to owners.

Democratization means to make something equally readily available and accessible – and that is precisely what blockchain technology does with a globally trustless and shared system of hard-coded truth.

Once on-chain, publicly available assets become what we call crypto-securities, unforgeable records of ownership. Also generally referred to as tokenized securities (although this would apply specifically to securities issued via a smart contract – a far different user experience), crypto-securities offer a new investment paradigm; freedom of information.

Where market opacity once limited an investor’s ability to trade without institutional support, a blockchain’s distributed ledger provides an open and globally accessible database of real-time transactions, giving all parties access to the same market data and the same assets.

While blockchain-based securities hold value like traditional securities, they transact differently. First and foremost, crypto-securities are recorded and traded across a vast and widely distributed network. As anyone familiar with blockchain technology is aware, the distributed ledger recording the movement of assets is not centrally owned or monitored. There are no third parties involved in the transactions, clearing, or settling of the asset. Various platforms will handle this differently, however the most democratic is an atomic swap that facilitates your trades directly between you and the other party.

Like bearer instruments, crypto-securities are held directly by you rather than being owned and held on your behalf by a transfer agent or other custodian. This arrangement reduces cost and risk, allowing investors to directly validate their holdings. Of course, blockchain technology also serves in the verification and authentication of assets by way of cryptographic signatures, represented by private keys and the very nature of the transparent, immutable ledger.

Putting securities on the blockchain also means issuers can attach digital parameters to something of value by giving an asset a set of rules by which to behave. With these rules in mind, assets on the blockchain have greater integrity; their ownership and transaction history are both fully verifiable and auditable. Rules also specify who and how an asset can trade. Based on the domicile, a whitelist may be required to ensure that the security only trades between accredited investors. Instead of involving an intermediary to execute these rules, the security is programmed for where it can and cannot be sent.

With the implementation of blockchain technology, the markets are experiencing a power shift. Unlike other technological advances that markets have seen, like the digitization of trades, clearing and settling, and the advent of high frequency trading, this innovation shifts the advantage over to the investors and issuers and away from fee-based intermediaries.