What is a Security Token Exchange?
In simple terms, a Security Token Exchange is a platform where security tokens are traded under certain rules and regulations.
Security token exchanges have been gaining popularity in the recent past and statistics show that with every new month comes a new security token exchange. And considering that liquidity remains the biggest hindrance to the “widespreadness” of security tokens, this is a welcome move for the growing sector.
Today, there are a few regulated security token exchanges and this has caused an almost total lack of liquidity. The mere fact that a firm decides to tokenize its shares does not make it possible for anyone to trade the shares just yet.
But do not get me wrong, issuance is a key ingredient of the whole puzzle, but so are exchanges. Security tokens are set to have liquidity as a major advantage over traditional securities; it is therefore, very important to get this right.
That being said, this token security exchange guide will cover the following exchanges: Coinbase, tZERO, Open Finance Network, Australian Securities Exchange, and the London Stock Exchange.
Coinbase is a household name in Crypto land and things got even better when they announced in early June this year that they would start operating as a regulated exchange, thereby enabling the trading of security tokens.
And most recently, the news grew even louder when they announced that FINRA had agreed to sign up on their plans. Well, they say money talks and it is strongly believed that this was made possible by Coinbase’s appetite for expansion.
These triumvirate of acquisitions recently acquired three companies: Venovate Marketplace Inc., Keystone Capital Corp., and Digital Wealth LLC and this helped them gain access to what they needed most: a Registered Investment Advisor (RIA) license, an ATS license, and a broker-dealer license. And the last piece of the puzzle fitted in when the regulators finally signed off on the grand deal.
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tZERO has managed to garner a lot of publicity due to its parent’s reputation. For this Overstock subsidiary, it has not been all rosy – their STO started off on very wrong footing when the US SEC announced that it would be conducting investigations on the firm’s operations and then followed a class action lawsuit just a month later.
Legal issues aside, this platform has an enormous potential to play a big role in trading security tokens due to its access to capital, operational capacity, and its ambitious growth plan.
A quick sneak peek of the company’s operations revealed the following:
tZERO owns PRO Securities LLC and SpeedRoute LLC, both of which are FINRA Member broker-dealers and SEC-registered firms respectively.
The exchange features stock inventory management systems, smart order routing, brokerage services, and a 24-hour trading platform.
This platform’s exchange is quite impressive and currently executes 15 to 18 million orders on a daily basis. However, the company is believed to have the capacity to process over 100 million orders per day.
Open Finance Network
Despite the uncertain regulatory state in the US, a number of interesting security token projects are taking shape. Open Finance Network (OFN) is the first US-based regulated security token exchange; this caught our attention and here is what we found out about the platform.
OFN operates a trading, clearing, and settlement exchange that provides alternative assets and integrates a decentralized P2P settlement process as well as a centralized matching system.
After a few months of beta testing, the platform went live at the end of June 2018 with a few early partners and investors.
Australian Securities Exchange
Outside the US, major exchanges are also beginning to wake up and smell the coffee.
The Australian Securities Exchange (ASX) has a market capitalization of AUD 1.9 trillion (USD 1.4 trillion) and a daily trading turnover of AUD 4.685 billion (USD 3.4 billion); this makes this exchange among the world’s top 15 highest transacting securities exchange.
ASX is among the first exchanges to recognize the importance of tokenized shares and Distributed Ledger Technology (DLT). In partnership with a Blockchain infrastructure called Digital Asset (DA), the exchange decided to replace all of its registry settlements and clearing system with a Distributed Ledger Technology platform. To date, the move has made the exchange a renowned Blockchain converter in the financial sector.
However, critics noted one catch with the system.
The system will apparently operate on a private and regulated Blockchain platform, and the allowed participants will be given special clearance with ASX as the sole body that will be able to commit transactions to the ledger. Now, this is simply means that ASX will make the network centralized.
A number of experts caution the effect this may have in the long term by claiming that decentralized public networks will grant investors the power to create a unified and inter-operable system of finance. Exchanges with closed operations may find themselves left out in one of the fastest growing industries.
London Stock Exchange
The Blockchain community received a great boost from one of the world’s oldest and largest exchanges.
The London Stock Exchange Group (LSEG) and the UK’s main financial regulator, Financial Conduct Authority (FCA), recently teamed up with UK start-ups 2030 and Nivaura to issue compliant equity security tokens.
The partnership is set to take full advantage of the LSEG Turquoise platform and target both accredited and institutionalized investors.
One can assume that the equity tokens will leverage the ERC20 standard since the tokens will be Ethereum-based.
2030 is the first company expected to test the process and after a year or so, the service will be open to members of the public, making way for start-ups and small- and medium-sized companies to tokenize their shares.
Though the process is still at its infancy, here is to wishing the partnership utmost success even as we look forward to its full roll-out.
Congratulations if you managed to make it through this technical post. The good thing is that it contains complex ideas made simple for anyone looking to understand the concept of a security token exchange.
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