Certain historians argue that the legal concept of securities goes back as far as ancient Rome, where first corporations emerged. In its essence, this concept of security as a tradable financial instrument with monetary value has roughly changed ever since: even now, the general idea remains more or less the same, while science and technology keep pushing the evolution of financial markets further. Telephones hit the mass-market, and all of a sudden stockbrokers were able to sell ten times more shares than before. Several decades after the Internet came along, allowing for the automated execution of stock trades. And now, as the distributed ledger technology is disrupting the landscape of finance right before our eyes, completely new types of tokenized assets are brought into existence — above all, the smart securities. But what exactly are these assets and how are they different from traditional securities?
Here is the thing: although tokenized assets have been around for quite a while, the industry hasn’t yet developed a uniform understanding of what they are or how they should be regulated. There’s no established definition of a tokenized asset and no statutory criteria for what counts as one. Challenged by this problem, we have conceptualized our vision of smart securities.
Broadly speaking, smart security is nothing but a digital representation of a certain traditional financial asset — or rather its tokenized counterpart. Hence the identical legal nature: not unlike conventional financial instruments, smart securities entitle their holder to certain rights, e.g. voting rights in case of tokenized shares or payment rights if we are talking smart bonds (sounds quite fancy, doesn’t it?).
This shared legal nature also implies that smart securities have to adhere to the security regulations. With this in mind, when securities are tokenized, compliance becomes automated, meaning that smart securities may then be traded anywhere they are deemed as being compliant — blockchain technology and smart contracts make it possible to include ownership and regulation directly into a token. Unfortunately, this is not the case for traditional securities, where issuers are compelled to manually ensure compliance across every jurisdiction the asset is traded in.
With this in mind, when securities are tokenized, compliance becomes automated, meaning that smart securities may then be traded anywhere they are deemed as being compliant — blockchain technology and smart contracts make it possible to include ownership and regulation directly into a token.
Where traditional securities fall short
Built-in compliance with statutory regulations is not the only comparative advantage of smart securities over traditional ones. Although smart securities bear the legal essence of traditional instruments, they drastically improve on the technological side of things: built on blockchain, they encapsulate all the disruptive features this tech is so appreciated for. For one thing, blockchain brings disintermediation: for you to become a shareholder, your regular share has to pass through the hands of brokers, transfer agents, clearing firms, custodians and whatnot — at least 7 intermediaries in total. As for smart securities, it’s just the issuer and the investor with the issuance platform inbetween: the number of intermediaries is severely reduced, which allows for a significant issuance cost reduction and saves great amounts of time.
Speaking of time, which is always of the essence for the holder of any financial asset: as an investor, you want to have the ability to purchase or get rid of any given security as fast as possible. Now that’s where smart securities really stack up against regular instruments: the latter take T+2 (trade date plus two) business days to settle, whereas the former take minutes. And, unlike NASDAQ, decentralized exchanges don’t close for the weekend, they’re available 24/7. On the financial market, where each second counts, this means a lot.
Finally, let’s not forget that certain classes of traditional assets suffer from illiquidity, partly due to not being listed on secondary markets. Take, for instance, crowd investing, where people invest in unlisted early-stage companies — shares in those are not traded on NYSE, nor on NASDAQ, nor on any other secondary market. The same goes for private equity: the lack of secondary markets for these assets is attributed to high risks associated with them. Tokenomica aims to bring liquidity to these previously illiquid assets by building a secondary trading facility for them: by virtue of disintermediation and programmable compliance, they could be easily traded on secondary markets as smart securities.
Traditional and smart securities have the same core concept — as said before, both are tradable financial assets issued with the purpose of raising new capital. The crucial difference lies within the technological solutions behind them: in a loose sense, a share is just a record in a registry, whereas a tokenized share is just the same record, only in a distributed ledger. When put into effect, the distributed ledger technology allows smart securities to push forward where the institutions facilitating the exchange of traditional assets drag. Metaphorically speaking, if the solutions behind the former were compared to a late 70’s gasoline-powered car, the underlying tech of the latter would be the Tesla.