We often equate crypto-assets with bitcoin or other cryptocurrencies. But “crypto-asset” is actually a much broader term covering security tokens and new disruptive models for the security value chain, from issuance to custody and settlement.
After 10 years spent getting to grips with divergent regulatory frameworks, securities market stakeholders are at a pivotal state in their transformation in which they must balance a need for transparency and risk mitigation in relation to their environment, against the need to make the process as efficient as possible.
Are security tokens the answer? Are security tokens the securities of tomorrow?
A Security Token Offering (STO) is the process whereby a financial security (or a digital representation of a financial security) is issued in the form of a digital asset; typically the digital asset represents ownership rights in an underlying company and/or its assets. Analyzing the impact of using security tokens within a Distributed Ledger Technology (DLT) ecosystem is done so by considering issues relating to the primary market (issuance/notary services), trading and post trading (clearing and settlement), and safekeeping and custody services. It is one of the main focusses for European (ESMA, EBA) and local (FCA) regulators, but also for the lawmakers in Switzerland, Italy, Malta and more recently Luxembourg, who are looking into integrating DLT and security tokens within their legislative framework.
The security token is the security of the future. European and local authorities now acknowledge that DLT platforms and security tokens can provide clear added value in terms of transparency, efficiency and enhanced reporting/oversight.
However, taking advantage of this opportunity will involve adopting two main principles.
1. Playing by the rules of the game
Security tokens can be offered (through security token offerings—STO) and existing assets can be tokenized in a way that ensures that they qualify as transferable securities as defined under MiFID. This will entail complying with requirements derived from other European regulations such as the prospectus directive, Central Securities Depositories Regulation (CSDR), Settlement Finality Directive (SFD), European Market Infrastructure Regulation (EMIR), Market Abuse Regulation (MAR), UCITS, and AIFMD. However, doing so will open up new business opportunities throughout the security value chain.
Of course, it is possible that a security token value chain will emerge on DLT platforms with little or no regulatory oversight, as we saw with crypto-payment platforms. From our point of view, security tokens can only secure a sustainable presence in the industry if they are underpinned by a well-defined regulatory framework. This is a prerequisite if we are to establish a trusted, transparent, and resilient environment that serves regulators and investors alike.
2. Thinking outside the box
To fully leverage DLT and security token opportunities, we need to view DLT not simply as a new type of “database” but rather as a new way to organize the security value chain from issuance to custody. This is clearly one of the main challenges we face, as we will have to break away from the sequential centralized value chain model and embrace a distributed leger model where participants can access the same information at the same time.
This will entail defining a new security value chain, roles, and responsibilities (trustee agent, insurance for digital wallets, etc.), redefining existing roles (issuance, notary services, safekeeping, and custody services), and developing new products and security offerings on the primary and secondary markets (AIF, digital property, digital art, etc.).
There remains challenges and constraints in setting up a safe and trusted DLT environment for security token not least interoperability between ledgers and European regulation related to custody. Nevertheless, it would be remiss to bypass the opportunity of increased efficiency and reduced operation costs that security token and DLT may provide for stakeholders of the security value chain.
A strong and sustainable development of security tokens in DLT will result in a well-balanced ecosystem combining a defined regulatory framework, an innovative mind set from new entrants, and expertise from existing market infrastructures.
Press release by Deloitte
Publié le 08 mars 2019