The Digital Asset ecosystem has developed significantly since the advent of Bitcoin over a decade ago. Beyond cryptocurrencies, blockchain technology is going to have a revolutionizing impact on financial services, including Capital Markets. The Global Capital Markets including equities and bonds was valued at $177.5 Trillion at the end of 2019 according to research by SIFMA. These markets are essentially data, and the benefits of transferring data on a blockchain include accessibility, liquidity, and transparency. The attributes of digital assets and how they will transform capital markets will be discussed in depth at our upcoming event, ELEV8: Digital Assets NYC.
Capital Markets function slowly by nature. Companies issuing stocks and bonds have to go through rigorous regulation and auditing, and as an investor, you are locking your funds up with the intention of long-term gains. In terms of accessibility, capital markets are generally only available to those with large amounts of funds and access to private markets. Companies like Robinhood and E-Trade are starting to bridge this gap for the public, but even so, you still need to be banked to have access. Blockchain technology allows anyone with internet access to interact with these markets from anywhere on the globe, 24/7. This is the ultimate form of accessibility. Furthermore, assets within capital markets have low liquidity. Traditionally with stocks, you have to wait to go through a broker, and bonds often lock up your funds for years on time. Liquifying your assets is a whole entire process that frequently requires more than just the buyer and a seller – there is a middle man. Digital assets, alternatively, have a much shorter settlement time. The powers of blockchain technology, in some cases, allow funds to be transferred in a matter of seconds from one party directly to another. Lastly, digital assets offer more transparency than traditional assets. Information sent over a distributed ledger can be tracked with 100% certainty because every single transaction is uniquely recorded on the blockchain.
While these innovations are undoubtedly more effective than the current system, enterprises and financial institutions still have to operate with “settlement finality and tight integration with current infrastructure,” as a report from R3 puts it. The blockchain industry is still in its infancy, and the fact is that it is still largely undefined. Regulated capital markets will not simply switch to a fully digital ecosystem until there are tighter regulation and more successful case studies. This does not mean, however, that the revolution has not started.
New market players are starting to emerge by raising capital through the issuance of debt and equity on a blockchain-enabled market. Specifically, stable coins and digital securities are going to dominate the digital asset landscape in the near term.
Stable Coins. A stable coin is simply a cryptocurrency pegged to the price of an asset. They provide practical use of cryptocurrency by providing the speed and security of blockchain technology without the volatility of traditional cryptocurrencies like Bitcoin. Some examples of popular stable coins include Tether, Paxos, and USDC, which are pegged to the US Dollar (USD). These coins are being used today and on a relatively large scale. Tether, for example, has the largest trading volume of any cryptocurrency, including Bitcoin! Some use cases include fixed-income investments, loan payments, ordinary payments, and recurring payments, per an article from Hackernoon. While stablecoins still lack decentralization and require auditing for backed funds, there is no doubt they are instrumental for mass adoption.
Digital Securities. Digital securities, or Asset-backed tokens, are digital assets that represent the value of the underlying asset. Similar to buying a stock in a company, and therefore owning a small percentage of it, digital assets offer the ability to fractionize ownership of any asset. This includes, for example, the tokenization of real estate, or energy, or fine art. Many analysts believe that the digital asset market will dominate the blockchain industry in the near future. And, as discussed above, digital assets provide more accessibility, liquidity, and transparency. Ilker Koksal, a tech contributor to Forbes, sums up the benefits of tokenization well. “Digitizing an asset and using a smart contract,” he says, “enables the shares’ owners, for example, to sell shares of private securities on complaint exchanges on-demand — and not suffer from their money being locked up in funds for years.” Having the security, speed, and decentralization that blockchain offers will only help grow industries, like real estate, that can benefit from digital securities.
Currently set to speak on the How are Digital Assets Transforming Capital Markets panel are Charles Bovaird, a senior contributor at Forbes, and Beralda Kokoshi, Digital Product Lead & VP at State Street.
Bovaird, Kokoshi, and other executives will discuss the latest trends and a forward-looking perspective that that digital asset will have on capital markets. The depth of the impact of digital securities on capital markets is extensive, so come join us on April 15th at ELEV8: Digital Assets NYC, to learn more on the latest investment trends from State Street, Gemini, Morgan Creek, Pantera Capital and more.