The Rise of Security Token Exchanges
Many countries want to dematerialize their financial markets by switching from physical to digital securities tracking using blockchain technology. For issuers, digital securities make global issuance cheaper and more efficient, while streaming business activities with smart contracts. On the investor side, digital securities give access to a larger pool of investment opportunities, while reducing settlement costs and times
The race to become a security token exchange
Intercontinental Exchange (ICE), the owner of the New York Stock Exchange (NYSE), unveiled digital currency exchange bake in 2019 – “Bakkt” is a play on words for “backed” or “asset-backed securities”. Bakkt’s focus is to warm up Wall Street to the idea of virtual currency trading and act as a scalable crypto-on-ramp. However, its development is still ongoing and is expected to be completed in 2023.
In Australia, the Australian Securities Exchange (ASX) formed a team with leaders in the cryptocurrency space to move its current exchange platform to distributed ledger technology. Today, it provides distributed ledger technology as a service to customers, who enjoy the benefits of better data accessibility and smart contract-supported optimized workflows.
Asia and Canada are also seeing traditional exchanges exploring the digital asset space. The Hong Kong Exchange and Clearing Limited (HKEX) recently launched Synapse, a technology-enabled distributed ledger service that facilitates the movement and ownership management of securities after purchase. Meanwhile, the Canadian Securities Exchange (CSE) launched a settlement platform and promotes the use of Security Token Offerings (STOs), which many companies have used as semi-regulated and accelerated paths to the market.
On the cryptocurrency side, major exchanges have: alsoo noted the latent potential of digital effects. With blockchain technology already in place, they are competitively positioned to conquer the market. While operating in the largely unregulated cryptocurrency space, they have slowly accumulated the licenses needed to exchange traditional securities on-chain.
Cryptocurrency giant Binance caught the attention of global regulators in mid-2021 when it began offering a product called it “stock tokens”, tokens whose values were linked to publicly traded shares. After being threatened with serious legal action for trading securities without the proper license to do so, Binance shut down the sale. Binance CEO Changpeng “CZ” Zhao then announced Binane’s plans to become a fully regulated financial institution.
As described by Quinlan & Associates, Huobi and Coinbase, which have already secured SEC and FINRA regulated broker-dealer licenses, are on track to offer security tokens as well, reinforcing the inevitability of security tokens as a major market power.
Landscape of security token exchanges
However, both traditional and cryptocurrency exchanges face major challenges in their transitions. Traditional exchanges are held back by outdated technology and paper-based securities. Cryptocurrency exchanges may face difficulties in changing their brand perception from cryptocurrency specialists to digital asset generalists.
In response, new broker-dealers of digital assets, known as blockchain exchanges, have entered the space. Some examples include Archax, the first security token exchange regulated by the Financial Conduct Authority in London; tZERO, an SEC-regulated alternative trading system that offers digital asset trading; and INX, a trading platform for regulated security tokens and cryptocurrencies.
Still, blockchain exchanges have their own problems. Most are set up by cryptocurrency enthusiasts unfamiliar with licensing, and as such are unlicensed compared to traditional exchanges. This leaves a void, or industry white space, for financial organizations with both high digital capabilities and full licenses.
Positioned to fill that white space, fusang, founded in Malaysia in 2015, is the first fully licensed digital stock exchange in Asia. Fusang provides a platform for global investors to invest in digital securities through on-chain digitization of real-world assets, including stocks, bonds and funds. The platform includes several products intended for easy management of digital assets.
Fusang’s exchange excels where traditional asset exchanges fall short – technology, fulfillment, product access and market access. Fusang Vault is a secure and fully licensed custody service provider that protects customers’ assets from external threats. Finally, Fusang Digital Identity is a digital user ID that can be used in a modular and scalable way. Fusang offers a comprehensive customer onboarding service, including KYC, AML, and a risk-based assessment to onboard retail and corporate customers quickly and with minimal friction.