2019 has been a year of notable growth and evolution for the digital securities industry. By removing many of the barriers involved in investing in the traditional private securities market, digital securities offer the potential to improve liquidity, efficiency and valuations – and both issuers and investors are responding accordingly.
Security token offerings (STOs), the first wave of the evolving digital securities market, have seen a surge in investment within the last year. At Openfinance, we’re proud to play a role in the development and maturation of the digital securities market. While the road ahead is not without challenges, we remain optimistic about the future of our business and the industry as a whole. Here are three ways we expect the digital securities market to grow in 2020, opening up new possibilities for both investors and issuers.
Prediction 1: Forward Momentum Will Force Greater Regulatory Clarity
A supportive and clear regulatory environment is essential for the long-term success of digital securities. At the end of 2019, however, many key regulatory questions remain unanswered. Regulators have historically needed time to understand exactly how the technology powering market evolutions works, making capital markets and their regulators notoriously slow to enact changes.
In particular, the Securities and Exchange Commission is weighing in on the topic of custody in a digital securities environment. While third-party custodians hold assets in the traditional private securities market, industry players are seeking a solution that can bring greater efficiency to the process while still protecting investors and their assets. The industry as a whole continues to tread lightly around the area of custody, and we expect to see major decisions on this topic and other key regulatory considerations in 2020 and beyond.
Additional regulatory moves suggest forward momentum for the space as of late 2019. The SEC has recently approved a cluster of Reg A+ offerings; broker-dealer licenses for companies including Harbor, Tritaurian and Watchdog; and transfer agent licenses for Securitize, Harbor, Tokensoft, Vertalo, and Block Agent. In another promising development, the SEC is reviewing an order it previously rejected that would allow for a bitcoin exchange-traded fund (ETF). The SEC also is allowing 24 months for Paxos Trust Company to work on a private blockchain – a positive indicator that regulators are willing to at least test on-chain security transfers.
These recent announcements offer encouraging signs that regulators are fully engaged and are willing to explore and test various concepts. Further updates will hopefully give the market much-needed clarity in 2020, providing a clear path for future growth.
Prediction 2: Overall Industry Growth with Institutional Player Participation
Continued regulatory uncertainties have resulted in moderate growth for digital securities, leaving many institutional players cautious about entering the market. As the SEC and the Financial Industry Regulatory Authority, Inc. provide more clarity, however, we expect to see additional growth of digital securities across the financial sector. Blockchain technology has already laid the foundation, and now major corporations are starting to explore just how beneficial it can be.
In Deloitte’s 2019 global blockchain survey, over half (53%) of respondents agree that blockchain technology has become a critical priority for their organizations. Key examples include HSBC, which reportedly used distributed ledger technology to settle over $250 billion of transactions in 2018 alone. In addition, JP Morgan has announced its release of an E-Wallet, signaling the potential for blockchain and crypto currencies in the future. There are also a number of pilot blockchain projects on the rise from major players, like Franklin Templeton’s new digital money market and Santander’s digitized bond instrument. Looking beyond digital securities, crypto assets will be available in investment accounts starting in 2020 from major names like eTrade, Ameritrade and Fidelity, which has also rolled out its own crypto custody service. It’s also exciting to consider the possibility of regulators approving an crypto-currency ETF.
These movements by large players will continue to force regulatory bodies like the SEC and FINRA to look more closely at the space and provide a clearer path for compliant security token custody in 2020. Ultimately, we could see an industry-wide butterfly effect if a major investor takes interest in STOs. If a traditional Wall Street capital markets firm invests in tokenization, others will surely follow suit.
Prediction 3: Continued Innovation in Digitization and Tokenization Technology
The past few years have seen the entrance of new digital securities providers, platforms and technologies, which have come together to build the infrastructure required to make this entire market a reality. Industry tools and technologies will continue to evolve in 2020 in response to regulations and market needs.
One major development to keep an eye on is the rise of digitization. The alternative asset space remains frustratingly backward in too many of its processes – a situation that dramatically restricts the access and liquidity available to participants. Digitization is essentially a more efficient form of the processes used today, offering market participants an alternative to tokenization that doesn’t require the use of blockchain. With digitization, data is represented in a digital format, but still resides within a system. With tokenization, data can live outside of a particular system on its own without verification. Openfinance recognizes the importance of both, and we’ve crafted our platform to support diverse paths to digitization.
While we plan to further develop those paths in the coming year, continued innovation for Openfinance and the industry as a whole depends on constructive regulatory guidance. Without regulatory clarity, technology innovation is at risk of stalling out in the U.S. digital securities market. As we monitor additional developments, we will continue to pursue the innovative investment solutions that the market demands. Our technology and processes have been designed to be compliant with current securities laws since day one, and we will remain focused on that legacy going forward.
What’s Next in the New Decade?
2019 was undeniably the year that made regulators finally take notice of the STO market’s legitimacy. At Openfinance, we’ve been fortunate to play a role in the growth of this new market and the success of many of its users.
As the industry continues to gain momentum, it’s clear that digital securities have the capability to revolutionize the capital markets. While 2019 was about laying the right foundations, 2020 will be the year the industry takes shape to create a lasting legacy.
About Juan Hernandez, Founder & CEO, Openfinance:
Juan is a serial entrepreneur, technologist, and polymath experienced in financial markets, exchanges, and blockchain technology. Prior to entrepreneurship, Juan spent his career designing and developing financial exchange platforms, algorithmic trading systems and healthcare security networks. He holds a CS degree from Northwestern University and an MBA from the Kellogg Graduate School of Management.