Juan Hernandez is the Co-CEO of Openfinance (OFN). As an Alternative Trading System (ATS), OFN aims to facilitate the secondary market trading of security tokens. Recently, Hernandez reflected on the security token industry’s progress in 2019, while tying together three strong predictions for 2020.
Digital Assets and the Need for a Clear Regulatory Framework
If there’s one thing the industry needs more than anything else, the words of Hernandez suggest that to be regulatory clarity. 2019 saw the successful implementation of security tokens in various facets. Still, at the start of 2020, “many key regulatory questions remain unanswered”, says Hernandez.
One area in particular which is catching the attention of regulators is the custody of security tokens. In the traditional private securities market, assets are held by trusted third-party custodians. Hernandez says the digital asset space is “treading lightly” around this area, while it waits for decisions from regulatory authorities.
There was some regulatory progress, however. Several Reg A+ token offerings were approved by the U.S. Securities and Exchange Commission (SEC). A number of broker-dealer licenses were issued to companies focusing on the security token space. Transfer agent registrations were confirmed for companies to include Securitize, Harbor, Tokensoft, Vertalo, and Block Agent.
What we can see here are positive indications of regulatory support. Hernandez says “regulators are fully engaged and are willing to explore and test various concepts”. With the industry gaining recognition, credibility, and momentum, he says this will ultimately culminate in greater regulatory clarity in 2020.
Participation from Institutional Capital in the Security Token Industry
A lack of regulatory clarity has seemingly created additional problems for the industry. One of them includes virtually no significant participation from institutional investors.
This could also be on the verge of a tipping point, says Hernandez. The demand is growing: HSBC settled $250 billion worth of Forex transactions on its proprietary blockchain in 2018. A survey from Deloitte says 53% of respondents say blockchain “has become a critical priority for their organizations in 2019”. Popular online trading platforms to include eTrade, TD Ameritrade, and Fidelity all plan to feature some form of cryptocurrency investing in 2020.
As larger entities continue to enter the space, regulatory bodies will have a stronger incentive to provide a clear regulatory framework says Hernandez. This is especially the case for custody.
More Innovation to Provide the Right Infrastructure
The security token industry as a whole requires a number of different services for both issuers and investors. Companies need the ability to tokenize existing assets, to conduct initial offerings, and compliantly issue tokens. Investors need to ways to purchase, store, and sell digital assets. Secondary market trading platforms need to facilitate the liquidity that security tokens are anticipated to bring to capital markets.
In order to see adoption, all processes need to feature a user interface which requires no technical expertise. There are therefore a number of parts to the intricate equation that results in security token implementation.
In 2020, Hernandez believes one of those parts will be the continued integration of digital processes in securities. With the digitization of greater amounts of information, data can reside in a system where transfers are easily facilitated. Yet this system still relies on trusted third-parties — and often times several.
With the blockchain and tokenization however, transactions can be settled drastically faster than traditional methods and without verification from third-parties. As private securities continue to see increased levels of digitization, higher levels of tokenization are soon to follow.
All-in-all, Hernandez noted a progressive year in 2019. But the best is yet to come:
“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.”
What do you think about Hernandez’s predictions for the security token industry in 2020? Do you agree that regulatory clarity is a primary need for the current state of the industry?
Images courtesy of OFN.