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Digital Securities for Private Markets

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Digital securities offer infrastructure that facilitates capital raising dramatically. They provide numerous advantages for issuers and investors.

  • Increased Access: lower transaction costs associated with blockchain issuances allow issuers to offer more assets at lower investment amounts to more investors.
  • Greater returns: with blockchain technology, issuers and marketplaces incur less transaction costs. This can ultimately translate into higher distributions for investors, combined with a simpler dividend payment process and cap-table management.
  • Liquidity: when there are secondary markets for digital securities (in both centralized and decentralized exchanges), investors can sell their tokens at a profit, benefitting from near-instant settlement and access to their funds. Public markets are 330 more liquid than private markets, yet they raised half the amount of primary capital. The need for liquidity in private markets is clear, and digital securities facilitate the path to secondary trading.
  • Market efficiency: digital securities create an easier process for issuers looking to raise capital, and as a result bring more competitive offerings to the market. This increase in competition builds a more efficient investment ecosystem, particularly in real estate where investors can now pick from a variety of cash-flow producing assets side-by-side.

There are numerous private market venues that are looking to solve the liquidity need for private company shares (eg. SharesPost, Equityzen).

Companies that have been private for a number of years are looking for ways to help early stage employees and investors find partial liquidity.

Currently, many of these venues operate with complex back-end cap-table management and outdated transaction settlement processes. Further, private securities transactions are usually executed manually — buyers and sellers are matched by the intermediary venue’s team, and liquidity is highly dependent on the size and market dominance of the venue. Private market venues can benefit tremendously from digital securities, allowing them to offer a more robust and frictionless investment ecosystem for investors.

Another facet of digital securities is their ability to provide near-instant settlement, dramatically reducing transaction costs and counter-party risk.

Currently, securities settlement is an outdated, timely process. Although the transaction date determines the price at which securities are traded, ownership transfer is determined on the settlement date.

Historically, securities transactions were settled on a “T+5” basis, meaning that it would take 5 business days after the transaction date (T) for settlement to occur. Thanks to technological advancements, most publicly traded securities currently operate in “T+2”, meaning the transactions are settled 2 business days after the trade is executed.

Securities settlement is an issue on a variety of fronts. Not only is it costly to have to settle transactions after the trade date, but it also creates challenges when it comes to dividend distributions.

Further, longer settlement times traditionally imply higher counter-party risk. As a result, margin requirements increase and the operating model becomes more expensive.

Distributed ledgers offer a secure settlement process, which can be exponentially better if combined with Central Bank Digital Currencies (CBDC). We explore the topic of CBDCs in detail in our recent CBDC Article.

Vlad Estoup is a Research & Data Analyst at Atlas One Digital Securities, and pioneered Atlas One's Research Terminal - a leading portal for investors seeking digital securities data from around the world. Vlad is a Finance graduate from the University of British Columbia, Canada, with a passion for blockchain technology and capital markets.

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