Digital Securities — A Macro View
Author: Vlad Estoup
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The digital securities market is beginning to grow steadily around the world. Numerous players are emerging, issuing digital securities in a variety of industries and adopting diverse capital raising models.
From central banks’ Central Bank Digital Currency initiatives to private enterprises issuing securities on the blockchain, the financial world is beginning to understand the benefits of digital securities.
Several digital asset exchanges around the world are emerging and adding capabilities for trading of both digital securities and tokenized stocks (pre-existing securities that are sold on exchanges as price-pegged tokens).
Real estate presents a lot of potential in adopting digital securities for capital raising. Currently, it is the third largest industry after Technology and Finance.
On a year-over-year basis, the market capitalization of all real estate issues has increased from $98 million to $148 million, representing 51% growth over the past 12 months. Below is a breakdown of the market by sector:
Market Capitalization: $1,132,497,239.60
Growth year-over-year: 91%
Average Issuer Capitalization: $15,099,963.19
Median Issuer Capitalization: $1,520,000.00
Number of Digital Securities: 76
Est. Year-End Market Cap: $3,500,000,000.00
Real estate is an important area of increased adoption of DSOs. New real estate marketplaces are emerging and adopting blockchain technology.
This is largely due to two factors: recognition of the economic advantages of real estate tokenization and overall appreciation of the asset class.
The technology sector has also been a leader in digital securities adoption, likely due to tech-related issuers being more familiar with the value proposition of blockchain technology. Several Cryptocurrency mining firms are leveraging digital securities to offer a blockchain-based experience for their investors, with seamless distributions and potential for secondary liquidity.
Finance DSOs have also grown since the start of 2021. Large banks and institutions have been experimenting with blockchain-based settlement solutions and fixed-income digital securities issuances. Amongst these are the DBS Digital bond and CGS-CIMB’s commercial paper. These issuances have added a substantial amount to the market’s capitalization. As of this writing, CGS-CIMB has raised $7.5M through its digitized commercial paper offering, showing the clear benefits of digital securities adoption in short-term financing.
Amount Raised through Digital Securities by Blockchain:
Ethereum: $798,759,167
Tezos: $21,300,000
Other Blockchains: $30,377,852
In terms of blockchain protocol, Ethereum remains the main blockchain used for digital securities issuances, featuring major offerings such as Blockchain Capital (BCAP) and INX’s revenue sharing token.
Most of tZERO’s securities, however, are hosted on the Tezos blockchain.
Tezos has been positioning itself as a competitor to Ethereum in the digital securities space.
Although Ethereum gas fees are the highest in the industry, the infrastructure around decentralized trading is largely built on Ethereum.
Gas fees can be mitigated by issuing securities on private blockchains, and subsequently issuing them on public blockchains once secondary trading becomes available.
The Ethereum 2.0 update is also aiming to reduce gas fees, which could make issuances even cheaper.
Furthermore, even with high gas fees, digital security offerings remain cheaper than traditional alternatives.
One advantage of issuing on the Ethereum blockchain is the ability to customize the digital security offering to the needs of the issuer, oftentimes by whitelisting addresses and creating jurisdictional limits for trading.
There are currently two Ethereum standards designed specifically for digital securities: ERC-1400 (built by Polymath) and ERC-1404.
Although most digital security offerings are done as ERC-20 tokens, INX was recently issued as ERC-1404.
Various security types have been issued as digital securities. Currently, the most common type of security are equities (62%), but the fixed-income market has been making headlines, particularly when it comes to commercial papers and real estate-backed bonds.
Revenue sharing securities are also popular, allowing issuers to raise capital without giving away equity.
The largest digital security to date, Overstock, is a digital dividend issued to retail investors of the company’s publicly listed stock. This was a powerful way to promote adoption of digital securities amongst public equity investors.
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