Digital Revolution Forces Capital Markets To Rethink Strategies

Digital transformation is revolutionizing capital markets globally. Securities exchanges are rethinking their business models and strategies to remain competitive and capitalize on new opportunities. New technologies are driving changes in how securities are traded, priced, and settled. Data is becoming a key differentiator as exchanges seek to provide more insight to market participants. Blockchain is also emerging as a key technology with the potential to streamline post-trade processes.

This transformation is a journey that requires organizations to fundamentally rethink how they operate and deliver value to their customers. For capital markets firms, the journey is amplified by the need to meet the ever-changing regulatory landscape, operate in real time, and provide 24/7 customer service.

To succeed, firms must focus on rethinking their business models, developing new capabilities, and adopting new technologies. This requires a fundamental shift in mind-set from top to bottom of the organization. Firms must move away from siloed thinking and operating in isolated pockets of excellence, and instead embrace an ecosystem mindset where they partner with other firms to drive innovation.

Blockchain is not only powering the fast-growing cryptocurrency industry but also reshaping traditional finance. One of the most promising blockchain use cases in finance is the issuance and trading of digital securities.

What Are Digital Securities?

Digital securities, also known as tokenized securities or security tokens, are financial securities that are digitally represented on a blockchain. While residing on a decentralized network, they are still under the purview of traditional securities laws.

To understand digital securities, we should start by defining what securities are in the first place. Financial securities are fungible and tradable financial instruments used to raise funds in private and public markets.

Traditionally, there have been three main types of securities:

• equity (such as stakes in private companies or stock in public companies);
• debt (such as bonds);
• and hybrid, which combines the attributes of equity and bonds (such as convertible bonds and preferred stock).

Financial derivatives, including options and futures, are also regarded as securities. Thus, while commodities are not securities, commodity-based derivatives (like oil, gold and bitcoin futures) are considered securities.

In recent years, the trend of digitalization has accelerated, with investors monitoring the rapid growth of crypto sectors like decentralized finance (DeFi) and non-fungible tokens (NFTs). Nevertheless, traditional securities markets are also trialing and adopting the technology.

The securities market is huge, and the dematerialization of equity, bonds, and derivatives is only starting and will likely accelerate in the coming years.

As of 2021, data from the Securities Industry and Financial Market Association (SIFMA) shows that the size of the global bond market (total debt outstanding) is at US$119 trillion. Elsewhere, the size of the global stock markets was worth about US$90 trillion in 2020, while the total assets under management (AUM) across private equity markets reached an all-time high of $7.4 trillion as per a recent McKinsey report.

Digital Versus Traditional Securities

Digital securities have the same attributes as traditional securities in terms of their legal status.

Still, they are more flexible, faster, and easier to handle. Think about the difference between digital files and paper documents – a similar gap can be determined between digital versus traditional securities.

Even today, issuing securities is a cumbersome process, as it requires much time, money, and effort spent for what is mostly a manual and paper-based system. Elsewhere, the cost of issuance of digital securities is much lower, as the process is more straightforward and convenient.

Thanks to blockchain, digital securities are more accessible, transparent, flexible, and liquid.

The promise of borderless liquidity is probably the most valuable feature of digital securities.

Thanks to fractionalization, digital securities can represent even the most illiquid assets, such as real estate and art. They can be traded on global digital securities exchanges and marketplaces, which has been unachievable for privately held traditional securities.

Accessibility and real global reach are on the horizon. This will change the game not only for investors but for small and midsize companies that will have access to capital as never before.

Over the past few years, some global exchanges have embarked on journeys in digital transformation to reshape their business models, redefine and refresh the customer experience, support new product and service offerings, and strengthen regulatory compliance. Among key focus areas for technology enablement:

• Reduce manual operations. Automate processes through digital interventions across member onboarding, payments, and listings.
• Provide data on demand. Develop models that provide data and information to help clients make efficient trading decisions and better manage capital.
• Reduce latency for various services. Minimize turnaround time for high-volume activities, including risk and regulatory reporting.
• Launch digital products and services. Reduce time to market for blockchain, chatbots, and other offerings.

• Access global exchanges. Partner to provide additional benefits for companies, such as dual listing and increased investor reach.
• Enhance market surveillance. Better identify market manipulation, fraud, and compliance issues with minimal manual intervention.

Digital transformation in capital markets is being enabled by a portfolio of emerging technologies that address current front- and back-end challenges while also making exchanges “future-ready.”

It is clear that digital transformation is revolutionizing capital markets globally. Securities exchanges are rethinking their business models and strategies to remain competitive and capitalize on new opportunities. New technologies are driving changes in how securities are traded, priced, and settled. Blockchain and data are becoming key differentiators, as exchanges seek to provide more insight to market participants.

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