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The blockchain
August 18, 2022

All about blockchain securities trading

Everything you need to know about how to trade securities on the blockchain, including how to find security token exchanges and invest in security tokens on Polymesh.

So you know how to invest in traditional securities on Nasdaq, and how to purchase cryptocurrency on Coinbase – what about blockchain securities trading? 

In this blog we’ll take a look at trading securities on the blockchain. You’ll learn:

  • The advantages of blockchain for trading securities
  • The disadvantages of blockchain for trading securities 
  • How to find a blockchain exchange
  • Which security tokens live on Polymesh
  • Options for trading securities on Polymesh

And more!

What can be traded on the blockchain?

As a digital distributed ledger, blockchain is highly useful for transactions involving any assets– whether currency, commodities, or securities. We’ll focus in this article on blockchain securities trading, the blockchain-based trading of financial securities.

When it comes to trading securities, blockchain can be used to trade both traditional securities as well as traditionally illiquid assets. Traditional securities that can be traded on the blockchain include stocks, bonds, and debt. Traditionally illiquid assets that can be tokenized or fractionalized and traded with liquidity on blockchain include private placements, real estate, fine art, intellectual property, synthetic asset baskets, and more.

Here are a few key advantages of blockchain for trading securities: 

  • Transparency: Blockchain can serve as a verifiable golden source of truth for all parties, eliminating reliance on trust in a third-party (and the risks for security, privacy, and manipulation that go along with it).
  • Immutability: Blockchain can’t be unilaterally modified by one entity, meaning its data can’t be altered or destroyed without consensus.
  • Efficiency: Blockchain removes the need for a central intermediary and automates traditionally manual, labour-intensive processes. This brings higher efficiency and faster operations while reducing costs and risk of human error.
  • Compliance: Blockchain can improve compliance enforcement and reporting by increasing the security, transparency, and traceability of data. With Polymesh, it’s possible to automate even complex compliance requirements efficiently and cost-effectively. 
  • Liquidity: Blockchain increases liquidity with a market that can operate 24/7, bigger global investor pools, and innovative new product offerings through fractionalization.

Of course, there are disadvantages of blockchain too. Depending on what blockchain you use, you could encounter issues such as:

  • Hard forks
  • Sybil attacks
  • System failures
  • High costs
  • Long computing times
  • Extra due diligence required

Not to mention the inability to meet legal requirements around regulated assets!

This is why Polymesh is needed: it provides institutional-grade blockchain infrastructure that solves these problems to meet regulatory needs for governance, identity, compliance, confidentiality, and settlement. We call them the 5 pillars– find an overview of them here.

What security tokens live on Polymesh?

As a blockchain for security tokens, Polymesh expects to host not only equity, bonds, and funds, but also physical assets such as the fractional ownership of vehicles, racehorses, real estate, and land; as well as royalty tokens for creatives, or any of the other exciting cases discussed above. There’s no discrimination when it comes to what tokenized securities are possible on Polymesh. (Actually, there’s no discrimination for any tokens on Polymesh– more on that here). 

At the time of posting, there are 18 assets created on Polymesh and 23 tickers registered. You can see activity for security tokens on Polymesh with the Subscan block explorer.

The block explorer reminds us: we have a Request for Proposals (RFP) for a finance-oriented block explorer oriented to Polymesh’s exact layer 1 data that can leverage it to report on identity, assets, and settlements. If you think you can build this, we encourage you to apply for a grant

At the moment there’s no easily readable reporting on security tokens on Polymesh, but when the finance-oriented block explorer is created, it will be possible to view and index security tokens on Polymesh, provide them with context, and perhaps even track their prices. 

Until then, you can use Subscan to track any blockchain activity, or follow @PolymeshNetwork on Twitter, where we share monthly updates on Polymesh stats (including tickers registered and assets created). You can also crawl the Polymesh blog for any announced integrations with security token issuers and tokenization platforms or products.

Where are security tokens traded?

To list a tokenized security, issuers first need to use a tokenization platform to tokenize the asset. Some platforms also feature blockchain trading, enabling investors to view and purchase issued tokens on the same platform the issuer used to create them. Tokenization platforms with built-in blockchain trading are a good option for companies who don’t want to do the work of routing tokens to an external blockchain exchange or other service designed for trading securities.

Some tokenization service providers such as Polymath or DigiShares offer token management and trading platforms that can be white-labeled, making them especially useful for companies wanting to create their own marketplace of tokenized securities. The downside, of course, is that the company will have to attract investors and raise awareness of their offering through their own marketing efforts.

Issuers who want more liquidity and a bigger pool of investors and are concerned with US or Canadian regulations can use an established Alternative Trading System (ATS). An ATS is a non-exchange trading venue that matches buyers and sellers to find counterparties for transactions. They typically have a broker-dealer license.

Another option is to use a blockchain exchange, an exchange that hosts digital assets and allows investors to buy and sell security tokens similar to how they’d buy stocks or other investments through an investment exchange.

Blockchain exchanges can either be centralized (exchanges which act as a third-party in transactions between buyer and seller) or decentralized (exchanges which operate as peer-to-peer marketplaces where traders make transactions directly). Most blockchain exchanges also handle trading of cryptocurrency, but a few security token offering (STO) platforms were built to be blockchain stock exchanges specifically. 

To find a blockchain exchange, you can use Security Token Market (STOMarket.com), where you can peruse security tokens to buy and see which blockchain exchange they’re trading on. From there, you can register on the exchange to purchase the security token.

Is there a blockchain exchange for security tokens on Polymesh?

Polymesh is currently integrated with a blockchain exchange Tokenise, and also integrated with tokenization platforms that feature their own systems for trading securities. 

One platform is DigiShares, a white-label tokenization platform that allows issuers to tokenize assets on Polymesh and features a cap table that is automatically updated when tokens are traded, investor onboarding, and a bulletin-board internal trading system. Digishares specializes in tokenizing large physical assets such as real estate and works with asset managers, investment fund managers, real estate developers, renewables project developers and others interested in more efficient ways of raising capital and managing a large group of investors in their fund.

Polymesh is also integrated with Polymath’s token exchange service, which also provides companies with their own platform to create listings and onboard their investors. As with DigiShares’ platform, Polymath’s service enables investors to participate in blockchain securities trading for the issuer’s own products directly instead of requiring the issuer to provide these security token offerings offline or through a blockchain stock exchange, where they’re traded side-by-side with others.

Services like those offered by Polymath and Digishares are a good option for issuers or companies who want to host a marketplace with their own security tokens only. Companies interested in these services include those wanting to tokenize real estate, royalties, aviation assets, co-ops, and options, among many others. 

If you’re not aware of any issuers offering security tokens on Polymesh through one of these services, you’ll have to do some self-research about the tokens currently on-chain. As a start, you can scan the chain using Subscan to find out which tokens were created, or use the finance-oriented block explorer when it’s deployed. From there, you’ll have to look into the token to discover who’s issuing it and where you can purchase it from. 

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