Security tokens, the next generation of electronic trading

Tuesday 8 June 2021 08:50 CET | Editor: Alin Popa | Interview

The Paypers has sat with Darius Liu, ADDX to learn more about security tokens and regtech solutions that enable investment aficionados to fight financial crime and stay compliant in a tokenised economy

What is ADDX? What are security tokens?

ADDX is a digital securities platform that brings private market access to individual accredited investors. We are fully regulated by the Monetary Authority of Singapore for the issuance, custody, and secondary trading of digital securities, or security tokens.

Using blockchain and smart contract technology, ADDX tokenises and fractionalises multi-asset securities such as hedge funds, wholesale bonds, and private equity, overcoming manual processes in the traditional private capital space that have hitherto made it impossible to serve large numbers of smaller investors. 

The creation of regulated security tokens reduces the minimum investment size for such investments from USD 1 million to USD 20,000 or less. This extends access to all individual accredited investors, not just institutions or ultra-high-net-worth individuals.

Security tokens represent the next generation of electronic trading. They are stocks, bonds, funds, and other securities taking the form of tokens on a blockchain rather than physical certificates or some other form. Using blockchain technology as the foundation on which securities are built, managed, and traded yields important efficiencies, such as fractionalisation and reduced settlement times – from the market norm of two working days to instant. 

2021 might be the year digital assets/tokens/crypto will be entering the mainstream financial world. What are your thoughts on this, considering some of the gaps within the digital assets market?

In 2020, digital securities made significant progress globally among regulators, financial institutions, issuers, and investors. They have entered the mainstream. We expect digital securities to grow by leaps and bounds in 2021 and to constitute a rising share of private market issuances.

As the frontrunner in this space, ADDX has listed private funds and bonds, and we plan to enable access to equity in unicorns this year. Anyone who has an ADDX account can get access to these otherwise inaccessible investment opportunities – we currently serve accredited investors from 24 countries, spanning Asia, Europe, the Americas (excluding the US), Australia and New Zealand.

In any jurisdiction, the regulator first needs to decide how it wants to regulate digital securities. It could simply recognise that digital securities fall under the same regulatory framework as traditional securities, which was what the Monetary Authority of Singapore did in August 2017 when it clarified the regulatory position on the offer of digital tokens. Alternatively, it can build a separate framework for digital securities. This is more time consuming as it means more rounds of consultation with industry players.

After regulators adopt a clear legal and regulatory framework on security tokens, there are further steps they can take to drive the sector’s expansion and maturity. This includes building the rules and ecosystem to enable security token owners to perform the full range of actions possible for traditional securities: such as transferring the securities, pledging them as collateral, and taking both long and short positions. Bridging these gaps will require further conversations among regulators, industry players and legal and compliance specialists.

How can effective KYC processes drive the sector’s expansion and maturity? 

KYC processes are critical in enabling digital securities, as they maintain the high-trust environment digital securities need to thrive. Currently, digital securities are being used mainly in the private markets, where the potential efficiency gains from using blockchain technology are the greatest. In most jurisdictions, private market products are restricted to accredited or sophisticated investors. KYC processes are therefore required to whitelist investors who apply to become users. Once whitelisted, they can subscribe to primary issuances and take part in secondary trading on an exchange.

ADDX acquired a license at the beginning of 2020. Being an investment platform, what were the must-have regtech solutions that you needed to be in business?

We currently use two regtech solutions – one for identity and document verification, and another for risk assessment. Because digital securities are designed to increase significantly the number of investors who can subscribe to a private capital issuance, efficient KYC processes become an important driver of growth and scale among digital securities platforms.

What regtech solution would you consider/need when ADDX scales across multiple jurisdictions?

As ADDX expands into multiple jurisdictions, we would need similar regtech solutions for identity and document verification, as well as risk assessment. However, the solution provider for each new jurisdiction must possess a keen understanding of local requirements and circumstances. To give just one example: To what extent does this jurisdiction require the collection of tax assessment information of new investors, and if so, how can that information be collected in a rigorous yet efficient manner?

About Darius Liu

Darius Liu is Co-Founder and Chief Operating Officer of ADDX. He played a key role in its journey towards becoming a regulated financial institution. He was previously Vice President of Total Portfolio Strategy at GIC and has held roles in Singapore’s finance and defence ministries.



About ADDX

ADDX democratises access to private capital markets, putting previously out-of-reach investments in the hands of underserved investors. Backed by Singapore Exchange and Temasek subsidiary Heliconia Capital, ADDX is fully regulated by the Monetary Authority of Singapore for the issuance, custody, and secondary trading of digital securities. 

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Keywords: security token, cybersecurity, tokenization, blockchain, digital assets, regtech
Categories: Fraud & Financial Crime
Countries: Singapore
This article is part of category

Fraud & Financial Crime