Where is equity trading headed in the future? In Switzerland, digitization is well advanced. It is worthwhile for investors from America or England to take a look at Europe. The crucial prerequisite for issuing digital securities in Switzerland is the Digital Layer Technology (DLT) legislation. The Swiss parliament passed the DLT bill in September 2020, and the “Blockchain Law”, which makes digital share certificates possible in the first place and forms a legal basis, has been in force since February 1, 2021.
Starting signal for first digital shares
The regulations relate primarily to the storage, trading and transfer of shares in the context of so-called settlement. The focus is on register value rights. These are tokens realized via blockchain, which can stand not only for shares, but also for bonds or participation certificates. February 1, 2021 was then also the starting signal for the first digital shares in Switzerland.
Shares – linked to the blockchain
MME is the company that first launched digital share certificates in Switzerland in accordance with the new legislation. Just one second after midnight on February 1, 2021, the time had come. The Swiss consulting company cooperated with the digital share platform “Daura” for this purpose. A few minutes later, the company “Aktionariat AG” followed suit, linking its shares to a token based on the Ethereum blockchain. The company offers Swiss companies a range of instruments to create a market for their digital share certificates. On the same day, crypto bank Sygnum – which claims to be the first digital asset bank ever – launched its first wine tokens.
Earlier attempt with token shares failed
Digitized assets will change the stock business in the future. Different models are at the start. Sygnum, for example, wants to cover the entire range: legal and technical aspects of token issues, trading on its own platform. But also settlement and custody. Tokenized shares, however, are nothing completely new, as Luzius Meisser from the Institute of Banking and Finance at the University of Zurich says. Meisser is CEO and one of the founders of Aktionariat AG: “Back then, however, a contract linked the token to the share.” This had a key disadvantage, he says: “The share was difficult to market because it lacked an explicit legal basis.”
Alethena, a former startup co-funded by Meisser had relied on this method. The shares of individual companies, such as crypto service provider Mt. Pelerin, are tokenized using this method to this day. Thanks to the new legislation, there is now legal certainty, as shares and tokens can be equated. Meisser is therefore also convinced: “If digital shares become established, it will be in Switzerland.” A look at Europe and North America shows: There, the legislation is complicated and not very far-reaching.
Companies that make their shares tradable via the blockchain still have to overcome various technical hurdles.Luzius Meisser, CEO and one of the founders of Aktionariat AG
Internationally binding standards are lacking
Switzerland – together with Liechtenstein and Singapore – is one of the world’s forerunners in the field of digital registered securities. Responsible for this is not only the comparatively quick and comprehensive legislation on the topic of DLT. The development of the trading system of the Swiss stock exchange SIX Digital Exchange (SDX) also seems to be well advanced. It will probably be some time before Europe or North America are at this level. However, this also has disadvantages. For example, there are still no binding international standards for DLT applications for digital book-entry securities in general and for digital shares in particular. At least a kind of quasi-standard seems to have been established with the very often used blockchain Ethereum.
Only a small selection of digital shares so far
Similar to the digital Swiss franc, investors or consumers cannot really invest in digital assets yet. The new investment products are niche products and do not open up new opportunities for the average investor. For investors, the choice of digital registry securities in Switzerland remains relatively small, even months after the change in legislation. To be sure, there is a list from Aktionariat AG. Swiss companies that have linked their shares to tokens can be found there. However, the number is still relatively small:
- Boss Info AG
- TBo Shares
- Aktionariat AG AG Shares
- Green Consensus SA Shares
- i.AM Innovation LAB AG Equity
- SEBA Equity Token
- Medignition Share Token
- Dyves Group AG
It should be noted that the list also includes companies that have chosen a different service provider rather than Aktionariat. In addition, only four of the public companies listed above have a market capitalization of more than CHF 10 million. Moreover, the shares of the lowest three of the listed companies are not even tradable. Competitors such as Sygnum at least point to a full pipeline. However, this also includes other tokenized assets.
Investors could save money thanks to DLT
In addition to February 1, 2021, August 1, 2021 is also an important date for digital certificates. This is because the laws regulating trading with these assets in Switzerland have also been in effect since that day. The number of investment options for potential investors is growing due to the existence of digital securities. Moreover, investors could also save money at some point thanks to DLT. “DLT is […] designed to make clearing, custody and settlement more efficient as well,” Jacques Iffland, chairman of the Capital Markets and Technology Association, emphasizes in this context in the “NZZ”.
What are the opportunities of digital shares?
The only question is when and to what extent service providers will pass on these efficiency benefits to investors. With thoroughly positive consequences:
- Opportunities are opening up through tokenization and digital shares for small and medium-sized companies that do not have the critical size for a regular IPO. Because this is usually associated with significantly higher costs.
- Keeping a “digital share ledger” tracked in real time is one of the big advantages of share tokens.
- Last but not least, of course, the service providers who offer services in connection with the digital share benefit. In addition to newly founded companies, there are also well-known names from the financial sector that are using them to expand their value chain.
Automated dividend distribution possible
Tokenized shares, however, also allow automated processes, for example, in the distribution of dividends or capital increases. But things work differently than with crypto tokens such as Chiliz, Bitcoin or the startup token Dohrnii. This is shown by the following aspects:
- Investors cannot store the share tokens in their own crypto wallet. Here, as with classic shares, trading via banks and storage in the classic securities account is necessary
- Delivery of the digital tokens to private electronic “wallets” is sometimes opposed by the money laundering provision. A company must know its own shareholders
- Also, going to the notary to present the subscription certificates still has to be done in the same way as for traditional capital raisings
The introduction of the new technology can be compared with the change from ring trading to electronic trading on the stock exchange. There, the electronic message followed the shouting in the pit. The stock exchange, however, always remained central.
What are the advantages of a stock corporation?
From the point of view of a corporation, the advantages of issuing and transferring its shares as DLT securities lie primarily in a gain in effectiveness and efficiency, writes the judicial newsletter “Weblaw“. For example, the data programmed on a blockchain is available as secured information to all system participants at the same time. “Therefore, DLT is particularly interesting in areas where actors need to coordinate with each other.” This is the case, he said, in the clearing and settlement of securities (see FAQs at the end of this post). DLT can reduce the amount of coordination required for transactions involving equities, he said.
Many providers – different scope of services
Companies looking to convert their shares into digital assets are currently spoiled for choice, as Luzius Meisser says: “There are more companies offering tokenization than those asking for such services.” However, the service portfolios of these service providers sometimes differ significantly. Daura, for example, offers solutions for a digital or virtual general meeting. Sygnum, on the other hand, is a universal service provider and handles virtually all relevant services for issuers. The future will show which scope of services is in demand among customers.
What is the function of the SIX Digital Exchange (SDX)The SIX Digital Exchange (SDX) is a digital exchange whose launch has already been postponed several times. It is intended to offer a fully integrated trading, settlement and custody service for digital assets. Among other things, the digital exchange will also enable the tokenization of existing securities and provide a secure environment for issuances. In September 2021, the Swiss Financial Market Supervisory Authority officially granted its approval
FAQ – Frequently Asked Questions
Digital shares are tokenized securities. Unlike cryptocurrencies such as bitcoin, these are not stored in a wallet. The Swiss Money Laundering Act prohibits this. Tokenized shares also enable smaller companies to go public. In addition, companies can make automated dividend distributions and hold virtual general meetings.
The financial term custody can be translated as safekeeping of securities. This means that customers of crypto banks can buy, hold and transfer their digital assets easily and securely by order within the banking infrastructure, just like conventional asset classes. The banks also take care of, for example, the collection of investment income or various tax issues.
Clearing is a step in the settlement of exchange transactions. Crypto banks are working on new systems for digital settlement. Clearing follows the actual trading transaction and data reconciliation between seller and buyer. During clearing, the offsetting of receivables and payables between the parties takes place. This is followed by settlement.
Settlement is a term used in finance and is being redefined for digital stock trading. Crypto banks are working on new systems for settlement. Settlement generally refers to the mutual fulfillment of spot and forward transactions. In the context of stock trading, the seller receives money and in return delivers the desired shares to the buyer. After settlement, the buyer is the owner of the shares.
Translated with www.DeepL.com/Translator (free version)