Blockchain: Opportunity or competition for traditional investment business?
In the 1990s, the introduction of the Xetra electronic trading system, which largely replaced parquet trading on Deutsche Börse, was a revolution. Such a moment could also be ahead of us now, because the blockchain ensures that, in addition to Bitcoin & Co., collectibles and securities can also be sold and stored digitally. But how does it actually work and what opportunities and risks does digital securities trading entail?
Why can blockchain change the securities business?
It is widely known that cryptocurrencies are traded on the blockchain. On the other hand, the revolutionary development towards digital securities trading, which offers significant benefits for market participants. Because the decentralized nature of blockchain could significantly improve efficiency, transparency and security in an industry that is traditionally characterized by complex processes and intermediaries. The use of blockchain therefore has the potential to fundamentally change and democratize traditional securities business and open up new perspectives for issuers and investors.
DLT makes it possible
But how does crypto securities trading actually work? The basis is a blockchain-based trading and settlement system as part of the pilot regime Distributed Ledger Technology (DLT). This is a technology for recording information via a decentralized database. DLT is mostly based on public key cryptography, a cryptographic system that uses key pairs: on the one hand, public keys that are known and are used for identification, and on the other hand private keys, which are kept secret and used for authentication and encryption. The blockchain is a subpart of DLT, in which several pieces of information are combined into a block and blocks are stored in chronological order in a linked manner in distributed databases.
With special DLT rules, the EU created a “sandbox” in 2023, in which market participants can test trading, settlement and clearing processes for investments issued on the blockchain. The draft of MICA regulation (Markets in Crypto-Assets Regulation) provides a comprehensive set of rules for the regulation of crypto assets, including securities. On June 10, 2021, Germany also has the law on electronic securities (eWPG for short) came into force. For the first time, it was possible to issue (crypto) securities purely digitally without physical documents, which can represent real assets such as stocks, bonds or other financial instruments in digital form on a blockchain.
Benefits of digital securities
As already mentioned, digital securities on the blockchain have advantages for all market participants. These include democratization, speed, security and efficiency. This is because digital securities are stored decentrally on various computers via the blockchain. There is no need for a central securities depository, as the “settlement” is carried out digitally directly. As a result, processes are significantly shortened and costs are reduced.
One Study by Porsche Consulting confirms the efficiency gain: At the time of publication in December 2023, the cost savings potential of investment products based on Distributed Ledger Technology (DLT) was up to 22 percent, according to Porsche Consulting. For example, digital assets could save financial institutions up to 15 million euros per year by eliminating unnecessary intermediaries. By 2028, the savings potential is even likely to rise to up to 85 percent.
Digital securities transactions are already being tested. A current example of the use of blockchain in securities business is Cooperation between Stuttgart Stock Exchange and the European Central Bank (ECB). Both are currently testing the use of blockchain-based securities. The aim of the project is to improve efficiency and security when issuing and trading securities. The tests include processing transactions in real time and using digital euros for payment processing. This pilot project could serve as a blueprint for the wider integration of DLT into European financial markets.
From an investor's point of view, it is positive that the use of blockchain in securities transactions should help democratize access to capital markets such as private markets. This is because the tokenization of assets, i.e. their digital representation on a blockchain, also makes assets tradable that were previously reserved for institutional investors. Retail investors can also invest in fractions of an asset in this way and thus diversify their portfolio.
FINEXITY has established itself in the area of tokenized tangible assets and private market investments and even launched the first crypto security in September 2024 — a yacht investment in the port of Marbella — issued. Michael Ost, CEO Europe at FINEXITY, welcomed the development: “With the first crypto security that can be subscribed via FINEXITY, we are expanding our range of offerings on both sides — both for investors and issuers — and strengthening our position as a technological pioneer in private market investments.”
