Are digital securities the salvation for SMEs?

Blockchain scores points with increasing seriousness

Until now, many people are only aware of blockchain technology in connection with cryptocurrencies. Individual coins of the respective currencies are stored as unfalsifiable, unalterable, unique data blocks in the blockchain. With the spread of technology and the increasing seriousness of the associated offers, political interest in the use of blockchains has awakened. The decisive factor for this is the high level of protection against forgery of the data records, which are virtually self-organized and can be easily verified with certain calculations. The data on a blockchain can be stored in encrypted form if required — this ensures that it remains protected. Nevertheless, the authenticity of the data chain can still be verified at any time.

Financial sector stability is strengthened by blockchain

Blockchain is now regarded as a guarantee of stability in the financial sector. Anyone who follows the federal government's blockchain strategy will find real gold digging sentiment there. In autumn 2019, a law was drafted which gives blockchain a broad field of activity. The financial sector should play a central role in this. In addition to ensuring stability, it is also desirable to stimulate new ideas and trends. The new law regulates the handling of digital investment products. Financial services that deal with cryptocurrencies or digital securities are subject to a permit requirement. Providers who want to store, issue or trade digital securities require a corresponding license. As a result of this licensing requirement, the Federal Government has created a legal framework. It protects investors at a high level and ensures professional and reputable support for the corresponding products.

Current: Issuance of digital securities

The first digital securities for SME financing were already issued at the end of 2019. The financing for FR L'Osteria SE brought in more than two million euros. The issuance, transfer of ownership and secure storage of the shares in a digital portfolio were organized by the supervising financial service provider in collaboration with a renowned law firm. This example could soon set a course. Many medium-sized companies need fresh capital to compensate for the losses caused by the corona crisis. Others could seize opportunities that would require investment. By issuing digital securities, participation in the company can take place quickly and relatively unbureaucratically. The risk can be spread across numerous investors. In return, they can expect good returns if successful.

SMEs in particular are used to working efficiently and profitably. Many of the companies are family-run and are strongly committed to the success of the company. In this sense, the cuts caused by the current crisis also represent an opportunity for change. Instead of asking the house bank for the necessary investments, companies can offer digital securities on the market. They therefore remain independent of major financial institutions and do not have to submit to unfavorable conditions for a loan.

What are the advantages of digital securities compared to traditional investment products?

In terms of their design and regulatory requirements, digital securities should be treated in the same way as traditional securities. They can be set up like a bond with a fixed interest rate or can represent company shares like a share. However, the issuance and sale of digital securities requires significantly lower administrative costs. Intermediaries such as banks, notaries and central administrators can be dispensed with.

The issuing companies decide for themselves which structure their digital securities should receive based on a blockchain. The digital shares are sold directly to investors or investors. Any denominations are possible, which enable investors to invest even with smaller amounts. The issue, transfer of ownership and other actions, such as interest or dividend payments, are stored forgery-proof via the blockchain.

The issuance of digital shares, the so-called security token, via a permissioned, private blockchain offers investors a high level of protection, both through blockchain technology and through appropriate legal regulation. Since the tokenized shares reflect real tangible assets, they are largely protected against currency fluctuations and turbulence on the equity markets.