UPRETS INSIGHTS ｜ The Myth of Liquidity in the Digital Security Space
Blockchain technology is not a new concept. Some of the major attractions to this technology include transparency, enhanced security, improved traceability, reduced costs, increased efficiency, and speed. It is now possible to enter new markets that in the past seemed to be a preserve of the wealthy or a specific class of people courtesy of this technology due to digitalization.
Digitalization and Liquidity
Digitalization refers to the process of issuing a digital security that represents a real tradable asset. For example, a real-estate company can issue a digital security that represents ownership of a property that it wants to sell. When a company digitalizes assets, it makes it easy to have fractional ownership, access to a global market on a 24/7 basis, makes it easy to automate compliance, reduces costs, enables rapid settlement and increases liquidity.
What Is Liquidity?
An asset with high liquidity has a large volume of orders in the market.
What traders need?
· Transparent, open and secure market
· High liquidity, making it possible to trade large positions in short time period
· Organic trading volume and demand on both sides.
Liquidity is the degree to which a security or an asset can be quickly converted to cash. It thus refers to the speed with which such as an asset can be sold or bought in the market. Cash is the most liquid asset in the world. Examples of illiquid items are tangible assets such as land, vehicles, and buildings.
Can digital securities fulfill their promise of liquidity? by Julianne Sloane
What Is A Digital Security?
It is one that passes the Howey Test. It thus means that it must fulfill the following; be an investment of money, the investment needs to be in a common enterprise, and there should be an expectation of profits from 3rd parties or the promoters.
The security can represent ownership, participation in an investment fund, or shares in a company. One can then trade the digital securities in a secondary market.
Why Digital Securities Compliance with Laws
One of the main factors that made ICOs are unpopular is the issue of regulation. A lot of dummy companies with no direction were founded only to end up defrauding investors. Digital security offerings are regulated and have a legal framework. UPRETS, for instance, has a parent company XIN Real Estate Group which trades in major markets including the NYSE.
Ensures Efficiency in Cross-border Trading
Trading securities across borders is usually characterized by time wastage as every party seems to employ an agent for the transactions. Mistrust is also very common and sometimes and a lot of intermediaries come into play. Storing the information in a central place makes it easy to verify digital assets and pass ownership within a short time.
Transparency
One of the disadvantages of private markets is that there are high chances that the other party will fail to fulfill its obligations. Digital Securities apply smart contracts that will self-execute once certain conditions are met which lowers the chances of default.
Digital Security Offerings Defined
Digital Security Offering refers to the process where an investor exchanges money, mostly fiat, for digital securities that represent an investment. Digital security offerings popularity started to rise in late 2018 as a replacement of ICOs, which were highly unregulated and risky. digital security offerings are highly regulated, and that is why many people are considering them as investment options.
Security Markets And Liquidity Issues
Is a digital security a liquid asset? It is an interesting question with different approaches when you want an answer.
The digital security will only become liquid if you have the right infrastructure. The digital security becomes liquid only after it is easy to exchange it in a secondary market.
A secondary market is a platform where securities, such as digital securities are offered to the general public after being traded on the primary markets. Investors can thus buy securities or sell those they already own through such a market. It is also important that there is enough demand for the digital security or else it will remain illiquid.
For a digital security to become liquid, there should be both funding and market liquidity. Funding liquidity is the availability of funding or credit mechanisms that allow institutions to take leverage or borrow. Market liquidity refers to the ability of the different players in a market to make large purchases or sells without affecting the overall prices. The market becomes liquid when financial liquidity is high and vice-versa.
According to Debunking the Myth of Liquidity in Digital Securities written by digital security market, liquidity come from the following channels:
#1 Peer-to-peer / Private market — Just because your digital security won’t have instant liquidity up to any volume like with an IPO, it doesn’t mean you can’t create your own marketplace for buyers to compliantly buy your assets via a digital security and resell them back to you or to someone else via your marketplace. Many cost-effective technology providers are making this a feasible option for asset managers to consider as a way to create a market for their assets. An inefficient market is better than no market at all.
#2 OTC Desk / Broker Syndicate — Partnering up with the right firms specialized in market making and OTC will provide liquidity services for your digital security on specific exchanges or directly with you in a partnership (perhaps on your private market). This way buyers can go through a reliable middleman who can control your price and offer a bigger volume of liquidity.
#3 Digital Security Exchange Listing — Strongly consider the underlying compliance protocol that your digital security is using. These protocols are supported by specific digital securities exchanges around the world, usually on more than one. This means that you can list your digital securities on these exchanges for buyers to find or at the very least for sellers to be able to list on multiple exchange options to try and find liquidity.
Security Market Markers
Digitalization Issuance Platforms
These platforms aim at providing standardization or issuance of digital securities. Companies that seek to digitalize or access higher liquidity will approach such a platform. There are many platforms with varying focus. Some focus on digital securities while others launch asset-backed digital securities.
Exchanges
They are part of the ecosystem that provides liquidity. It is essential the potential investors can access a digital security easily once it has been released by issuing platforms and exchange makes this a reality. Some of the key players to offer liquidity include National Stock Exchanges, Digital Security Exchanges, and Crypto Exchanges. An exchange ensures that investors can find buyers/sellers quick and at some desired price. The trade between buyers and sellers will happen almost instantaneously.
A good example is Binance, which partnered in 2018 with the Malta Stock Exchange and Neufund to provide a decentralized and regulated exchange ecosystem for trading and listing digitalized securities.
Why Liquidity Matters in Such Markets?
The speed with which someone can change an asset to cash is what bars many people from investing. Take, for instance; you want to invest in real estate. You need to save or raise cash equivalent to the value of the said property. However, when you need cash fast, you have to go through the selling process that will involve various 3rd parties.
UPRETS eliminates all these challenges by providing investors with direct access to real estate deals from all over the world. It is a one-stop-shop for investors and developers.
The latter get services such as consultancy, administration, distribution, investor document management, and underlying technology. Investors will get a legal structure, benefit from fast transactions, and provide a variety of investment options, enjoy fractionalization and investment management.
In the near future, we will see the emergence of more capital market infrastructure solutions, which includes Custodians, Secondary Exchanges, Payment Options, Accounting Agencies and Regulatory Guidances. With the maturation of the infrastructures, the liquidity of this novel capital market would be much better than the current status.
Author:
Kadeem Clarke@Clarke Global Marketing
Ran Wei@UPRETS, Dan Zhi@UPRETS
About UPRETS:
UPRETS is a platform focused on simplifying investment in real estate.
We are dedicated to providing a convenient, compliant and advanced real estate digital securitization platform for property developers, asset owners and investors globally.
By utilizing UPRETS platform, real estate developers and assets owners can create digital securities for their properties, allowing investors to benefit from the rental dividends and capital appreciation of the properties in major global cities.
Backed by a publicly listed real estate conglomerate (NYSE:XIN) and our award-winning, patented blockchain technology, Xbolt, we bring a network, experience and luxury assets to the platform.
For more information about UPRETS,
visit www.uprets.com
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