Welcome back to another edition of Old Men, New Money, where today we’re peeling back the layers on a topic many find unexciting but crucial—digital securities infrastructure. I’m Douglas Borthwick, and while everyone might gravitate towards talks on the latest token offerings or blockchain innovations, the heartbeat of our industry lies within the infrastructure. This is the silent savior that determines the success of digital securities.
The Role of Infrastructure in Digital Securities
Infrastructure may seem mundane, but it forms the backbone of digital securities. We’re talking about alternative trading systems (ATS), transfer agents, and custodians—each playing a pivotal role to ensure the market runs smoothly. A breakdown in any of these components can bring trading to a halt, underscoring its importance.
Building the Foundation: Lessons from INX
At INX, we learned early the significance of self-reliance for infrastructure because waiting for non-existent systems wasn’t an option. We took matters into our own hands by acquiring essential components like Open Finance, which brought broker-dealer and ATS capabilities, and Tokensoft’s transfer agent services. In doing so, we became our own infrastructure.
Understanding the Three-Layer Stack
Layer One: Custody
Custody is the bedrock, involving secure holding of digital assets. Unlike traditional securities, custody in digital entails control over private keys which directly translates to asset control. Various models exist: self-custody, third-party custody, and multisignature custody—each with varying degrees of control and regulatory compliance requirements.Layer Two: Transfer Agent Services
The silent workhorses maintaining records, ensuring compliant transfer of ownership, and bridging traditional and blockchain records. The dual-record system provides advantages like key recovery, not possible with typical cryptocurrencies.Layer Three: Trading Venues
ATS platforms provide venues for secondary trading, critical for most digital securities which can’t be listed on traditional exchanges. These platforms manage everything from regulatory compliance to market liquidity.
Challenges and Solutions in Digital Securities
Despite advancements, digital securities infrastructure faces bottlenecks such as limited trading venues and custody solutions. The US lags behind global counterparts like Switzerland and Singapore due to fragmented regulations. However, consolidation, technological improvement, and institutional adoption promise a positive trajectory over the next few years.
The Broader Horizon: Regulations and Market Dynamics
The regulatory environment is complex, requiring ATSs to align with various compliance mandates. Traditional exchanges like NASDAQ’s anticipated entry into digital trading is poised to significantly enhance market credibility and liquidity, positioning it for transformative growth.
Conclusion: Facing the Future with Strong Infrastructure
As we forge ahead, focus must remain on robust infrastructure development. As we learned at INX, success hinges on not just innovation but reliable infrastructure. Whether you’re an issuer or investor, understanding and engaging with the infrastructure is indispensable.
In the next series of Old Men New Money, we delve into corporate treasury strategies with insights on Bitcoin and Ethereum treasury approaches. Until then, stay curious and informed. Experience is the best teacher in this quickly evolving landscape. I’m Douglas Borthwick. If you found these insights beneficial, share them—education is key in shaping the industry’s future.
Final Thoughts
While infrastructure may not get the same attention as flashy innovations, remember: it’s the steady, often unnoticed elements like ‘picks and shovels’ that build lasting value in any gold rush. Embrace it, because in the realm of digital securities, infrastructure is everything.
To move on to Module 2, click below:
Episode 5: Blockchain 101: What Wall Street Needs to Know
Understanding Blockchain: A Financial Professional’s Guide
