Enthusiasts for security tokenisation must sometimes feel like Old Testament prophets waiting for the new dispensation to begin. Yet the fact that they are waiting at all is a mystery. Theory and practice (albeit modest, so far) both suggest that issuers ought to be queuing up to issue security tokens. Tokenisation would cut their cost of raising capital significantly, by widening the investor base, cutting issuance fees and trimming listing and investor servicing charges. Yet even the most optimistic forecasts do not expect debt and equity security token offerings (STOs) to clear much above, say, US$4.0 trillion by the end of the decade. Which suggests tokenisation will not make much of dent in global equity and bond markets capitalised even today at US$225 trillion. The optimists have many reasons to be cautious about the rate of growth. It is hard to convince issuers to take the risk, especially when many extant STOs have failed to reach their fund-raising target, and securities laws and regulations are out of joint with the new technique. The start-ups aimed at making the primary markets more efficient seem to lack ambition. The sheer plethora and variety of security tokenisation platforms is daunting, and they are virtually all constrained by limited licences and unkind memories of the reputational issues at some crypto-currency exchanges. Though several established stock exchanges have embraced tokenisation, most are worried about cannibalising their existing revenues. So the marquee STO has yet to happen, and the security token markets look set for slow and unspectacular growth. That said, cumulative STOs will offer substantial scope for trading activity – perhaps 20 times as much as the value of accumulated outstandings, or more than US$150 trillion a year by, say, 2030. High-frequency traders, FX traders and hedge funds are already active in the crypto-currency and Decentralised Finance (DeFi) markets and should not struggle to adapt to trading security tokens as well, legacy systems apart. They and other trading houses ought to value round-the-clock trading, new asset classes in tradeable forms and the ability to arbitrage between tokenisation platforms as well as between tokenisation platforms and traditional marketplaces. As liquidity increases, price information will fuel the production of derivative instruments that increase liquidity still further. An active secondary market would do much to boost the primary markets too, not least as a source of price information for new issues. This happy outcome hinges on inter-operability, which in turn depends on the development of standards that make API-intermediated data exchanges between tokenisation platforms and between tokenisation platforms and traditional marketplaces friction-free. And, in the long run, even traders will baulk at the destiny outlined for them already by developments in the DeFi markets: their replacement by algorithmically operated liquidity pools that dispense with fee and spread-earning intermediaries such as brokers and market makers altogether. At this Future of Finance webinar, a panel of experts will consider what is going right and what is going wrong in security token issuance and trading, and share ideas about what can be done to bring a new and better capital market system closer.

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