Building Blocks podcast host and Prime Trust CSO Kevin Lehtinitty talks to tZERO CEO Saum Noursalehi about their alternative trading system and the future of financial infrastructure
Back in February, we were reminded why the financial system needs an update to its settlement processes. Trading of popular securities, $GME and $AMC, was restricted on various trading platforms when the trading volume of these assets over-extended the capacity and capital reserves of the underlying clearing houses. The frustration that many retail traders experienced brought attention to the need for instantaneous settlement -- something that Prime Trust supports. (We recently wrote about this: T+0: Instant Settlement for Digital Assets and Private Securities.)
In the latest episode of the Building Blocks podcast, host and Prime Trust CSO Kevin Lehtinitty discusses the state of financial infrastructure today, across private and public securities markets, with tZERO CEO Saum Noursalehi. Their conversation covered how private securities and digital assets create new investment opportunities for investors, and the aging - or antiquated - infrastructure that much of the financial system still depends on.
tZERO, as their name suggests, is an alternative trading system (ATS) that supports T+0, which is short for trade + zero days -- the instant settling of a trade. Using blockchain technology, tZERO provides a marketplace for digital assets, offering new liquidity for private and tokenized securities. With the ability to tokenize a range of assets via smart contracts and provide retail investors with new options, the marketplace democratizes access to private assets.
Here are the top 5 takeaways from Kevin and Saum’s recent chat:
1. Liquidity is created when assets are accessible
Liquidity has long been a problem when it comes to the private security market. tZERO allows investors to participate in private company offerings and trade those assets, creating liquidity. Without liquidity events like this, companies may feel compelled to go public in order to offer their shareholders a market.
tZERO solves for liquidity by providing a marketplace with access to private securities. But this solution doesn’t just apply to private companies who have issued shares to private investors like venture capitalists or angel investors, it also offers liquidity to retail investors who participate in crowdfunding events through Reg CF and Reg A+.
2. tZERO is modernizing financial infrastructure
The plumbing of Wall Street needs an overhaul, and the tZERO marketplace provides that updated financial infrastructure to private markets. tZERO supports the trading of tokenized assets, leveraging blockchain technology. Blockchain technology brings the next level of automation to the antiquated financial system.
Blockchain also supports the fractionalization of assets. This means that a previously illiquid asset can be tokenized on-chain using smart contracts. For example, now we can fractionalize and tokenize a building and allow investors to participate, offering them dividends based on the yield of the asset. Commercial real estate has traditionally been closed to most investors, making them ineligible to receive the kinds of yields that an asset like this provides.
3. Tokenized securities are programmable assets
The trading of assets is guided by rules and regulations encompassing compliance that determines when and where assets can be bought and sold. This removes manual review processes, eliminating wait times and missed market opportunities.
Tokenized assets are a significant financial innovation because they can be programmed with these rules and regulations directly into the ‘contract logic’ of the asset. Smart contract technology allows issuers to program the regulatory constraints of a given asset into the asset itself. Utility tokens are programmable, so platform or product ecosystems could have a security with utility included. Assets can be tokenized that aren’t traditionally thought of as securities, opening up many new markets.
4. ATSs offer retail investors new access to an asset class that was previously restricted
Typically, only accredited investors are granted access to high growth investments, like venture capitalists, angel investors, and private equity.
Now, these kinds of investments can be made available to anyone; retail investors can participate in a high growth investment at the ideation, early, or medium stage. Greater investor access brings liquidity, meaning that previously illiquid investments can now find liquid markets. Tokenized assets open the door to a new world of investment opportunities, allowing investors access to asset classes that were previously restricted.
5. Settlement of private and digital assets is much faster than public securities
Traditionally, settlement of trades can be a slow process. Based on old financial architecture, settlement of private assets can take months -- it can be manual, even in today’s digital world. Public markets currently settle on a T+2 system, meaning trade + 2 days to process the trade of securities via clearing houses.
But digital securities can be swapped instantly. This eliminates the possibility of settlement risk in some scenarios, which involves layers of intermediaries. Blockchain is trustless and decentralized as an inter-party ledger that everyone can agree on as a source of truth.
The Depository Trust and Clearing Corporation (DTCC) says they’re working on T+1, an improvement of one day. But is this a patchwork fix? The system needs to be reevaluated and redone, which is what blockchain makes possible.
Listen to the full podcast episode.