A whole new segment of the financial world is emerging. Numerous banks, traditional and crypto exchanges, and startups are currently working on secondary markets for Security Token. The new trading venues are intended to enable the simultaneous purchase and sale of tokens. What potential this offers and what obstacles still need to be removed – these are the questions that the fintech 21finance, provider of digital marketplaces for the financial sector, is addressing together with a number of partners from the growing blockchain ecosystem.

Security Token are digital, transferable assets and offer advantages over traditional securities on both the investor and issuer side. Asset tokenization lowers the barriers to entry for investments in illiquid assets, such as profit or share rights in a company, art assets, or real estate. The technology enables fractional ownership of assets and simplifies the transfer of their ownership rights.

“Even though, with circa 3.8 billion in market capitalization so far, the potential of tokenization is far from being fully exploited, there is much to suggest that Security Token will establish themselves as an alternative to traditional securities. Looking at the traditional securities market, a large market potential is opening up. According to forecasts, ten percent of global GDP will be covered by tokenization in the future,” says Max J. Heinzle, CEO of the fintech 21finance, based in Liechtenstein.[1]

Status quo in token trading: peer-to-peer using liquidity providers

Will small investors soon be able to trade tokens around the clock with real-time transmission while benefiting from low transaction costs? According to Maximilian Portenlänger, Head of Securization at Bankhaus von der Heydt, there are still no established regulated marketplaces in the form of multilateral trading facilities (MTF) for Security Token in Germany. Nevertheless, there are alternative solutions: “Security Token are already being traded on peer-to-peer platforms. In these constructs, the liquidity of the tokens is often ensured by central liquidity providers acting as licensed proprietary traders.” The private bank has developed an integrated solution for this, from the banking infrastructure to the custody of the Security Token to proprietary trading, which is mapped via the partner network.

Growing technical infrastructure

Data interfaces and the lack of a technical infrastructure are currently two reasons that still stand in the way of the secondary market, but not the core problem. On the one hand, there are already APIs to decentralized exchanges such as Uniswap and the technical infrastructure is also available across the board, he said. “Things are changing. International exchanges are visibly opening up and creating the appropriate infrastructure. For example, the London Stock Exchange and also the German stock exchanges in Stuttgart and Frankfurt are developing regulated trading platforms for digital assets. It will be crucial to build bridges between the different tokenization standards,” says Heinzle.

More upwind through uniform legal framework

Regulation plays an essential role in the balancing act between investor protection and technology promotion in the development of secondary markets, he said. “A major barrier is created by the fact that Security Token are classified like traditional securities in most countries. This classification brings with it additional legal requirements that issuers must comply with. Two examples are anti-money laundering and know-your-customer regulations” says Heinzle. Liechtenstein lawyer Dr. Thomas Nägele, founding partner of the eponymous business law firm, adds, “The hurdles of the regulatory framework created for the traditional financial market are not appropriate for the token economy. The obligation to book in the securities giro of the central securities depository is the biggest obstacle to the development of a secondary market for Security Token. A solution has already been promised by the European Commission.”

One solution to the legal uncertainty and discrepancy between individual countries is, for example, the TVTG implemented in Liechtenstein, a progressive framework for the “token economy.” Switzerland has taken a step in the same direction with recent legislative changes, as has Germany, where the Electronic Securities Introduction Act (eWpG) came into force in 2021. And across the EU, the European Commission is currently drafting a proposal for the regulation of crypto-assets (MiCA), which will apply to all EU member states in the future.

“There is a consensus among the experts we interviewed that the aspect of regulation will give a boost to the topic of secondary markets for Security Token. There are already more and more market participants who are working with their projects on secondary markets for Security Token,” summarizes Heinzle, whose fintech offers banks and financial intermediaries the opportunity to create their own legally compliant online store for financial products and to sell their traditional and digital financial products through it.

About 21.finance AG

Founded in 2017, 21.finance AG’s “Marketplace as a Service” (MaaS) software solution enables banks, financial intermediaries, and non-financials to create their own marketplace and distribute their products through it. With their own digital and legally compliant online shop for financial products, the fintech’s customers can optimize their sales channels to increase assets under management, reduce operating costs, acquire new customers and ultimately open up new revenue channels. The white label solution gives them access to software and support services to provide a fully digital and regulated investment experience for their investors. Learn more about 21finance at www.21.finance.

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Birgit Haisch

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Susanne Bichlmair

21.finance AG

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