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Digital platform flexes blockchain edge in private markets
Entry of traditional players seen boosting acceptance among issuers and investors
19 Apr 2021 | Tom King

Amid the technological transformation sweeping across the financial services industry, several major banks are realizing the tremendous opportunities in digital securities and planning to enter the market. Just recently, Singapore’s largest lender DBS has announced plans to launch its own digital exchange.

Far from feeling threatened, however, digital securities platform iStox welcomes the entry of traditional players into the business. “We welcome the move as it validates our view that digital securities represent an enormous opportunity to transform the infrastructure of the global private markets,” says iStox chief commercial officer Oi Yee Choo.

“The entry of a bank also helps increase the general level of understanding among both issuers and investors, which is important given that this is an emerging space that many are not yet familiar with.”

Backed by the Singapore Exchange, Temasek subsidiary Heliconia and other investors, Singapore-based iStox offers a one-stop solution for the issuance, custody and trading of digital securities. Connecting accredited investors directly to issuers, the platform provides seamless digital access to banking, brokerage, exchange and clearing mechanisms. 

It is one of the earliest players in the digital securities space globally. The company obtained a full licence from the Monetary Authority of Singapore (MAS) for the issuance, custody and secondary trading of digital securities, after it proved its infrastructure worked smoothly and securely, “graduating” from the regulator’s fintech sandbox programme in 2020.

The size of the private markets is extraordinary, Choo says. “There is more than enough for each player to tackle. According to a Bain report, the private markets are much larger than the public markets – 4.5 times larger for equity and 2.5 times larger for debt.” 

Democratizing deals

In this space, iStox believes that a digital platform offers investors key advantages over traditional investing processes. “Using blockchain and smart contract technology, we tokenize securities backed by real world assets. This allows us to overcome manual processes in the traditional private capital space by automating actions such as dividend and coupon payments, the tracking of ownership and secondary trading. With these efficiency gains, the platform is more flexible and can serve more investors and issuers than current players can,” says Choo.

On the issuer side, iStox is able to lower the minimum fundraising threshold to around US$2 million. This has a number of potential applications, such as the issuance of green bonds for smaller sustainability-related projects.

“We are attracting accredited individual investors who do not feel well-served by other financial institutions,” she notes. “There could be a few reasons for this. Maybe the investment minimums were too high, and therefore each investment added too much risk to their portfolios. Or the fees were too high, and they didn’t feel they needed the additional perks private banks were providing their clients – which clients ultimately have to pay for through higher fees. Our digitized infrastructure means we can offer both lower fees and fractional ownership for each investment.”

On the investor side, the possibility for fractionalized ownership means the platform can give individual accredited investors access to deals that have previously been too large for their portfolios. “For example, we could bring a hedge fund down from a minimum investment of US$1million to US$20,000,” she says.

Choo also sees settlement times as another draw for investors. When investors trade their securities on the platform’s secondary exchange, settlement happens instantly – not two or more working days as in the case of other exchanges.

Growing pipeline

Since the start of 2021, iStox has announced a number of blue-chip issuances, including the Astrea VI private equity bonds by Temasek subsidiary Azalea, and a private real estate investment trust by global real estate asset manager Mapletree.

Choo says new product lines, including equity in pre-IPO companies and commercial paper offerings, are in the pipeline. The firm plans to have at least 20 products listed on the platform by the end of this year.

Although Singapore-domiciled, iStox has attracted individual and corporate investors, including brokers, external asset managers and family offices, from Europe, the Americas, Australia and across Asia.

Choo remains upbeat on the outlook of the digital securities platform. Her long-term vision for the blockchain-powered platform is to see it develop into a mature vehicle with a strong list of issuers and investors.

“For an investor, that means a wide range of products will be available that can meet their specific portfolio diversification needs at different points in their investment journey,” she says. “For an issuer, the high volume of capital from platform investors will ensure it can meet its fund-raising target of each new issuance planned.”