Once again Japan finds itself in the (somewhat rare) position of world leadership on a topic of innovation. Last week, Japan’s major security firms announced the creation of a consortium focused on STOs (security token offerings).
As far as I know this is the world’s only major economy in which such an industry-led initiative exists.
As I wrote in this space a few months ago, what is exactly is the appeal of a security token anyway ? Why, for instance, would I want to invest in fractional ownership of a building in Chicago that was securitized ? In the case of real estate, there are already mechanisms for such investments. they’re called REITs. so it’s unclear to me how a blockchain-based solution could bring an order of magnitude of innovation to this existing process.
On the other hand, for items for which, unlike real estate, trading products have not yet been created, I could understand how securitizing such an asset via a token would represent something new and innovative. However, in the case where no securitized precedent for the asset exists already, the new product would require a heavy dose of explanation, probably in the form of a prospectus of several dozen pages.
Perhaps such a day will come, but I don’t see how are using tokens to securitize exotic assets would in any way represent the early applications of this technology.
No, something much more mundane which is already widely understood would be the best initial application for a security token. But what could that be ?
After scratching my head on the topic for a while and getting nowhere, I decided to reach out to smarter friends of mine.
One of the best suggestions I heard seems to fit the bill pretty well: corporate bonds.
Think about it. Corporate bonds are among some of the most unsexy financial instruments around today. Check. They are widely understood by institutional investors worldwide with decades of familiarity. Check. Unlike say CDOs, CLOs, MBSs, etc., they do not require fast-talking Wall St. salesmen to explain how you’re supposedly not getting screwed. Check. Perhaps most importantly, corporate bonds (i.e. fixed income securities) lend themselves well to being modeled by a smart contract (i.e. ”Computer: pay such and such fixed amount on such and such dates”).
Security tokens could democratize access to corporate paper to investors worldwide.
That sounds to me like a pretty compelling proposition as we undergo this paradigm shift from a world of risk-free interest to interest-free risk, full of investors desperately seeking yield.
To be sure, this idea remains severely half-baked. For example, I cannot imagine how such a solution could be entirely decentralized, in the purest spirit of trustless blockchain. Yet it feels like something worth exploring. In fact, a few pilot projects along these lines are underway inside banks.
Perhaps Japan, the country with the first major STO brokerage consortium, will illuminate the way.
