Digital securities are rapidly becoming essential for modern investments. In CRE financing, they are an integral part of any decentralized finance (DeFi) platform. And the reason couldn’t be clearer.
The financial services and commercial real estate industries have been in a period of flux over the past decade. Rapid advancements in technology have provided tools to make investing in commercial real estate not only more secure but automated.
Blockchain, in particular, has provided a vehicle that personifies efficiency, data ownership, and increased transparency – all leading to lower transaction costs and reduced risks.
What are digital securities?
Digital securities are essentially the digital versions of traditional securities. A common misconception is that they are linked to cryptocurrency or ICOs – they aren’t. Furthermore, these securities are regulated by the SEC alongside other similar asset classes.
When you invest in a digital security, you receive a token, which acts as your proof of ownership. You can transfer your token or buy other tokens on the platform with ease, providing a vast improvement over the costly manual processes typically associated with private securities.
How do digital securities differ from traditional securities?
Digital securities are significantly different from traditional securities for several reasons. First, compliance and data are ensured through advanced cryptography, providing a trustless means of communicating information to stakeholders. This affords many benefits for issuers and investors, including a more efficient due diligence process, faster transaction times, and increased investor confidence. Alternatively, traditional securities are heterogeneous by nature and require complex solutions to guarantee compliance.
Digital securities are transparent. All transactions are recorded on a blockchain ledger. Without getting into the nitty-gritty technical details, blockchains store transactions in blocks in a linear fashion and cannot be revised. This technology allows you to securely capture, link, store, and authenticate critical information, such as KYC data.
Furthermore, digital securities are portable. Issuers can choose to list their digital securities on regulated secondary exchanges efficiently enabling enhanced liquidity and trading for their investors. With digital securities, investors can request and initiate compliant transfers within minutes reducing time spent and expenses for all parties.
What will digital securities change about the industry?
Digital securities are transforming the way we trade and store assets. As a trustless system, it eliminates intermediaries who increase costs. And at the same time, these digital assets provide better transparency.
There are several ways that digital securities are changing the industry. Here are just the top few:
Digital security transfers are almost instant. What typically can take days or weeks usually takes minutes. The right platform can provide accurate data with fast transaction and settlement times, as well as several additional features for managing your digital assets.
One of the reasons the process is so quick is that smart contracts significantly reduce the required number of intermediaries. Smart contracts are agreed-upon conditions under which specific actions will automatically take place.
The intermediaries are expensive, too. Currently, outmoded intermediaries cost issuers between 2% – 5% of the capital raised for commercial real estate equity on average, resulting in around $160,000 wasted on each transaction. So, in addition to faster workflows, you’ll be dramatically reducing the costs of each transaction.
There are many levels of customization when it comes to digital securities. A token may represent any type of asset, which provides significant flexibility. On a higher level, smart contracts provide an avenue for customized and automated processes that require little intervention.
Significant liability is associated with litigation, foreclosure, taxes, penalties, property loss, and reputational cost. All of which can cost you millions of dollars. Digital securities significantly reduce these risks.
As we mentioned before, digital securities were designed to be safe and compliant. The right digitization platform will also maintain their compliance certifications. KYC/AML data can be linked to accounts and stored securely with the token. Your information on the blockchain is private, and you retain ownership over your data at all times.
According to PIMCO, illiquidity discounts imputed by investors for privately financed real estate range from 11.5% – 33%. This is mainly due to outdated processes and manual work, which can be riddled with errors. Manual securities certificates and transfers are cumbersome to deal with. But digital securities are liquid and can be transferred in only minutes and traded on regulated exchanges like tZERO.
Since all transactions are listed on the blockchain, you can leverage a clean audit trail, making compliance easier. At the same time, authenticated data is permanently tied to each digital instrument throughout its lifecycle, eliminating redundancies. All of this can be shared with stakeholders, providing accurate and accessible data, which is critical for making solid decisions.
Implementing digital securities in your investment workflow
Implementing digital securities into your capital raising and investment practice is easier than ever. The most difficult decision is usually which platform to pick. Digitization platforms should provide a one-stop solution for your CRE financing needs, handling other aspects of your overall workflow.
Some critical features to look for are:
- Data authentication
- Digital securities and loan origination
- Automated KYC and AML data collection and audits
- Automatic servicing and distribution management
- Automated Cap Table management
- LP consensus management
- Automated funds control
- Automated transfer
- Integration with the public or partners with sophisticated APIs
Once you decide on a platform, you will usually need to go through a form of KYC/AML before accessing platform features, or interfacing with your other systems. At Earn.re, we offer a robust API infrastructure for our partners and clients to connect their existing systems to the platform providing stakeholders with a seamless experience.
At the end of the day, digital securities are the future of CRE financing. The technology provides the flexibility, transparency, and liquidity that has been lacking from more traditional solutions. At the same time, you do not have to sacrifice accuracy or data ownership or deal with the bloated costs of several intermediaries.