Guest commentary by Attorney at Law Lutz Auffenberg, LL.M. (London) Mai 2020 – Since German Financial Supervisory Authority BaFin approved the first prospectus for a blockchain based security at the beginning of 2019, more and more medium-sized companies have become aware of Security Token Offering. This term describes the first public offering of securities on the capital market that are issued as blockchain tokens, completely digitally and via a smart contract on a suitable blockchain – such as Ethereum, Stellar or NEO.
Security tokens do not require a paper certificate and therefore neither require a custodian bank. The tokens can be held and stored directly and immediately by the investors themselves or, alternatively, they can be placed in the custody of a specialized service provider. Different from traditional securitised products, the transfer of tokens in the secondary market also works directly, as a transaction processor or other intermediary does not necessarily have to be involved. Tokenised securities thus bring the investment closer to the investor and also open up the possibility of a considerable reduction in costs by eliminating traditionally required service providers. But what does this mean for sales; does the age of tokenisation of financial products herald the end of the personal brokerage consultation?
Personal contact between intermediary and investor is and remains a relationship of trust
It is obvious that tokenised financial products are regularly offered by issuers or issuing platforms commissioned by them via an online subscription process. This possibility is particularly interesting for private investors from the Internet-savvy generations who like to use it. However, not all potential investor groups belong to the generations of “digital natives”. Both private investors of advanced age and institutional investors in particular still need personal contact with a financial investment broker they trust and who can offer them a preselection of interesting investment opportunities that he or she considers to be good. A certain breadth of the target market is crucial for the success of capital market issues. In this respect, the increasing tokenisation of the capital investment market does not change much for sales.
Investments are being taken to a new level through tokenisation
On the contrary, tokenization opens up numerous new business areas for financial advisors. For example, it brings completely new investor groups into the circle of potential subscribers, particularly in the area of so called „Vermögensanlagen“ which are a particular German case of alternative investment assets. Those investment products are not fungible like securities, but only tradable on the capital market to a limited extent. Up to now, investments such as shares in limited partnerships, direct investments or unsecuritised subordinated loans have only been of interest to private investors because, as purely contractual relationships between issuer and investor, they are not eligible for custody. Therefore, those kind of investment products have never been suitable vehicles for pension funds, pension schemes or investment funds, which are absolutely dependent on their auditor being able to audit and confirm the investment portfolio. This changes fundamentally with tokenised investments which can be stored as digital asset positions by external service providers with the corresponding BaFin approval. Institutional investors thus have the possibility of receiving deposit statements from external crypto-custodians for their token holdings. In this way, they can invest in tokenized investments. For financial sales companies as well as for issuers of investments this means access to institutional investors. Tokenisation therefore leads to genuine innovation and new distribution channels.
Sales opportunities – product diversity for investors
New technologies do not necessarily mean the end of traditional service providers; they merely shift the focus, simplify processes and create added value and innovations. At its core, however, the financial market remains the financial market on which capital-seeking companies solicit investments from investors. The fact that investments will increasingly be made digitally in the future, replacing ink on paper, does not make the link between supply and demand – the financial sales industry – obsolete.