How tokenization improves the fintech industry
Fintech has become one of the fastest-growing industries in recent years. Startups offering a variety of technical solutions for the financial and banking sector were at the peak of popularity recently. However, this niche also has its own nuances and difficulties. This article will describe how financial markets’ tokenization affects the industry and can improve it.
The current state of the fintech sector
The total fintech market in 2020 was $110.57 billion, and it keeps growing every year. Economists believe the market will reach a valuation of $698.48 billion by 2030. At the moment, the most relevant fintech trends and challenges are as follows:
1. Embedded solutions in banks
Embedded financial services have become a growing trend in the last year, as many banks are trying to expand their scope and provide customers with the broadest possible range of services.
2. Increased regulation of embedded services
It is expected that the relevant authorities will more closely monitor the emergence of new services embedded in traditional financial products in the next 6-12 months.
3. Fintech startups from developing regions receive more attention
Nowadays, investors primarily look to jurisdictions that are considered underdeveloped in terms of financial products, such as the Middle East, Southeast Asia, Africa, and Latin America.
4. It becomes more difficult for companies to attract investments
After the boom in fintech startups, there was a relative calm, interrupted by one or two reports of large investment rounds from time to time. However, the further, the more difficult it becomes for fintech startups to attract funding from large investment funds.
5. The status of a unicorn company is losing its significance
This point is related to the previous one. The market is flooded with projects valued at more than $1 billion, and this status hardly impresses anyone. Accordingly, the mere fact that your project is considered a unicorn will not affect the next round of funding.
How can tokenization improve the fintech market?
First, let’s understand how tokenization works and how it can be used for companies that develop financial products. Tokenization is the transfer of a company’s ownership or shares to the blockchain. The information in the distributed ledger is available to all participants at any time and cannot be changed without authorization.
During tokenization, the company issues tokens. Such a financial markets token can be compared to traditional shares. Security tokens are subject to state regulation and provide all the same benefits to investors as shares and bonds do. The difference is that a particular asset’s ownership or share is now represented by a few lines of code. This gives certain advantages: instant transactions, automatic execution of deals due to smart contracts, the possibility of seamless trading, and so on.
What opportunities does financial markets tokenization open up for fintech startups?
First of all, we would like to mention wider opportunities for obtaining investments. As mentioned above, every year, it becomes more and more difficult for a fintech startup to attract the attention of investors and raise the necessary amount for further development, hiring employees, and other means. Large investment funds are cautious in selecting projects for investment. Financial markets tokenization opens up more opportunities for companies that need funding. Launching an STO (security token offering) can attract investors from different parts of the world. In addition, it may not be 1 or 2 large investors but 10-15 smaller but sincerely interested in your project investors.
The second benefit of tokenization for the financial industry is the speed of STOs. If you turn to Stobox experts, the whole process from selecting a jurisdiction to launching an STO takes up to 4 months on average. This option is three times faster and much cheaper for any company than an IPO. At the same time, your business does not become public, and you yourself can regulate the lists of investors. In addition, if you have previously experienced difficulties in obtaining investments, issuing a financial token can be the first step for you. After a successful security token offering, investors will look at your offering more favorably, and it will be easier to close new funding rounds faster.
Another advantage is liquidity. Many investors are not ready to immediately invest a lot of money in one questionable project. STOs allow investments even with small amounts (around $500). After the end of the STO, tokens can be traded on decentralized exchanges, allowing investors to exit quickly if something goes wrong. Otherwise, they can keep the fintech tokens and profit from the company’s activities or wait until the tokens become more expensive and sell them later.
How is financial markets tokenization regulated?
Many owners of fintech companies are interested in the issue of legal protection. How can a fintech token holder actually claim a stake in a company? Can they exercise this right or claim compensation in case of failure? In fact, in many jurisdictions, security tokens are regulated like traditional securities. There are only a few nuances, such as storing a list of investors on the blockchain. Such details need to be taken into account when choosing a jurisdiction, and Stobox consultants can help you with this. Overall, you can consider security tokens improved and more modern versions of traditional securities. Such fintech tokens are regulated by the same regulatory bodies at the moment. And although controversial situations sometimes still arise and require proper advisory, the legal regulation of STO is becoming more transparent and easier to understand for both companies and investors every year.
Security tokens are not just digitized ownership rights but a modernized version of usual securities. They are issued on the blockchain, which ensures the safety of all information, automatic execution of transactions, and many advantages for companies that want to attract investments. For example, even the KYC procedure on the blockchain is many times faster than the usual way. Thanks to STOs, you can raise funds from investors of any scale worldwide. At the same time, the minimum investment amount is significantly lower than with traditional funding rounds. This becomes real salvation for fintech projects looking for investments for further development.
Tokenization and STO have many other use cases. To find out how these technologies can be used for your business, contact us for a free consultation.