One of the primary benefits of digital asset issuance is democratizing access to fundraising opportunities for small to medium size enterprises (SMEs). By using blockchain based digital securitization, SMEs and other low-cap market participants can get access to capital from a global investor audience within a regulated digital asset venue at a fraction of traditional issuance costs. Consequently, issuers can increase margins while helping contribute to competitive free market conditions that yield innovation.
Costs of Issuance
Current financial infrastructure that facilitates issuance is restrictive in nature and could be considered anti-competitive. Administrative costs result from numerous manual processes and inefficient data flow. These costs in traditional issuance outlets are passed down to the issuer and investors. The result is non-inclusive market entry that makes securitization expensive and unattainable for many businesses.
The cost of securitization varies depending upon the readiness of a business, size of the business, the underwriting process and incremental costs (post issuance). Incremental costs that place substantial administrative burdens on businesses include audits, reporting, compliance, legal and human resources. Using DLT completely on-chain can automate audits, reporting and compliance, which accounts for roughly 62% of incremental costs that are placed upon issuers.
Automating Incremental Costs & Administrative Overhead
Traditional systems are digital, but humans are needed for manual verification at key points of the issuance pipeline and throughout the asset lifecycle. Consequently, burdensome administrative overhead is placed on the issuer, making securitization largely unattainable for low-cap market participants.
Incremental costs post issuance includes reconciling disparate methods of indexing data, compliance obligations, cross border transfer and settlement and corporate actions. By putting all of the information pertaining to a given asset, the issuer and investors onto an immutable ledger, a complete audit trail and smart contracts can used to automate incremental costs.
Advantages of EOS
Digital asset issuance platforms are not all made the same. Several protocols are developing issuance platforms in anticipation of the eventual transition from traditional capital market infrastructure to distributed ledger technology (DLT). But most of them do not offer a low cost, high performance option that can keep the entire data flow from issuer to investor on-chain. For example, Ethereum has very high gas fees and long wait times for finality, which makes keeping data flow on-chain too expensive. The costs simply outweigh the gains. Virtually all protocols have similar constraints as Ethereum. In comparison, EOS has extremely low transaction fees and 0.5 second execution times. This enables issuance fully on-chain includes that secondary trading capabilities.
Slow and expensive protocols force data flow to be put off-chain to accommodate for performance constraints. When data flow goes off-chain the full benefits of DLT are sacrificed because manual processes are reintroduced into the issuance pipeline and data is maintained on centralized servers.
As manual processes are introduced so are the inefficiencies that leads to a high barrier to securitization for low-cap market participants. Additionally, maintaining compliance can be problematic because when the data flow goes off-chain you introduce counterparty risk with centralized data storage. As a result, an immutable audit trail that is characteristic of decentralized technologies is forfeited or degraded. Only an immutable, on-chain audit trail is capable of automating compliance controls and checks.
Efficient Flow From Issuer To Investors
Chintai has developed a high performance DLT architecture on EOS that is specifically designed to keep the entire process from issuer to investor on- chain. Everything from compliance obligations to the asset lifecycle, including corporate actions, are executed on-chain. This allows our clients to fully benefit from the promises of DLT and facilitate an efficient flow of capital from issuer to investors.
The ensured immutability of DLT on which the Chintai regulated architecture operates results in a core advantage over traditional financial infrastructure — by decentralizing the system, there is no need for a central authority or intermediary for placing and executing orders. Chintai can facilitate peer-to-peer transfer and direct buy and sell of assets between parties without a third party needing to intermediate the trade. This reduces the transaction cost on each trade and the time needed for the transaction is significantly reduced.