Significant growth potential in Asia with a US$7.5 trillion addressable market
HONG KONG, 4 March, 2021 – Security token offerings (STOs), using blockchain technology, are going to transform capital markets and help strengthen Hong Kong’s status as a global financial centre. Opportunities for STOs are particularly strong in private equity and real estate, structured finance and debt offerings with a combined addressable market of US$7.5 trillion in Asia alone, according to experts from digital asset exchange HKbitEX, Deloitte and the University of Hong Kong in a white paper they have just published.
The paper, which identifies pain points of traditional capital raising channels faced by market participants, explains with case studies how STOs can address some of those issues.
“Hong Kong has done remarkably well last year as a capital raising hub on the back of homecoming and biotech listings. To strengthen further its position as a regional and global financial centre, Hong Kong needs to get ready for the digital economy particularly for the arrival of tokenization which is set to disrupt capital markets,” said Dennis Chow, Chairman of Deloitte China.
Tokenization, which is the process of creating a digital representation of a real-world asset, enables features that address many of the inefficiencies of traditional fundraising channels.
“Traditional capital raising instruments tend to cater for more mature companies in established industries with tangible physical assets, leaving many growth stage businesses and new economy start-ups unserved,” said Gao Han, Founder and Chief Executive Officer of HKbitEX. “Exchange traded STOs provide entrepreneurs with an alternative avenue to raise funds on a secure, regulated and lower cost platform, on top of the added advantage
of 24-hour trading and better operational efficiency through automation and the use of smart contracts.”
Tokenization has the potential to democratize access to capital. “Assets and instruments such as private equity, fine wine, real estate and intellectual property rights are illiquid as they cannot be easily divided or transferred. By empowering fractionalization of assets, tokenization enables asset owners to raise liquidity without selling the entire asset. Professional services firms play a key role to bring new technologies into capital markets as a new driving force. With more financing channels for businesses, we will further facilitate the diverse development of financial capital markets,” added Robert Lui, Partner, Southern Region Capital Market Group Leader at Deloitte China.
“For investors, STOs bring alternative opportunities for portfolio diversification. They also enable investors with less capital to participate in the growth of large pre-IPO companies, an opportunity often reserved for institutions and high net worth individuals. This helps to promote a fairer financial world,” said Lin Shi, Chief Operating Officer at HKbitEX.
The market potential for tokenization is enormous. Take real estate as an example. The private market is 32 times larger than the public market. Total funds raised globally from STOs now exceed US$360 million and the addressable market in Asia covering assets across bonds, private equity and real estate as well as structured finance stand at US$7.5 trillion.
According to Ms Shi, debt STOs will be the biggest contributor to the overall STO market going forward, followed by structured finance including mortgage-backed and asset-backed securities. “Bonds generally carry lower risk and fewer variable factors than equities, making it relatively easy to tokenize. It also has a much bigger potential market. In 2019, of the US$2.1 trillion of capital raised in the U.S., $1.8 trillion was debt.”
However, for STOs to succeed, trading platforms will need to enhance credibility, investors to be educated, reputable traditional financial institutions to participate, and more importantly, a consistent global regulatory framework to be implemented. “Until we see global regulatory alignment, many of the advantages of tokenization, including free and international exchange of security tokens, may not materialize. We are glad to see that industry participants and regulators around the world are working together in the right direction,” concluded Douglas Arner, Professor in Law at the University of Hong Kong.
The full report is available at: https://help.hkbitex.com.hk/hc/en- 001/articles/360061585494--Advantages-of-Security-Token-Offerings-