Estonia-based DX.Exchange has announced the launch of an institutional security token trading platform. The development of a regulated secondary market will be crucial for the future of digital assets.
DX.Exchange announced the launch of a security token trading platform for institutional investors. The Estonia-based exchange enables companies to list security tokens, which were previously issued on other platforms, for secondary trading.
Professional and institutional investors can buy security tokens with fiat, BTC, ETH, USDT, and XRP. Retail investors, as well as investors from the US, are excluded from using the platform – at least for now. The firm also said it will introduce its own technology for asset tokenization.
CEO and co-founder Daniel Skowronski said, “We class ourselves as a digital asset exchange and believe that everything will look like this in two to five years. We are opening up the entire financial industry as a whole and servicing the bottom set of people that have missed out before.”
Compliant with European regulations?
Estonia is a full EU member and DX.Exchange claims to be an EU-regulated exchange. Skowronski said the new platform was “completely compliant under European regulations.” He added, “What’s great is that this is a real exchange. What’s out there currently is more like an OTC.”
Investors who want to trade security tokens will be subject to KYC checks compliant with the European Markets in Financial Instruments Directive II (MiFID II).
But some voices involved in the European STO market remain skeptical and question whether the exchange is properly licensed to operate throughout the EU. DX.Exchange has two Estonian licenses that are MiFID II compliant. Under European law, it is possible to passport national licenses to other EU countries. However, as there is no clear legal framework for digital assets in the EU, there is some degree of legal uncertainty.
Dx.Exchange has also outlined its requirements for listing security tokens. The platform’s investment committee will evaluate each application. There will be full background vetting, a legal evaluation and a review of the token’s blockchain protocol.
Applications will have to provide the exchange with data on to whom and how they will distribute the tokens. A firm’s whitepaper, fundraising method, and its team will also be part of the evaluation process.
The controversy around MarketPlace Securities Ltd.
Cyprus-regulated MPS MarketPlace Securities Ltd. will be the entity that lists the tokens and thus acts as a counterparty in their trading. That means whenever there is a trade match in the order book, MPS will buy the security from one client and sell it to the other, taking accountability for trade clearing.
The partnership agreement with MPS has so far enabled DX.Exchange to list tokenized stocks and ETFs. MPS guarantees market liquidity for 24 hours a day, seven days a week.
The whitepaper of DX.Exchange states: “Tokens do not entitle you to any equity, corporate governance, dividends, voting or similar right or entitlement in the company […]” In other words, investors do not purchase the ownership of a company’s stock. Instead, they purchase the ownership of a token issued by MPS.
The company MPS Marketplace Securities Ltd. is licensed under the Cyprus Securities and Exchange Commission (CySEC) and was previously named SpotOption Exchange LTD. After controversy regarding its binary options exchange in 2017, the FBI shut down SpotOption and arrested the CEO. CySEC issued an administrative fine against the company.
MPS operates under the same license number as SpotOption Exchange. That raises the question of whether or not the company is trustworthy.
Institutional adoption requires a secondary market
The development of a secondary market is paramount for the evolution of digital securities. But so far, secondary trading infrastructure is still underdeveloped. Many companies, including Liechtenstein-based LCX and Switzerland’s leading stock exchange SIX, have launched projects, but none have come to fruition yet.
The value proposition of digital asset trading is enormous. With digital assets, investors can buy a fraction of an asset. Thus, it enables investors with limited funds to invest in assets which they couldn’t afford previously.
Skowronski explains, “You might ask ‘what’s the deal’ if someone buys $20 of Amazon and in two years it’s worth $120? But if you take Indonesia with 150 million people but only 400,000 of them trade shares, multiply that 10 dollars by millions of people, and that’s real wealth that wasn’t there before. We’ve found a niche market, and now we want to service it.”
A secondary market will also be necessary to attract institutional investors to the crypto space. Without the possibility to trade security tokens on a regulated and professional exchange, institutional adoption of digital assets will be unlikely. Thus, despite the criticism, DX.Exchange might be leading the way with its project.
Currently, the platform is still a closed regime for their 8,000 pre-registered users. The main launch is planned for April. But the company strongly believes in its long-term success.
Skowronski says, “We believe that all assets whether its securities, art or real-estate will be tokenized. This tokenization has many benefits, but the strongest is the ability to help create wealth for people all over the world no matter their social or economic situation. At DX, we can help trade the untradeable.”