Cost Disruption in the Issuance Market

Digitalization is an integral part of the world as we know it. Digital processes like securities trading have shaped the financial landscape. Still, the core of the capital markets is untouched by digitalization. Securities still are documented in a certificate and physically stored in a central location.

At Cashlink, we aim to shape the capital markets of tomorrow. By the
tokenization of a DAX share together with Bankhaus Scheich and Finoa, we took a monumental leap in the direction to digital securities. Praised as a ‘meeting of the old world with the new world’, we were able to prove that tokenization will be a key element of future capital markets.

As a pioneer in tokenization, we know the benefits of this process: Faster transactions, high transparency, and significant opportunities for cost savings. Especially the latter point has received great attention over the last year. The search for new investment opportunities, together with the need for cost savings throughout the whole value chain, are shaping the financial world in the light of the ongoing pandemic.We decided to cooperate with the custody provider Finoa to shed light on the cost efficiencies of tokenization. An extensive report compares the process and associated costs of traditional securitization with tokenization via DLT.

To make predictions for various business scenarios, we considered different asset classes (e.g. equity, real estate, bond), issuance volume, and market scenarios (e.g. B2B, B2C). Analyzing issuances in Germany and the DACH region, the results can, to a certain degree, be applied to a global context. Data from already executed tokenizations and securitization were analyzed and compared. To enrich this data, qualitative interviews with customers and service providers from both the blockchain ecosystem and the traditional financial world were also considered.

Cost efficiencies were analyzed by tracking the value chain and respective processes of an issuance:

1. Legal and transaction structuring pre-issuance
2. Issuance services and transactions in the primary market
3. Life-cycle management of assets (custody and asset servicing)
4. Trading of assets on the secondary market

Taking into account the different scenarios described earlier, costs savings between 35-65% throughout the whole value chain were identified. The main drivers of these savings are efficiencies through digitalization and automation, very prominent in the primary market and for custody and asset servicing. In these areas the impact of digitalization and automation is extremely high. In the secondary market, saving opportunities are lower due to the existing efficiency of the digitalized infrastructure. The pre-issuance process is still dominated by regulatory complexity and legal costs, e.g. security structuring and prospectus preparation. Therefore costs for tokenization and securitization are on par in the pre-issuance stage.

A case study illustrates these findings and provides practical insight. The specifics of the case were chosen based on typical issuances in our dataset.

The tokenization of a bond with an issuance volume of 50 million EUR, a maturity of 7 years, and 3000 investors saves more than 750.000 EUR compared to traditional processes.