Regulated Security Token Exchange

Published in

Cointronix

6 min readSep 23, 2018

Relating back to my previous article regarding STOs, i mentioned secondary trading and liquidity are comparatively reduced for these tokens, as securities can’t be traded as freely as the Utility Tokens since securities are subjected to many country-specific restrictions.

Most of the current market activity has come from utility tokens. While its predicted that the trend in utility token issuance will continue, security token issuance will also gain prominence. Anecdotally, there will be more and more companies going to great measures to ensure compliance with local securities regulations, particularly in jurisdictions outside of Asia.

As liquidity remains one of the biggest obstacle to widespread adoption of security tokens, this is an important development for our emerging industry. Today, the security token market is characterized by an almost complete lack of liquidity, because there are very few regulated security token exchanges in operation. The application of blockchain technology and tokenisation can make illiquid assets more liquid and accessible to everyone.

“ Can a Regulated Security Token Exchange solve this issue?”

Introducing to you, Cointronix

ASIA’S FIRST REGULATED SECURITY AND UTILITY TOKEN EXCHANGE

Cointronix aims to be first regulated security token and utility/non-security token exchange in Asia. By having a regulated exchange in a fast-growing region like Asia and linking it to the world’s single largest investor market, they hope to increase the liquidity for companies listing on their platform through a fast track dual-listing program.

With the expectation for more issuance of security tokens globally, Cointronix will aim to be the first licensed exchange for both security and non-security tokens in Asia that will be open to all levels of investors, from retail to institutions. With Singapore already the second largest ICO market globally, it makes little sense that there is no security token exchange in Asia. Cointronix initial exchange will be a centralised utility token exchange that will launch in late August. This will be followed by an upgrade to a hybrid decentralised exchange for both utility and security tokens in Q2 2019.

Other Security Token Exchange:

Comparison to other Exchanges:

Cointronix will seek to be a fully regulated security exchange in Asia, likely in Singapore, and in the US. Companies that have been approved by local regulators to offer security tokens in either one of the two jurisdictions will be allowed to be fast-tracked into a dual listing to the second exchange at minimal cost, provided they have also complied with the securities laws in the second jurisdiction. The dual listing in exchanges in Asia and the US will serve to increase the company’s global brand and promote greater liquidity through broader global investor interest for the company’s security tokens as both listed security tokens will be fungible with each other

Securities trading architecture and settlement system

In a simple peer-to-peer trade, the seller of 100 lots of ABC securities can do so only if he/she can find a buyer at his/her price point — let’s say $1 per lot. If the buyer and seller know and trust each other, the trade should be relatively safe.

However, if the buyer and seller are unknown to each other, then there is a risk that one of the parties will not deliver the funds or securities after the other party receives the funds or securities.

Solution:

This problem can be solved by introducing a trusted third party. The buyer will deposit the funds with the third party and receive the securities. Likewise, the seller will deposit the securities with the third party and receive funds back. In the securities trading world, this third party is called the central counterparty or clearing house. The central counterparty can be a regulated exchange which will normally have its members pre-fund their accounts before buying securities. In the new era of blockchain technology, the role of the clearing house could be filled with the use of Atomic Swaps. This would allow traders to transact directly with each other through another layer of hash time-locked contracts (HTLCs).

With a securities exchange, only members can trade on the platform. Typically, members are brokers, market makers/ dealers, or proprietary trading firms.
After every trade is executed by the broker, a couple of things need to happen:

The custodian, an entity that keeps assets safe for investors, will be notified of the trade and will make adjustments to the investor’s balance sheet to reflect the purchase/sale of securities. The custodian also provides other services like managing dividend flows, settlement of trades with the clearing house, and other asset servicing tasks.
Meanwhile, ownership of the transacted securities needs to change hands. This function is typically done by a transfer agent or registrar. The notification for change along with the details to be updated will be passed on by either the custodian or broker or the trader themselves if they know the transfer agent/registrar. Depending on the jurisdiction, the ownership registry is maintained by a central securities depository and/or by the company.

Securities trading with Cointronix

-No membership fees and easier onboarding process. Unlike traditional securities exchanges, Cointronix will make it much easier and cheaper for investors/traders to become members of the exchange. Eliminating high fees will allow some investors who don’t need the extra service provided by brokers to access the securities market directly and help reduce or eliminate the brokerage cost.

-Help with token development. For new security tokens looking to list with Cointronix they will also help them to develop smart contracts that can help reduce the cost for issuers and investors.

-Customised custody trading modes. For traders who want to keep their assets in their own custody instead of the exchange’s temporary custody, Cointronix will have an option for them to do so with a simple toggle switch to select self-custody or exchange custody. By selecting self-custody, the user will switch to an Atomic Swap (decentralised) trading mode. Cointronix will also allow users to set the time lock period for market makers, and price takers will need to comply with the market makers time lock settings. Price takers will be shown the time lock period when they enter a buy/sell order. In the case of exchange custody the trading will revert to a centralised trading mode. This function will be available for trading utility tokens also. While in centralised trading mode, users can also choose to have all assets associated with completed trades returned back to the user’s custody (outside the exchange) after the trade is fully executed. Assets tied to partially filled orders will not be returned to the user’s off-exchange custody unless the user decides to close the partial fill order. This will be like a hybrid decentralised mode. Traders who require faster trading and settlement throughout the trading day, such as high-frequency traders and bots, will favour the exchange custody mode.