Digital assets are digital records or representations of value stored and tracked using distributed ledger technology, which is often referred to as the blockchain technology. These records can represent traditional forms of value, such as stocks, real estate, and patents, and they can also represent new forms of intangible value, such as art.
Digital assets can be classified into four sub categories:
1. Digital Security Offerings (DSOs)
3. Central Bank Digital Currencies (CBDC) / "Stablecoins"
4. Decentralized Finance (DeFi)
1. Digital Security Offerings (DSO)
Digital Security Offerings are the next generation channels of capital formation for businesses. These offerings are similar to traditional securities offerings, but instead of receiving a stock certificate or note for their investments, investors receive their investment shares in the form of digital securities.
- DSOs are NOT cryptocurrencies
- Regulated by governing bodies and must be issued and traded on licensed platforms, such as InvestaX
- Essentially digitised version of traditional as well as alternative investments
- Present security-like features such as receiving voting rights and dividends
Types of assets that can be digitized
Benefits of Issuing digital securities
Opportunity size for DSOs in the private markets
A cryptocurrency is a medium of exchange, created and stored electronically on the blockchain using cryptographic functions to conduct financial transactions and to control the creation of monetary units.
- Cryptocurrencies have no intrinsic value
- No physical form
- Only exists on the blockchain network
- The supply is not determined by a central bank and is completely decentralized
- Not regulated by a central authority
3. Central Bank Digital Currency (CBDC) / Stablecoins
A central bank digital currency (CBDC) or stablecoins use a blockchain-based token to represent the digital form of currency backed by a reserve asset.
Central Bank Digital Currencies (CBDC)
- A central bank digital currency (CBDC) uses a blockchain-based token to represent the digital form of a fiat currency of a particular nation
- Unlike decentralized cryptocurrency projects like Bitcoin, a CBDC would be centralized and regulated by a country's monetary authority.
- Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference (i.e. US Dollar or commodity’s prices such as gold)
- They achieve their price stability via collateralization (backing) or through algorithmic mechanisms of buying and selling the reference asset or its derivatives.
4. Decentralized Finance
Decentralized finance (DeFi) is an experimental form of finance that does not rely on central financial intermediaries (i.e. brokerages, exchanges, or banks) but utilizes smart contracts on blockchains, the most common being Ethereum.
DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on a range of assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts.
What differentiates DeFi Dapps for traditional institutions?
- Core business not managed by an institution
- Code is transparent on the blockchain
- Dapps are designed to be global from day one
Is it legal to Issue a Digital Security?
Regulatory Framework in Singapore
Any Offer or issue of Digital Security Tokens in Singapore must comply with applicable securities laws i.e., Securities and Futures Act (Cap. 289) (SFA) and the Financial Advisers Act (Cap.110)(FAA). We generally see the following intermediaries facilitate any offers or issue of digital securities tokens:
- An intermediary who operates a platform on which one or more offerors of digital security tokens may make primary offers or issues of digital tokens (“Primary Platform”); (Requires CMS License regulated by the SFA)
- An intermediary who provides financial advice in respect of any digital tokens; (“Financial Advisor”); (Regulated under FAA)
- An intermediary who operates a platform at which digital security tokens are traded (“Trading Platform”); (Requires RMO License regulated by the SFA)
- An intermediary who safekeeps or custodizes such digital tokens (“Custodian”)
Digital Payment Tokens (DPT) are different from the Digital Security Tokens and are regulated by Payment Services Act, 2019 (PSA). DPT is defined as any digital representation of value that is expressed as a unit, not denominated in any currency or pegged to any currency, intended to be a medium of exchange accepted by the public as payment and can be transferred, stored or traded electronically and are regulated. So DPT, essentially covers all cryptocurrencies, virtual currencies, and utility tokens. Any person/entity carrying on a business of providing any service of dealing in DPT or any service of facilitating the exchange of DPT’s must be licensed under the Payment Services Act.
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