Bitfinex launches exchange to tackle security token problems

Bitfinex has launched a new exchange aimed at entrepreneurs.

Regulators gave the thumbs up for the British Virgin Islands-based operation to open Bitfinex Securities Ltd – a platform that will grant users better access to capital markets through the tokenisation of securities products.

Tokenised securities were forecast to be the hot digital asset class of 2021, and while that crown has seemingly been taken by the explosion of NFTs, tokenised security products are still at the forefront of innovation for cryptographic assets.

Security tokens, like much of the crypto industry, are also facing regulatory pressure, perhaps worsened by being both a new asset type and controversial product.

The announcement from Bitfinex comes after meeting stringent regulatory requirements in the Astana International Finance Center’s live regulatory sandbox – part of its Fintech Lab – and, in theory, means the exchange will be able to legally facilitate the trade of security tokens.

But what are security tokens?

The tokenisation of securities products allows the denomination of a real asset into fractional ownership.

More simply put, minting security tokens involves the creation of liquid digital contracts for ownership fractions of a genuine real asset such as a house or a car.

In essence, the tokens can be seen as a bridge between the worlds of traditional banking and blockchain, allowing companies seeking to conduct capital raises easy access to funds without needing to interact with institutions, regulators, or accountants.

In the instance of Bitfinex Securities, this takes place through an ‘admission to trading’ process, which Bitfinex hopes will become the standard practice for blockchain equities and bonds.

Paolo Ardoino, CTO at Bitfinex Securities, told Coin Rivet that the project was targeting smaller enterprises in areas where rapid development is being constrained by ineffective capital markets.

“Bitfinex Securities Ltd provides a regulated platform serving small and medium-cap companies that are currently underserved by existing, inefficient capital markets,” he said.

“We will challenge the incumbent stock exchanges by leveraging the enhanced efficiencies of the blockchain with the aim of one day creating the most liquid exchange in the world.”

Imagination is the only limit to the scale of impact security tokens could have on innovation and fintech growth.

Gloomy future for security tokens?

However, some level the accusation that this latest move by Bitfinex is tantamount to walking into a burning house.

Last July, the cryptocurrency trading app Abra received a $300,000 fine following an investigation by the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

The agencies accused Abra of “offering and selling security-based swaps to retail investors without registration and for failing to transact those swaps on a registered national exchange”.

Investigators were targeting Abra’s US-related securities products which enabled investors to swap cryptocurrency in exchange for a contract that effectively mimicked the security without being paired to underlying assets.

The CFTC claimed the platform was “entering into illegal off-exchange swaps in digital assets and foreign currency with U.S. and overseas customers and registration violations”.

Ultimately, despite efforts by Abra to move parts of the operation overseas to the Philippines, the security token exchange service was suspended.

However, Bitfinex has been working hard to ensure the exchange is up to the task. Basing it in the Astana International Finance Center in crypto-friendly Kazakhstan will likely afford the exchange a reasonable amount of protection.

But it seems unlikely that Bitfinex will invite US-securities to tokenise on the platform and draw the wrath of the federal agencies.

FTX has achieved some level of success with a security token exchange through the utilisation of a German brokerage service that has kept it in regulatorily check, this could serve as a potential model for Bitfinex.

As the exchange goes live, the industry will be watching to see whether Bitfinex Securities Ltd wins in the effort to put a stop to the security token housefire and chart a course into the widespread tokenisation of securities products.

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