DSTOQ: Stellar’s decentralised stock exchange as a force for good
Outdated central markets have baked inequality into geography. Asset tokenisation can fix it.
DSTOQ is a licensed stock exchange that lives on the blockchain, accessible through the DSTOQ app. Right now, it's live on the Stellar network, but it's still in a test phase offering play trades of fake DSQ tokens against different assets.
It might be thought of as a decentralised exchange that focuses on tokenised assets, security tokens and their direct peer-to-peer trading because that's essentially what it is. The main difference between DSTOQ and decentralised exchanges as one knows them in cryptocurrency might be that as a licensed stock exchange which deals in security tokens, DSTOQ still depends on custodians to verify the backing of securities being traded by users, but those users can still trade peer to peer.
The most obvious benefit is probably its ability to cut costs. Currently, someone investing overseas might pay up to 10% on top of base costs in cross-border trading fees, forex costs and other middleman expenses. By leveraging blockchain and cryptocurrency technology, DSTOQ can facilitate trades almost anywhere in the world for an expected 0.5% or so.
This ability to cut costs might go a long way towards facilitating financial inclusion, especially in geographically disadvantaged markets.
Location, location, location
It's a global world (by definition), and the Internet age has connected and digitised the planet like never before. But physical concerns still play an outsized role in the flow of finance, while lethargic legacy systems have kept economies inefficiently fragmented.
Money doesn't stop, but markets still keep operating within set trading hours and from specific physical locations out of habit. This might be optimal for the relatively small handful of people physically present at those locations or able to access them with ease, but for the rest of the human species, it's not ideal.
By tying access to better investment opportunities to specific locations, and inadvertently penalising people who try to access those investment opportunities from the wrong location, the world has baked economic inequality into geography itself. This same lack of access also inhibits the growth of local businesses in these "wrong locations," which means local investment opportunities are even thinner on the ground.
"Being South African myself, I experienced first hand how difficult it is to invest in foreign assets," says DSTOQ CEO Craig Mc Gregor. "I was forced to pay almost 10 percent in fees to invest abroad. In many emerging markets, investors are charged monthly fees of around $30, in addition to security broker fees between 0.2 percent and 0.9 percent per trade. This is on top of a minimum charge of around $25 and foreign exchange fees of 2.5–5 percent for foreign investments. This means paying 5–10 percent in fees to invest abroad, especially when investing small amounts.
"This is a roadblock for individuals seeking to accumulate even modest wealth. In addition, companies, especially in developing economies, lack channels of access to capital markets – this gives them virtually no options for raising funds to grow or innovate. I wanted to fuse my experience in the traditional financial services sector as both a manager of a portfolio of over 30 companies worth more than $600m and as equities analyst at Bloomberg. My belief in blockchain technology and my desire to use this revolutionary technology to do something good for the world.
"It was clear that a blockchain platform like DSTOQ could present a massive value add and huge potential customer base in emerging markets. This, in a nutshell, is why I created DSTOQ, along with my co-founding partner Christian Nagel."
Cutting costs is how DSTOQ plans to achieve its wider goals, says Mc Gregor.
"DSTOQ wants to allow individuals, particularly in emerging markets, to invest in high-growth assets that were either previously unavailable to them or significantly costly. For example, investors pay much higher trading fees when investments are cross-border (and then there are the forex fees), when combined, they add up to 2-10 percent on top of costs. By utilizing blockchain technology and cutting out third parties that restrict or prevent investors from accessing these opportunities, DSTOQ is able to keep costs incredibly low – in comparison, we charge around 0.5 percent for these services."
These fees will vary by application, with the bulk of them likely being associated with the tokenisation itself, rather than the exchanging.
An issuer of a new token, such as a business that wants to launch an IPO through DSTOQ and sell tokenised equity, will pay a fee for the tokenisation of their asset. For pre-existing securities, the initiator of the tokenisation process will pay the fees. The costs associated with security token maintenance are handled by the issuer.
For the end user, there's a fee of a small fraction of the token value when they sell tokens to other users.
The importance of tokenisation
The ability to access a wider range of assets more cost-effectively is one part of the solution. The ability to access the right kinds of assets is another. And beyond building wealth, the ability to diversify one's holdings in a way that's not entirely bound by local currencies is valuable.
Investing in, say, Apple stock or gold, in Venezuela is potentially more valuable when you don't necessarily have to sell it for Venezuelan bolivars at a loss before redeeming it for goods. Tokenisation, and digitising assets, is a way of actually facilitating the direct use of gold or anything else as a currency, which can be especially useful when local economies are floundering.
"Capital markets are currently designed in an unequal manner, not affording the same opportunities to everyone. By tokenizing securities, DSTOQ will allow almost anyone, especially in emerging markets, to participate in the global capital marketplace. These developments are particularly essential for nations bound by failing fiat currencies and hyperinflation, such as Venezuela, where there has been huge increases in crypto mainstream adoption. Tokenized securities equals lower fees, speed, ease-of-use and privacy, and will allow people who might be struggling financially due to geographical circumstances to build wealth," Mc Gregor says.
"An added impact of tokenizing traditional securities is the effect it will have on global markets. Trading on traditional assets is no longer confined to market hours, but is open 24/7. The new digital economy is outworking and overtaking the traditional economy."
This is in addition to all the other benefits of tokenisation, such as asset fractionalisation and programmability.
How to tokenise something
"Tokenisation is a conversion process whereby assets are digitised into security tokens," Mc Gregor explains. "The underlying securities are held by a licensed and regulated entity (the custodian), who ensures that each security token is linked to a real-world asset held in the vaults. The security tokens generated during this process represent legal ownership and rights to the token holder, who is the lawful owner of the asset.
"These tokens can then be traded peer-to-peer between traders on the DSTOQ exchange. DSTOQ obtained a stock exchange license to allow and enable us to do three main things: accept cryptocurrencies for our exchange, tokenize securities, and conduct IPOs directly on-chain.
"Let's hypothesize that a one gram bullion of gold is delivered to a custodian's vault by the token initiator. After the custodian confirms receiving it, he acts as a trustee for the deposited gold.
"The trustee generates a security token as a 1 for 1 representation for the gram of gold. He then transfers it to the initiator's Stellar account. Using this token, the initiator can act as the first seller of the security token on the DSTOQ platform. The same process goes for redemption – a token holder can re-transfer a token to the trustee in exchange for the actual gram of gold."
Development on DSTOQ and Stellar is continuing apace. The DSTOQ test version is already running on the actual Stellar blockchain, and the full release date is drawing nearer.
"The Stellar blockchain is an ideal starting point for DSTOQ given that their current capabilities fit our requirements and are already in production, unlike many other blockchains that have yet to be implemented," Mc Gregor says. "Through Stellar, we are able to offer fast transaction speeds, a high level of security, and the infrastructure for our decentralized exchange where we never control our customers' funds."
More broadly, further regulation and education is needed, he notes. And fortunately many of the emerging markets that DSTOQ is exploring tend to be quicker on the uptake than larger economies.
"When it comes to securities, digital or otherwise, one cannot avoid addressing regulation. The uncertainty and volatility in the crypto space today is a result of a lack of regulation and a lack of standardised obligations," he says. "In many emerging markets, where governments and economic systems are more agile and adaptable, regulation is already taking effect and allow these nations to become hubs of blockchain innovation. Larger nations are proving to be slower to adapt, causing them to miss out on these opportunities.
"I welcome the impending regulation and look forward to the stability it will provide, allowing our industry to transform into a more credible sector.
"I don't believe that there is a general lack of trust in cryptocurrency. However, I do believe that the ICO frenzy over the last year gave many people a reason to doubt the validity of ICOs – many projects did not actually deliver on their products and promises. The rise of security tokens will fix many of the issues and risks posed by ICOs firstly because security tokens, much like traditional securities, are linked to real value and not purely utility. In addition, DSTOQ holds a license – I do believe that the increase in regulation will ultimately provide investors with more certainty and lower risks."
Education is also key.
"A significant next step for us is to educate people on the benefits of and how to use digital assets as well as how to take advantage of the opportunities offered by security tokens. This space can often times appear intimidating and complex, but with the right guidance, it is quite intuitive and simple."
The ability to duck unwanted costs might be more useful in some places than others, but intuitiveness and simplicity are most definitely welcome everywhere.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.