A security token exchange based in the Philippines, CEZEX, announced plans to start trading in Hong Kong. The exchange, owned by Taiwan-based Inbase Partners, expects its Hong Kong branch to become operational at some point in Q1 2019. This will make CEZEX the first exchange to offer a regulated trade of security tokens.
Security tokens have always been a complicated matter to deal with. Different securities laws in different jurisdictions usually handle them in different ways. According to a recent statement by Carlos Salas, a managing partner at Inbase Partners, CEZEX is licensed and regulated by CEZA (Cagayan Economic Zone Authority). CEZA is responsible for managing the so-called “economic zone”, which is located northeast of Luzon in the Philippines.
By partnering up with a Hong Kong-based licensed broker-dealer, CEZEX will be able to offer its users a regulated token trading service which is in complete compliance with local laws. Salas confirmed this by saying that CEZEX has digitalized the existing financial system. This makes it very similar to a traditional exchange. However, it will not trade securities, but security tokens backed by assets.
What this means is that security tokens will get their value from external assets. According to some regulators, if a digital token allows their owners to receive dividends, that token can be considered a security. Utility tokens, however, only gives its holder a right to use a product or a service offered by the token’s issuer.
Salas added that exchanges that offer security tokens are capable of easing the transfer of the value of underlying assets to investors. In addition, it is also a cheaper solution. This is why CEZEX intends to tokenize things like real estate and even gold.
It is estimated that the process behind listing approval at traditional exchanges may take around six months, at best. However, at CEZEX, it will likely only take around two or three months. This is due to the enhanced liquidity of illiquid assets like artwork. Simply put, the asset is broken down into small units that can be traded, which allows greater speed and is an easier way to handle the asset.
This is also expected to lead to fractional ownership, which will be a key function to make assets significantly more marketable.
CEZEX will have support from three listing sponsors that are also CEZA-approved. This includes Inbase Partners, which will work with the other two to help various projects get to the CEZEX exchange. Inbase will also work with different brokers to tokenize derivatives, stocks, and other securities, like bonds.
Salas commented on this as well, stating that a large broker-dealer network is being created underneath the exchange. The advantage here is that other broker-dealers only specialize in a single asset class. In this case, however, the broker specializes in working with tokens, but those tokens represent numerous asset classes. Because of this, CEZEX will have the far more superior liquidity to any traditional exchange.
Hong Kong’s SFC (Securities and Futures Commission) noticed recent growth in a new trend that has seen intermediaries changing the way they do business so they can provide cryptocurrency-based trading services. Under the current law, these intermediaries need to contact and notify the SFC whenever they plan to introduce a significant change to their business. This also includes the addition of new types of service they plan to provide to their customers.
