Daiwa Securities, Japan’s second largest broker behind Nomura, plans to trial the issuance and trading of security tokens on a public blockchain. Japan is one of the most active jurisdictions for digital securities issuance. Daiwa Securities says it has underwritten 22.6 billion yen ($153 million) in asset backed security tokens, giving it the biggest share in value terms.
So far most Japanese digital securities have been issued on consortium blockchains, with Progmat and BOOSTRY proving popular. Notably, Daiwa is not an investor in either platform. Nomura founded BOOSTRY, which has backing from Nomura Research, SBI and Tokyo Stock Exchange operator JPX. MUFG initiated Progmat and is now a separate entity with investment from JPX, SBI, Mizuho, SMBC, Sumitomo Mitsui Trust and others.
Daiwa says it wants to trial public blockchains to enhance transparency and interoperability. There have been several other public blockchain issuances, including by Societe Generale, Santander, the European Investment Bank, Siemens and ABN Amro.
For the collaboration, Daiwa Securities will partner with web3 development and wallet firm Ginco and Daiwa’s fintech subsidiary Fintertech.
Regarding the drawbacks of using a public blockchain, the group sees the risks as hacks from leaking private keys and anti-money laundering checks. It particularly wants to focus on hacking risks.
Security token trials
The proof of concept (PoC) will involve Fintertech issuing soulbond tokens (SBT), which are like nontransferable NFTs that identify investors. An investor will buy a security token through a private placement. However, when they want to sell tokens, they can only do so if the buyer has a soulbond token as well. In other words, the buyer needs to have passed AML checks. The rationale is this methodology addressed both risks. Because even if the private key is leaked, the buyer has to have a SBT.
Of course, there’s still the problem of the potential theft of the SBT issuer’s keys. That’s one of the scenarios the PoC plans to explore.
Daiwa subsidiary issues crypto backed loans
Meanwhile, the Fintertech subsidiary is newsworthy. Daiwa Securities owns 80% with the balance by Credit Saison, a Mizuho affiliate. Fintertech provides Ethereum staking services, which is no longer novel.
However, it is unusual for the subsidiary of a regulated firm to offer cryptocurrency backed loans. That’s the same service provided by Genesis Global, Celsius, BlockFi and Voyager Digital, which all went bankrupt.
We don’t know the details of Fintertech’s operations, but it is possible to provide such a service in a less risky manner. What scuppered many of the mentioned firms is the lack of risk management. They made very large loans to a small number of counterparties, in some cases with dubious collateral.
Fintertech treats its offering as similar to conventional consumer or business loans but with different collateral. Only Bitcoin and ETH can be used as collateral and when the loan starts, the crypto value has to be twice (200%) the loan amount. They ask for additional collateral when the collateral value drops below 150% and start selling collateral at 120% coverage. One additional unusual aspect is it’s possible to get loans in dollars as well as yen.
Fintertech is regulated in Japan as a money lender and crypto asset business.