Security tokens (ST), which tokenize securities such as real estate beneficiary rights and allow small-scale investment, are expanding their market toward widespread adoption.
In December last year, Osaka Digital Exchange (ODX), founded by the SBI Group and Sumitomo Mitsui Financial Group, began operating its secondary market service "START," further increasing momentum.
We spoke to ODX's President and CEO, Hitoshi Murasaki, about the future of ODX and what kind of catalyst is needed to further popularize ST.
ODX launched "START" in December of last year as Japan's first secondary distribution market service for ST. How do you feel looking back from the time of its release to the present?
Kimio Mikazuki (hereinafter Mikazuki): We started the project without any clear future for the distribution of ST.
For example, in the case of real estate fractionalization products, we need to collaborate with various stakeholders, such as asset management companies and trust banks that create them, securities companies that solicit and sell them, and platforms that provide the system infrastructure using blockchain on which ST is recorded.
We need to standardize the product specifications with these companies in mind. This was the biggest obstacle, but in order to standardize, we reached out to industry stakeholders and held a forum for discussion.
However, each company has different systems and business flows, and accordingly, the contracts and other arrangements differ depending on the project. For example, the arrangements between a trust bank and a securities company for one project may be different from those between a trust bank and a securities company handling another project.
It took time to understand these circumstances, and it took about a year and a half to standardize the product and business process. We received a great deal of cooperation from all the stakeholders at a stage when we were still not sure what we could do with the market. We are truly grateful.
ST has the advantage of reducing costs for issuance and management, and making it easier for a wider range of investors to invest due to the smaller amounts that come with tokenization. What do you think is the biggest benefit of ST, and what are your expectations?
Mikazuki: When talking about the meaning of tokenization, for example, crypto assets are of course data on the blockchain that anyone can see.
Basically, even individuals can own wallets. The moment you put crypto assets into a wallet, they leave the exchange and are transferred to the individual's control. This is revolutionary compared to the various products managed by existing financial institutions, and I believe that it is a concept that crypto assets have spread.
Also, from the perspective of the principles of blockchain, tokens can be broken down into extremely small units. There may be fees, but it is unlikely that we will face a marginal increase in costs.
Also, in the case of blockchain, everyone can share the same data through a distributed ledger, so the idea is the exact opposite of existing financial systems such as the heavy and extensive systems of banks. I believe that this idea will be a great advantage in transferring value and will have a positive effect on ST.
When I heard that legislation was being developed for ST, I immediately thought of creating a secondary distribution market. However, there are still many things that need to be sorted out, such as issues with regulations and tax systems.
For example, ST can only be operated on permissioned/private blockchains. To take advantage of the benefits of blockchain, we would need to utilize a permissionless/public blockchain, but this is currently a very advanced topic and there are a number of issues that need to be resolved.
However, I personally believe that someday time will prove it, and that in the future ST will be issued on a public blockchain. To achieve this, we must ensure investor protection to prevent fraud, theft, and unfair transactions, as well as anti-money laundering measures.
But this is an extremely difficult point, since too much regulation will make it boring, and too much freedom will increase the risk of abuse. How to strike this balance will be the focus in the future.
It still seems like ST is too difficult for general investors to get involved with. What measures and initiatives do you think are necessary to popularize ST in the future?
Mikazuki: I think the reason why it is so difficult to get into is because blockchain reminds people of crypto assets, and they wonder whether it is safe as an investment asset and secure.
Also, among the various investment products, I think that many of those who are interested in ST are people who are quick to absorb information and are highly sensitive. It will be important to spread awareness and spread the word to those who have not yet taken the plunge.
In terms of the barrier to entry for investors, ST handled on the START market can currently be invested from about 100,000 yen.
In other issuance cases, investments can be made from 10,000 yen, and ST-type corporate bonds have also appeared, which pay interest in a form similar to electronic money. In terms of the amount, these investors will be able to come into contact with new value, which will lower the hurdle for investing in ST and lead to an increase in the issuance amount.
We are also increasing the issuance scale of real estate-related products, and have exceeded 100 billion yen since the beginning of 2024. Corporate bonds have already exceeded 10 billion yen.
We believe that ST can be traded much more smoothly than the image of traditional investment. Therefore, I feel that it is necessary to promote the secondary distribution market as a set that can respond quickly when more investors have buying and selling needs in the future.
Such efforts will also lower the hurdles for ST itself.
In addition, in order to increase awareness, it is necessary to proceed with handling new financial products that investors find "interesting," "tickles the sense of fun," and "easy to invest in." Currently, there are many real estate-related products, but another appeal of ST is that it is easy to create financial products that may interest investors while lowering the barrier to entry.
ODX will also launch an advisory committee for the START market and invite experts to participate, and will work across industries to diversify the products we handle in the future.
The tokenization of real world assets (RWA) has become a hot topic, especially in the Web 3.0 field. How big do you think real world assets will grow in the future?
Mikazuki: As I mentioned earlier, the issuance amount of ST has exceeded 100 billion yen. In particular, real estate-related products alone have grown to over 200 billion yen on a leveraged AUM basis, so it won't take long to grow to the 1 trillion yen scale. I think it will spread rapidly once the psychological hurdles of investors are lowered.
Regarding the spread of ST, what do you think could serve as a catalyst to further popularize it among general investors?
Mikazuki: There are long-standing regulations on securities. Even so, there are still people who try to raise money through insider trading or other methods that are considered "bad."
If this situation becomes widespread, it will create an environment where ordinary investors feel a strong sense of unfairness, as if they are saying, "That's not the game we want to play." Therefore, I think that eliminating such things and creating an environment where ordinary investors can easily participate in investments with peace of mind is the shortcut to penetration and will act as a catalyst.
To achieve this, I think it will be important to create a structure like crowdfunding. Specifically, under the premise that there are no inappropriate issuers, diverse fundraising is approached from a diverse investor base, and if the investors agree, the investment is made there.
This will create an environment that connects issuing companies and investors. Although it is disrupting the business model of existing securities companies and the market called PTS like ours, I think that direct forms of finance will become stronger.
I think that we need to provide added value that will not be excluded in such an environment.
As ST becomes more widespread, I think there will be a need for global standard regulations. What are your thoughts on the direction this is heading?
Mikazuki: Although the thinking differs from country to country, global standards are necessary, and I think that if there are standards, they will spread worldwide. In fact, there is talk of harmonizing standards, and it is technically possible, but the laws regarding financial products in each country are different, so that is a major challenge.
For example, in Japan, Japanese authorities do not often have a problem with overseas investors buying Japanese securities. On the other hand, if overseas securities are solicited in Japanese to Japanese residents, it will be considered a violation of the Financial Instruments and Exchange Act if the appropriate procedures in accordance with Japanese law are not followed.
In the Web 3.0 area, when an overseas cryptocurrency exchange provides services to Japanese residents, it must be registered as a cryptocurrency exchange business. Securities are the same image. Here, I have used Japan as an example, but the reverse is also true, and this varies from country to country, and it is complicated and intertwined.
If global standards can be aligned in terms of laws, it will be relatively easy to access global assets. If that happens, we can expect the globalization of securities and the expansion of the market, and I think it will become an interesting world.
Please tell us about ODX's vision and future prospects.
Mikazuki: We have been operating START as a secondary distribution market for ST since December 2023, but we started PTS trading of stocks in 2022. The daily trading volume here is nearly 150 billion yen and is gradually growing.
However, since ST was the original focus when we were founded, we would like to focus on diversifying and increasing the products we handle. This will require the participation of securities companies and the general investors beyond them, so we would like to work together as an industry to build a market.
In addition, in order to reduce the costs of transaction execution at securities companies as much as possible, we would like to build a settlement system that makes good use of blockchain functions. This will create a market that is convenient and low-cost for market participants, including securities companies.
This system assumes the presence of securities companies, but in the first place, under the current system, settlement for stocks is made two business days after a transaction is completed.
In this case, securities companies must perform "reconciliation work" to check whether the transactions they have made match the information on the scheduled settlement, and to check "who should be paid how much," and "how much each security will receive," which incurs a certain amount of costs.
By utilizing blockchain, it is possible to eliminate the complexity of such work and significantly shorten the two-day settlement period.
I mentioned earlier that the industry will be disrupted by creating a structure like crowdfunding, but in the end, if an individual has a wallet, the transaction will be completed, so there is no need for an intermediary.
However, at present, issuing ST on a public blockchain and transferring with a high degree of freedom are very difficult to achieve due to many issues in terms of investor protection and money laundering prevention.
I personally believe that one day an efficient market will begin to take shape in a DeFi-like world where individuals can trade via wallets, provided that appropriate products are handled appropriately, and I would like to work towards that.
To ensure this future, we will first thoroughly protect investors and propose appropriate regulations aimed at the current healthy development of the market.
Kimio Mikazuki
Osaka Digital Exchange Co., Ltd.
After building a foundation in corporate finance at Aozora Bank, he was involved in a wide range of venture investments and acquisition investments at ITX (formerly an IT business investment company affiliated with Nissho Iwai). He was seconded from the bank to a venture and worked on a project to install large LED displays in Shibuya. After that, he was involved in the management of IT companies after acquisitions, and gained knowledge in both finance and management of business companies. From 2019 to 2020, he was the head of the ICO business department/COO of BITPoint Japan (Chairman of the ICO/STO division of the Japan Cryptocurrency Business Association (JCBA)). Since 2020, he has been involved in the first corporate bond and real estate STO projects at SBI Securities, and has been the representative director of Osaka Digital Exchange since its establishment in 2021.
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