Digital private assets
The case for digital transformation
“Arranging the deal still takes time – but now the transaction can be instantaneous. That means more transparent and liquid markets”
(Josh Collard, FCX)
1. Removing months from issuance
“We have seen issuance cycles move from 6 months to 8 days through digital issuance”
The time and cost of private security issuance are holding back market liquidity. Facing long and expensive issuance processes that can last up to 6 months, private companies are often deterred from seeking capital injections through security issuance – turning to it only in strategic expansion and M&A cases.
But why does the process take so long?
From a process and operational perspective, due diligence is cited as the biggest challenge.
Book-running banks need to detect fraud, manage flight risks and control their balance sheet commitments – generating a vast quantity of document exchanges (often notarised) that remain largely physical and unstandardized. At the same time, counterparties need significant access to deal room data to understand and price the risks of the transaction. Papers are requested, sent, read, and returned one by one – each requiring people’s time and creating the potential for, processing and data security risk.
Add to this the sequential, manual editing of contractual and legal documents around the issuance itself, and the months can pass quickly.
For issuers, this means cost and slow access to capital. For banks, this means a lack of scale and excessive balance sheet commitments – and, in turn, excessive balance sheet commitments – and, in turn, higher costs – a vicious circle.
excessive balance sheet commitments – and, in turn, higher costs – a vicious circle.
Through digital issuance, the issuance process is accelerating from months to weeks. With all due diligence and deal room data available on a blockchain, (and empowered by smart contracts to verify and authenticate key documents), issuers and their banks can provide permissioned access at a data item level to different parties – all of whom see the same information in the same format and on demand. Throughout the issuance process, lawyers, bankers and counterparties can all access the same documentation – supported by smart contracts and workflows that accelerate documentation cycles and information exchange. No more emails and week-long delays to review minor amendments.
Acceleration can also transform the way banks and service providers see small capital. With faster issuance comes reduced balance sheet costs for banks – helping them to scale their already constrained balance sheets. Some issuances have consumed no capital at all – using the “agency issuance“ cycle, securities are only issued at the moment when investors have fully funded them, providing transformational benefits across the cycle
The net result? Faster, cheaper issuance and more providers, enabling greater market liquidity.
2. Removing weeks from settlements
– and enabling secondary markets
“From two weeks to settling in minutes”
Due diligence is also an obstacle in settlement. From one data silo to another, counterparties need to submit extensive, notarised documentation prior to transactions – delaying settlement and increasing cost. Even with the terms agreed, the authentication of share transfers can take weeks – with funding sitting idle in bank accounts, personnel costs spiralling and data and reconciliation risks growing in the background.
Previously these limitations may have been acceptable. After all, this market has had comparatively little secondary market activity to date (approximately USD100 billion in global turnover in 2021). But an expected growth rate of over 30% in 2023 will put severe pressure on back offices across the industry.
Slow settlements are an inconvenience for any normal security, including private assets – but in the case of non-performing or distressed assets that

currently have no market, they are an active blockage. There may in fact be a market for these assets with investors looking to buy them at a discount, but existing transaction cycles can be too slow for buyers to be able to take advantage of short-term opportunities.
Tokenization and smart contracts can reduce settlements down to minutes. With smart contracts managing KYC and notarisation, barriers to counter-party due diligence can be removed. And with near-instant settlements (running on a delivery-versus-payment basis, slowed only by the need for approvals), essential liquidity can be freed up on all trades and the tradability of all assets can be improved. Tokenization of securities settlement is not just about reconciliation and data security benefits – it is about driving (secondary) market liquidity.
3. Automated, bespoke lifecycle management
One firm experienced a USD$100m valuation issue due to poor data reconciliations in their cap table
Second to issuance, the post-trade challenges facing private market participants are the most significant.
Beginning immediately after security issuance or trading, the maintenance of capitalization (cap) tables and share registries is still heavily spreadsheet-based. Different parties maintain and reconcile their own records manually, across emails and using different forms of data. Across these disparate silos, the simple update of ownership after a single trade can entail numerous updates, emails and checks – all of which create a significant risk of variance.
Building on this cap table, corporate events such as dividends, votes and capital calls are then triggered. With little automation beyond spreadsheets, it’s all managed manually: from initiating an event to processing instructions to reconciling positions. Emails feed into spreadsheets, spreadsheets are compared with other spreadsheets and so on – involving more people and increasing with the risk of missed instructions or incorrect data transfers growing at every step.
Importantly, the resources supporting these events today are not cheap. Many firms rely on their company secretaries, general counsel or COOs to manage these processes, making the costs of multiple shareholder requests and queries extremely expensive.
In sum, we are building risky processes on risky foundations – which can seriously undermine the valuation process. With poorly reconciled positions, cash flows, dividends and event instructions, distorted valuations become highly likely. In the case of one holding, gaps in positions and ownership changes triggered a valuation gap of USD100m – with countless secondary impacts (in terms of investor risk and regulatory penalties).
Whilst some firms are moving to automate their own parts of this process, running the cap table (and associated transactions) on a blockchain is a simple yet comprehensive solution to these issues. With positions and instructions updated and reconciled in real time, in a standard format across all participants, the possibility for variance is eliminated – removing with it then need for any reconciliation at all.
But the true benefits of tokenization go further than just data consistency. Building on a sophisticated and real-time data source, smart contracts can not only begin to automatically trigger lifecycle events but can also make sure that events are properly targeted. Capital calls or new placements can be managed with minimal human effort – creating the potential to give some shareholders the right of first refusal on new offers or votes, for example.
This ability to forge bespoke relationships with specific shareholders is cited by many as the central value proposition for digital issuance in private securities – moving beyond operations into the realm of truly transforming investor relations.
4. Risk-free regulatory reporting
“How can a fund tell regulators about a major incident within just a day?”
Private markets have evolved largely outside of the purview of securities regulators – but this is starting to change.
As investment flows have continued to enter the private capital markets, the latter’s systemic risks have become a point of regulatory focus. In the USA, new FSOC regulations require fund managers to report serious events in a fund to regulators within a day. Other regulations require improved disclosures on expenses and fees, and, in Europe, DORA is creating new resilience requirements.
All of these changes are driving a fundamental shift that goes beyond how processes are managed to impact the frequency and timeliness of oversight. Based on today’s settlement and reconciliation processes as described above, there is little chance of a fund accurately being able to report on a serious error within 24 hours. Thus, funds now carry not only operational risk but also significant regulatory risk.
Similar to T+1’s impacts on the institutional equities markets, new regulation is forcing private capital players to manage risks… and to do so in near-real time. This can not be achieved through faster spreadsheets and emails. It requires real-time data visibility and consistency – through which regulatory responsibilities in seconds.
5. Connecting private assets with global liquidity
“If we want to reach the pool of digital wallet liquidity today we have to tokenize”
If faster issuance cycles can help to increase the supply of private securities in the market by making capital raising more appealing to issuers, tokenization can then help to increase the liquidity of these securities – creating a virtuous circle of transformation.
At present, private market securities are almost entirely decentralised. Each trade is entirely bilateral, with few opportunities for investor liquidity to concentrate in any single venue. As a result, the secondary market for private securities is extremely limited.
As digital ATS providers such as Texture Capital and tZero have begun to demonstrate in the USA, connecting private securities into a coherent trading and liquidity network inevitably drives trading volumes and secondary market activity. In addition to operational benefits across the trade cycle, blockchains offer significant value in helping to consolidate liquidity and create easy, standardised access points for global issuers and investors.
As tokenization providers in Europe and Asia have also shown, tokenization is a critical enabler in helping issuers to reach retail investors’ digital wallets.
With growing amounts of liquidity now held in these wallets, they are beginning to constitute a legitimate target for mainstream securities issuers – given that these investors are already comfortable with digital assets and equipped to handle them. Tokenization is becoming a means of reaching investors that traditional securities are unable to service.
Beyond just a secondary market, improved transferability of tokenized securities and heightened market transparency can help to support the increased financing of these securities and their use as collateral. If tokenized securities can be accurately valued and instantly transferred (with complete certainty), then they can begin to play a valid role in easing banks and investors’ balance sheets.
Tokenization is not just about process efficiency. In driving secondary market liquidity, widening the accessibility of these investments and enabling greater mobilisation, tokenization is laying the foundations for a broad-based transformation of private markets.
