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Nov 20, 2019

Disruption to the capital markets is on the horizon

Linda Montgomery explains why IROs should learn about blockchain and digital assets

Capital markets are on the verge of a tremendous transformation due to the emergence of blockchain technology and digital assets. IROs should be aware of these emerging developments to arm themselves with the new knowledge, skills and tools their future jobs may require.

Blockchain has ushered in new forms of digital money, like bitcoin, and is disrupting financial markets via the tokenization of assets into a truly digital, efficient and more liquid form. A security token represents ownership of an asset-backed investment recorded on blockchain. The security token offering (STO) is like an IPO for the digital age, offering advantages including:

- Easier investor and shareholder management (including authentication, voting, governance and dividends)
- Fast, efficient, cost-effective listing process for issuers
- Fractionalized ownership, increasing accessibility for small investors
- International investor access and 24/7 stock trading.

In a nutshell, blockchain enables an easily accessible, transparent, secure and immutable digital ledger. It offers decentralized trust through cryptographic verification instead of a trusted intermediary like a bank. Trust, in addition to logic in the form of smart contracts, can be baked right into the computer code.

These game-changing properties could change – or potentially eliminate – many functions performed by registrars, transfer agents, clearing houses and custody service providers today. Even lawyers, investment advisers and investment bank positions could be affected.

Administrative aspects of the IRO’s job may take less time as communications and regulatory requirements become digital and streamlined. But with this automation, more responsibility will fall on IROs to better understand the functions now hardwired into the new process for tokenized assets.

As the tokenization of capital markets advances, we may expect to see:

- Private and small-cap companies being the first to use STOs en masse, redrawing the traditional line between public and private firms
- The typical institutional investor base may include venture capital alongside buyside funds, and more small retail investors
- A growth in initial exchange offerings of security tokens by traditional stock exchanges, joining Binance, Coinbase and other crypto-exchanges.

The tokenization of capital markets will transcend regulatory borders as compliance for multiple jurisdictions will be built into smart contracts. IROs will cultivate even more shareholders in multiple time zones, cultures and languages that can buy or sell with ease.

With this comes the need for more sophisticated investor community management, or even affiliate programs, to manage a larger number of dispersed, digital shareholders and ensure their continued interest and loyalty. Also, IROs may have to engage and monitor an army of new analysts and influencers.

With more small retail investors, IROs will have to manage a greater ratio of one-to-many relationships. To acquire new shareholders, SEO and search engine marketing may become important strategies. IROs will use more digital channels than ever before in a flattened, more direct connection between C-level executives and investors.

IR tools from the early unregulated initial coin offering days will become mainstream, including Telegram, Reddit and chat tools for investor communications and engagement. Ask Me Anything sessions could replace quarterly calls or investor days.

Over the next five years, expect continued mainstream and institutional adoption. Thousands of new companies in addition to well-known institutions such as Fidelity, JPMorgan, ICE and CME have been developing needed institutional-grade infrastructure and products since as early as 2015. This includes solutions for custody and risk management, futures and ETF offerings. Industry standards and underlying enabling platforms such as Ethereum keep moving forward. International regulatory clarity will become a reality.

So IROs: blockchain and digital assets will transform your job. The more knowledge you gain today, the better prepared you’ll be for a tomorrow that’s closer than ever.

Linda Montgomery CPIR is a Toronto-based IR, marketing and growth expert.

This article was published in the Winter 2019 issue of IR Magazine.

Linda Montgomery

Linda Montgomery is a Toronto-based tech industry marketing executive and IR professional. She holds two business degrees and a CPIR (Certified Professional in Investor Relations) designation from the Canadian Investor Relations Institute.