How it works

Digital Assets

In essence, digital assets are very simple: “Who owes what to whom and when.” In other words, digital assets are about some party A (the “who”) having specific payment obligations (the “owes what”) to some party B (the “whom”) at some future time (the “when”).

The terms and conditions embedding such payment obligations and claims, respectively, are defined in the token smart contract. A digital asset is then simply a medium representing the financial claims encoded in a smart contract such that the holder(s) of the asset, i.e. the investors, are legally entitled to these claims.

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Trade-lifecycle of digital assets

The life of digital assets is divided into three phases (Issuance, Lifetime, Expiry/Maturity).
During the lifetime of digital assets involved parties engage in cyclic activities along three parallel lifecycles (Trade, Execution, Reporting).

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Issuance

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Lifetime

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Expiry/Maturity

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Issurance

Whether a simple company share tokenization or assets tokenization, the life of a digital asset starts with preparation of the issue. The Security Tokens issued have the terms of the asset and the financial contract backing it, drafted in the term sheet or prospectus, respectively, which is then reviewed by all parties involved.

Preparation of the issue also includes that investors go through a compliance process such as KYC and accreditation status verification. Once all these things are sorted out and parties agree to the terms and conditions, the digital asset is issued. At this point in time, the financial obligations according to the term sheet become legally binding between issuer and investors.

Lifetime

Once a digital asset is issued, the lifetime phase of the asset begins. Therein, the three lifecycles
mark individual event streams that progress in parallel:

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The execution lifecycle

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The reporting lifecycle

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The trade lifecycle

The execution lifecycle

The execution lifecycle covers various events and activities around the execution of terms encoded in the digital asset.

This involves all parties who participate directly in the digital asset, in particular the issuer and investor, but potentially also asset servicers such as facilitator, custodians, brokers, or transfer agents:

Issuer:

  • Determine payment obligations under the terms of the asset
  • (e.g. interest payments, repayments)
  • Define and declare optional payments such as dividends
  • Execution of payments
  • Updating the terms and conditions as foreseen by the contract
  • Announce corporate actions in general

Servicers:

  • Keep record of asset holders
  • Distribute payments from issuer among investors
  • Transfer payments to (fractional) beneficiaries
  • Distribute corporate actions information

Investors:

  • Determine own rights and obligations under the agreement
  • Monitor the performance of issuer and whether payment obligations are made
  • Receive payments from payment agents
  • Reconciliation of security records with custodians
  • Monitor and react to corporate actions announced by issuer
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The reporting lifecycle

The reporting lifecycle covers all activities around analysis and reporting for the digital asset. Specific examples of such reporting activities are:

  • Accounting
  • Controlling and financial planning
  • Risk management
  • Regulatory reporting

The trade lifecycle

The trade lifecycle captures all activity around the possible selling and buying of digital assets, or fractions thereof, on exchanges or over-the-counter.

Security tokens, because of blockchain technology as a shared infrastructure layer, overcome most of the friction in this part of an asset’s lifetime which is one reason for the increasingly widespread adoption of STOs.

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Maturing

Is the last period in the life of digital assets. For tokenized bonds or debt assets the time of maturity is defined as a term in the asset’s term sheet.

Other types of digital assets such as equities do not have a maturity or end of life because they can be traded on exchanges any time an investors wants to liquidate his digital shares. Furthermore, for debt assets the proceeds of principal repayment have to be distributed among investors and records for related assets updated.

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