/ 7 June 2022

OPINION | Tokenising equity can revolutionise capital financing as the JSE falters

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Blockchain, non-fungible tokens(NFTs), and Web 3.0 are just some of the latest buzzwords South Africans may hear in the news or in casual conversation about the tech sector. 

The perception that these are just the latest fads is part of the reason many people have been cynical about this next stage of the internet’s evolution. This has echoes with previous technological advances which were met with scepticism at first until they became so integrated into so many aspects of our lives that we forget we ever doubted their utility. 

To understand why we need Web 3.0. and its associated technologies, how practically beneficial they can be, and why they are bound to be key drivers in virtually every sector of the global economy, consider the illustrative problem of capital raising in South Africa.

The South African economy is in desperate need of economic growth and development with unemployment reaching new heights every quarter. We need entrepreneurs, we need new and expanding businesses and above all we need investment to drive this growth.

But the traditional tools for seeking investment to grow local businesses are increasingly failing entrepreneurs and established businesses alike. More and more, business owners are walking away from these institutions and looking for alternatives.

A prime example is the Johannesburg Stock Exchange. The JSE has never looked more vulnerable than it does today. In recent years, the JSE has experienced an accelerating https://mg.co.za/tag/blockchain-technology/downward trend. The exchange is reported to have lost 25 listings in 2021 and more than 250 companies delisted between 2000 and 2020. 

Meanwhile, new listings have failed to make up for these losses with only seven listings in 2021 and four in 2020. Sadly, there is no sign of this trend reversing.

The last few weeks have seen significant stock sell offs in global markets in reaction to an anticipated slowdown in economic growth. As indices tumble, stocks across the board face contagion risks. By contrast equity purchases through NFTs may prove to be more of a port in a storm for investors who do their due diligence and buy into firms with sound fundamentals. 

As a result of the JSE’s woes, business owners are looking for alternative solutions to raising capital. As in many traditional sectors, blockchain technology is beginning to address many of the problems of the current business financing ecosystem cheaply and easily, as evidenced by a growing global trend towards the tokenisation of equity.

For business owners in need of capital, NFTs, as a means of raising capital, provide direct, easy access to investors at minimal cost with virtually no red tape. This stands in stark contrast to the raft of regulatory and financial impediments to listing a company. A business can mint a token that entitles a holder to a percentage of the business in less than 10 minutes, at a fraction of the costs involved in listing a company. As a result of this innovation, small- and medium-sized companies can now approach the market and use their equity to raise capital without needing to approach venture capital or go through expensive gatekeepers. 

One argument in favour of traditional exchanges might be the protections they provide, but NFTs are just as reliable and secure a means of authenticating share ownership as the stock exchange. In fact, the possibility of investors buying fake tokens is precisely the type of problem that blockchain technology is great at addressing. 

A blockchain is essentially a secure and accurate record of data. For a tamper-proof way to prove authentic ownership of a share as it’s sold from person to person, you cannot do better than the blockchain. 

Put simply, an NFT is a digital representation of a thing — an artwork, a contract or a company’s stock. Blockchain technology allows for the original transaction and all subsequent transactions to be transferred along with the underlying rights in the form of an NFT. The token gives its holder digital proof of ownership that cannot be tampered with or duplicated because of three features of the blockchain: decentralisation, consensus, and cryptography.

What all this means for entrepreneurs seeking initial or additional investment in their business is that there is now a secure, affordable alternative to the traditional capital- raising mechanisms, including the stock exchange. 

While this will give established players like the JSE no joy, this innovation is great news for South Africa, for business owners and for the millions of unemployed people in the country whose future prospects depend on greater investment in the local economy. 

Countries like Switzerland have already enacted an enabling framework for this capital- raising solution to thrive and we can only hope that the South African government will do the same.

The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.