Digital financial assets (DFA) are digital rights that include monetary claims, the possibility to perform rights on equity securities, the rights to participate in the capital of a non-public joint-stock company, and the right to claim a transition of equity securities, which are provided by the decision to issue DFAs. There are also hybrid-equity securities, which are a combination of digital financial assets (DFA) and utility tokens (UT); that is, the right to claim the transfer of an object (or objects), exclusive rights to the results of intellectual activity, and (or) rights to use the results of intellectual activity, performance of work and (or) the provision of services.
Key participants of the DFA market:
1. Platform participants:
- Information system operator. These functions are similar to those of depositaries: the creation and maintenance of an IT infrastructure for making deals with DFAs, the organization of emissions, conducting deals on the platform, interacting with investors and authorities to provide data and enforce court decisions, processing payments for DFA deals using nominal accounts, and so on;
- Exchange operator. These functions are similar to those of a broker/exchange: making deals with the DFA, maintaining the DFA register, and clearing.
2. Platform users:
- Issuers (legal entities and individual entrepreneurs),
- Investors (legal entities and individuals),
- Investment banks (as underwriters).
The issuance, recording, and circulation of DFAs are conducted based on blockchain. The backbone of DFA is a smart contract — a program code that records the rights and obligations of the deal participants and the deal conditions in the distributed registry and ensures their automatic enforcement in the future under specific conditions.
The main difference between DFAs and cryptocurrencies is legal regulation. DFAs are issued on legitimate information system operator platforms, the activities of which fall under the supervision of the Bank of Russia. The DFA issuer is a specific legal entity that has obligations to the owners of the DFA and whose activity is regulated by law. Unlike cryptocurrencies, DFAs are backed by real assets.
DFAs are not a means of payment either in Russia or abroad.
Advantages of DFAs for issuers:
- The security, reliability, and transparency of transactions due to blockchain technology. The distributed database contains information about all transactions by participants, and this cannot be overwritten;
- Adherence to compliance requirements through the use of smart contracts;
- The unified data storage system ensures faster circulation of documents;
- The simplicity of issuance compared to traditional tools (stocks and bonds) thanks to the lack of government registration of issues, detailed issue documentation requirements, information disclosure, etc.;
- Cheaper issuance than classic financial tools. The reduction in the number of intermediaries reduces commission costs. Tokenization also reduces costs connected with the storage, transportation, and insurance of the underlying asset;
- Lowering the barriers of entry to the capital market related to the lower issuance cost;
- Attracting more investors by reducing the minimum lot of the instrument.
Advantages of DFAs for investors:
- Legal transparency of deals;
- High transaction speeds;
- Lowering the investment entry threshold through the possibility of splitting some DFAs;
- Reducing transaction fees;
- Increased opportunities for the diversification of investments;
- Opportunities for the creation of hybrid instruments, which unite financial tools and non-monetary claim rights;
- A possibility to structure investments for business in a digital format.
Disadvantages of DFAs:
- Limited liquidity – the lack of active secondary market listing;
- Data asymmetry – the decision to issue DFA is published in the public domain, but at the same time, the traditional order of information disclosure is absent, and the information disclosure is incomplete (for instance, the lack of some DFA issue results in the public domain);
- Restrictions on DFA circulation – prohibition of public issuances;
- Restrictions on investor qualification (by the investment amount and assets);
- Restrictions for institutional investors (non-state pension funds, insurance companies, etc.).
Risks of DFAs:
- Risks for the infrastructure operators – credit risk for the information system operator;
- Technical risks and cybersecurity – platform failure risks, errors in information entry in the DFA register;
- Common risks that may arise due to the absence of an established practice for DFA issuance, for example, tax and legal risks.
Examples of DFAs:
- Quasi bonds: RZD FRN 13dec2023, RUB, Inco-Energo, 17% 2apr2024, RUB (InCO 1);
- DFA comparable structured bonds: Alfa-Bank, 20sep2023, RUB, Alfa-Bank, 19feb2024, RUB;
- ‘Digital square meters’: Samolet Plus DFA, 31dec2025, RUB, G-Group, 30aug2024, RUB;
- DFA on shares: Digital Assets, 25aug2028, RUB, Digital Assets, 2aug2028, RUB;
- DFA on precious metals: Sberbank (8ABEA177), Alfa-Bank, 13jun2024, RUB (DFA);
- DFA including utility digital rights: Digital Heritage, 12sep2028, RUB (HERMITAGE_1, NFT) (VAd01), Digital Heritage, 22sep2028, RUB (HERMITAGE_24, NFT) (VAm15);
- DFA in foreign currency: Metrovagonmash, 4.2% 30dec2022, CNY;
- Secured DFA: TD Grass, 10.366% 22dec2023, RUB (938CF127), SOUZ Leasing, 8% 20dec2022, RUB (DFA);
- ‘Digital factoring’: Global Factoring Network Rus, 30sep2023, RUB (NDM_5), Sberbank Factoring, 6.9054% 30sep2022, RUB (9162996C);
- Floating rate DFA: RZD, FRN 13dec2023, RUB, NTS Gradient, FRN 10jan2024, RUB (NDM_12);
- Fixed rate DFA: Gazprom Neft, 13% 24nov2023, RUB (DFA), PR-Leasing, 14% 2oct2026, RUB (NDM_13).