The Model of OTC Securities Market Transformation in the Context of Asset Tokenization

Abstract

The relevance of this study stems from the fact that the development of a market for financial instruments can significantly expand lending opportunities for small- and medium-sized businesses. While research on the impact of tokenization on financial markets is extensive, literature provides virtually no description of mathematical models that can be used in the design and development of information systems issuing tokenized financial instruments. Thus, the study aims to develop mathematical models representing the transformation of the over-the-counter (OTC) securities market induced by the tokenization of underlying assets. The development of crowdlending platforms is gradually transforming the financial market landscape. The key change trends consist in transactional fragmentation both on the demand and supply sides. This paper proposes a mathematical model of internal transformation occurring in the OTC financial market, which describes the process of managing rights to underlying assets during their issuance and circulation. The model is built by analogy with the Harrison–Ruzzo–Ullman (HRU) model, applying the same principles to the relations of economic agents in exercising access rights to underlying assets as those that regulate access rights to files. The research novelty of the presented model consists in the formalization of financial market transformation occurring in the context of asset tokenization, which significantly expands the mathematical apparatus of digital financial transactions. This paper also proposes a mathematical model of competitive tokenization-induced transformation occurring in the OTC financial market, which describes transaction costs associated with attracting investment in the OTC financial market and the market for tokenized assets. In addition, the barriers of the OTC financial market and the stock market are described indicating the supply and demand trends in the context of transformation occurring in the OTC financial market under the influence of underlying asset tokenization. The novelty of this model lies in the mathematical formalization of the investment attraction process in the market for tokenized assets. The theoretical value of the developed models consists in the confirmation of significantly expanded supply capabilities of tokenized assets on the graph showing the dependence of asset returns on invested capital. © 2022 by the authors.