Certified Anti-Money Laundering Specialist Certification (CAMS) Practice Exam

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What is meant by dematerialization of securities?

Conversion of physical securities into digital records
Registration of securities under a new legal name
Issuance of new physical security certificates
Destruction of outdated securities

The correct answer is: Conversion of physical securities into digital records

Dematerialization of securities refers to the process of converting physical securities, such as stock certificates or bond certificates, into digital records. This transition eliminates the need for physical documents, thereby streamlining the process of buying, selling, and transferring securities. Digital records offer several advantages, including increased efficiency in transactions, reduced risk of loss or damage to physical certificates, and lower administrative costs associated with maintaining physical documents. The dematerialization process enhances safe custody of securities since they are stored in electronic formats managed by depositories. This also contributes to improved record-keeping and easier access to ownership information, benefiting both investors and financial institutions. By converting physical documents into electronic formats, the financial market becomes more agile and responsive to the needs of participants, which is a key innovation in modern finance.