In 2018 a foundation for Security Token Infrastructure has been laid. New regulations in Europe and other countries are planned in 2019. Private Placement, being as a door to IPO, demonstrated an amazing adoption start for STO market. In 2018, the value of PE deals reached a 10-years pick of $1.4 trillion, according to Mckinsey Private companies will benefit the most from the tokenization due to additional liquidity. What's going to comprise of these private placements of 2 trillion USD projected for 2019?
Evaluation investment in security tokens
Security Token: an investment (or smart) contract coded natively as software for the blockchain for the distribution, transfer, and store of value. A Security Token is a digital representation of value that is subject to regulation under security laws.
Tokenisations is a method that converts rights to an asset into a digital token. It is effectively a means to represent ownership of assets on DLT, according to ESMA
What is Security, by the way?
An asset considered as a security under the definition of the case SEC vs. Howey if the following involves:
- a person invests his money (consumer investment)
- in a common enterprise
- with the profit expectation
- solely from the efforts of the promoter or a third party
What are the types of tokens?
- payment tokens (like bitcoin) which are used to transact payments and have no additional functionality
- utility tokens used within the network as an incentive, to sense behaviours
- security (or asset-backed) tokens
- it makes sense to distinguish such notion as tokenized security. The issue raised by ESMA: “the frontier between crypto-assets and traditional financial assets is blurring as some traditional financial assets are starting to be issued and transacted on DLT and the business models are evolving."
- equity token, a subclass of the security token. Tokens which function as same as shares of stock. They represent the percentage of ownership of some third-party asset. Their value can be affected by dividends to the holder.
Why tokenize fund assets?
Fractional accessibility, increased liquidity, technological automation, reduction of issuance cost and marketing, opening up a new class of investors- are the factors of the ongoing upward trend of #securitytoken.
- Exposure institutional investors to crypto market
- Accessibility. Fractional ownership of security token enables access to the institutional type of investment. Tokenization of the private placement make it liquid and eliminate minimum investment requirements for its investors.
- Opening Up Capital to Global Markets. It's aligned with the blockchain vision to make assets and resources accessible for everyone.
- Increased liquidity due to 24/7 markets when the market is developed
- Exposure to VC risk profile deals with the ability of fast exit
- Liquidity premium. If we take an analogy with the private firms, we can expect a liquidity premium from 20 to 50 %, depends on the quality of assets and systematic risk.
- Rapid settlement
- Partial elimination of the intermediaries due to programmable functionalities of platforms
- Hedge against more volatile cryptocurrencies
How big is the market for security token?
There are more than 2,0000 crypto-assets outstanding representing a total market capitalization of cryptocurrency of around $132 billion per CoinMarketCap as of March 2019, more than 50% of it is accounted for bitcoin. Currently, there are few publicly available true “security token”: $POLY, $RVN and $NEXO which made less than 1% of total cryptocurrency market. In comparison, the aggregate market capitalization of the NASDAQ in the New York Stock Exchange is over 30 trillion dollars. So the crypto-assets represent the relatively small volumes involved and the limited linkages with traditional financial markets. The tsunami start is when some substantial portion of that 30 trillion dollars in assets in public market starts to come in and become ultimately tokenized.
What is the infrastructure needed for Security Token?
The security token ecosystem can be broken into 6 categories: (1) Issuance (2) Broker-Dealers (3) Custody & Trust (4) Legal (5) Compliance and (6) Trading
Security token exchanges
The pioneer's STO exchange t.Zero is currently trading with low volumes, planning to see the boost by the end of the year. The expected boost is related to current platform volume, but not to NASDAQ's
Global Liquidity and Settlement System (GLASS), a SharePost alternative crypto trading platform with liquidity pool and cross-border transaction features.
Liechtenstein based Bank Frick is launching an institutional, fully regulated exchange platform DLT Markets to access to the digital token asset class. Frick Bank is already a provider of a custodian solution.
Long anticipating of establishing of Bakkt's secure global platform which will enable access for institutional investors via the regulated platform.
Until Bakkt is awaiting regulatory approval in the US, its competitor CoinFlex has announced the launch of secure Hong Kong-based crypto derivative exchange.
Will institutional investors arrive?
David Weild, CEO of Weild & Co., and former vice chairman of NASDAQ gave the opening keynote address at the Security Token Industry Launch Event in New York early 2019. He provided with insight on Security Tokens from Wall Street perspective: « You don't need to be the first mover anytime. You need to make sure that you've got notes around your business and you watch the technology, you watch other people make mistakes take on regulatory risk, legal risk, legal liability, and when you feel that it's proper that you can either implement or bye.»
As an example, he pulled up Morgan Stanley's Code of Conduct: “Does my action comply with the letter and spirit of applicable laws, regulations and our policies?" The people from Strategic investment group at Morgan Stanley internally have calculated what happens if I lose? Loss of 1 dollar associated with a scandal, which therefore could trigger the stock sells off, could lead to a loss of 1.75 billion dollars of shareholder value. So, $ 1 = $ 17.45 billion
From this example, it's clear why institutional investors are so cautious with the movements.
Let's see from another angle.
When to fully Adopt for financial institutions?
A dilemma faced by financial institutions is when is the right moment to enter the cryptocurrency related activity. They consider how to de-risk and to access at the rather proven technology with substantial adoption rate. In the same time, competitive threat reaches a tipping point, competitors entering underwriting business and key institutional investors expressing interest. Their retail customers are going to competitors. The pressure is coming from all angles, so to adopt blockchain or not is no longer seen as the soft question, but rather as a crucial competitive factor.
In February 2019, J.P. Morgan became the first major U.S. bank to launch its own cryptocurrency «JPM Coin». The digital coin was designed to settle security transactions using blockchain. This allows them to enter the wholesale payments business, that migrates to the blockchain. Jamie Dimon, CEO of JP Morgan expressed the bank strategy: «JP Morgan Coin could be internal, could be commercial, it could one day be consumer».
Interestingly enough, that examples of future GP Morgan, Facebook, Strasburg coins can boost adoption.
The conclusion is that there is no conclusion. All is in dynamic development. Every week some important projects are launched, new countries get involved with the launch of regulation acts. All is in motions, rapid development, purification and optimal structure.
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