Overall, the number of publicly announced STOs increased in real estate, technology, heavy industries, and consumer services between 2019 to 2020. But the highest growth segment in 2020 was real estate.
It more than doubled its number of offerings compared to 2019, while finance and banking saw a steep decline to nearly a third of the previous year’s figures.
Total Number of STOs by Industry, 2017 – 2020
Source: Cointelegraph Research
When it comes to the amount raised, real estate is again at the top with banking and finance taking second place. As mentioned previously, this is mainly due to the Red Swan project accounting for almost all of the capital raised during 2020.
Amount Raised by Industry, 2017 – 2020
Source: Cointelegraph Research
Security Tokens Raised $5 Billion in 2020
Both the target raise amount and the raise amount saw an increase in 2020, however, the most important trend is the increasing success rate (in terms of % of target raised) which seems to have steadily increased over the past four years, as more and more investors begin to familiarize themselves with STOs.
The major segments behind the higher success rate are finance and banking and real estate, as all other segments seem to be lacking in this regard.
Target Amount vs Amount Raised in STOs, 2017 – 2020, $billion
Source: Cointelegraph Research
Percentage of Funding Goal Reached, 2017 – 2020
Source: Cointelegraph Research
That being said it is interesting to see that debt is the best performing class in terms of % of the raise target achieved, followed closely by asset backed. Equity lags way behind. This is likely due to the perceived risks across those different kinds of security tokens.
Percentage of Funding Goal Achieved by Underlying Asset Class, 2017 – 2020
Source: Cointelegraph Research
More countries and companies will also try out STOs for bond issuance as the mechanism matures. We will turn to this topic in an article next week.
ZURICH – Zurich-based bitcoin investing startup, Relai, today announced that Imo Bábics will join as Chief Marketing Officer to lead the company’s European expansion plans.
He brings over twelve years of marketing experience to Relai and a proven track record in growing a cryptocurrency startup. As the Head of Marketing at Bitpanda, Bábics built the Austrian fintech’s marketing department from the ground up within two years, paving the way for its future rapid growth. Before Bitpanda, he worked at Universal Pictures in London, where he oversaw the implementation of launch campaigns for Universal’s theatrical releases across the EMEA region.
Relai co-founder and CEO, Julian Liniger:
“We’re very excited to have Imo join the Relai team. As an experienced marketer with a track record of taking startups to the next level, he will be a valuable addition to our executive leadership team as we move into the next phase of our growth.”
Relai Chief Marketing Officer, Imo Bábics:
“The best days for Bitcoin are yet to come as it’s shifting from being the domain of pure technologists to the domain of digital natives who are concerned with governments inflating their currencies and looking for ways to protect their savings. I believe Relai has a unique opportunity to become the app of choice for the long-term bitcoin investor with its fast, secure, and hassle-free experience.”
In June 2021, Relai raised CHF 2.5 million in a Series A round led by renowned Swiss VC Redalpine. The capital injection will be used to build the leading bitcoin investing app in Europe and obtain a financial intermediary license.
About Relai
Relai is on a mission to make investing in bitcoin easy. The ‘Made in Switzerland’ bitcoin investment app enables anyone in Europe to invest in bitcoin within minutes and without the need for registration, verification, or a deposit. Learn more about Relai at www.relai.ch.
Along with the number of security token offerings grew the number of potential investment objects that have to be examined individually for a return on investment to determine what potential this new technology brings to investors.
According to the security token database1 compiled by the Cointelegraph Research team, there were 80 publicly announced STOs in 2020, just slightly up from the 79 STOs in 2019.2 Although Polymath claims 2019 had 380 security tokens, they are mistakenly combining the total count for ICOs, IEOs, and STOs in the 6th PwC report on ICOs and STOs.3
In 2020, our database reports $4.8 billion was raised by 80 companies, with a major part of the funding coming from two STOs. The first one was Red Swan, a US-based commercial real estate firm that partnered with Polymath and tokenized $2.2 billion in high-end properties. The second notable STO in 2020 was conducted by Thai Central Bank, which sold $1.6 billion worth of savings bonds using blockchain technology.
In 2019, nine security tokens started trading on secondary markets. During their first 18 – 24 months of trading, three of the coins had positive returns (BCAP: +129.01% and two RealT properties: Audubon: +52.93% (+10.38% APY) and Marlowe: +8.59% (+12.39% APY)). Six of the coins had negative returns (SPiCE: −6.04%, RealT property Fullerton: −6.48% (+12.76% APY), 22X: −53.85%, TZROP: −63.75%m PRTS: −66.67%, LDCC: −95.88%. The largest winner since inception of trading on secondary markets has been Blockchain Capital’s BCAP token, and the largest loser was tZERO’s TZROP token. The market cap of TZROP was bigger than the 8 other tokens listed in 2019, which brought down the entire market capitalization of security tokens between 2019 and 2020 by 50%.4
However, 2020 did see some recovery for security tokens. In 2020, the market cap grew 517% from $59 million to $366 million between Jan. 1 and Dec. 31. The daily trading volume grew by over 1,000% between 2019 and 2020 and had an average of $5.8 million in 2020. In 2020, many new coins started trading on secondary markets. The top winners and losers are shown in Figure 5.
2020 Return For Secondary Market Trading of Security Tokens
Source: stomarket.com, Cointelegraph Research
Which types of security tokens do exist? Considering such a versatile form of investment, it won’t surprise anyone that this question can’t be answered completely. It is, however, quite possible to list the most popular forms of Security Tokens. For this reason we will publish another article on this topic in the next week.
1 To purchase the database, contact [email protected] 2 This is not accounting for projects without an announced sale date 3 https://www.pwc.com/ee/et/publications/pub/Strategy%26_ICO_STO_Study_Version_Spring_2020.pdf 4 https://blog.stomarket.com/security-token-market-end-of-year-report-2020-59151e0caa1d
After discussing Ethereum and security token issuance last week, this week we will turn our attention to various alternatives. When deciding which blockchain to issue a security token on, an important factor is the software protocol used to represent the asset on the blockchain. Different software protocols have different options for the issuer and specific exchanges only work with certain protocol standards.
Ethereum’s dominance is not as large as it was in previous years, and it seems that projects are looking for alternatives. Tezos is the second most popular blockchain for security token issuance and trading. There are now more than $2.5 billion STs announced with the usage of Tezos blockchain. Tezos smart-contracts are more flexible for security token offering needs, having compliance and regulation features built-in. Elevated Returns was a pioneer in the security token industry and issued one of the the first security token backed by a trophy real estate asset, the St Regis Resort in Aspen, in 2018.
Tezos
Tezos is the second most popular blockchain platform after Ethereum for security token primary insurance and secondary trading. Tezos blockchain offers wider opportunities to test transactions and smart contracts off-chain before launching on-chain, which provides a solid security standard. Tezos also offers secure storage solutions for security tokens as well as flexible upgradeability of smart contracts. Tezos also has all the necessary compliance features including built-in KYC and AML compliance.
Notable uses of Tezos include Societe Generale, which recently issued the first structured product as a security token on the Tezos public blockchain. A large Brazilian investment bank BTG Pactual along with Dubai’s asset manager Dalma capital launched a real estate STO on Tezos backed by Brazilian property. Originally, the STO was launched on the ETH blockchain but BTG Pactual sees a potential in Tezos and that is why the STO was then moved to an alternative platform.
Hyperledger
Hyperledger is an open-source umbrella blockchain project by Linux. It’s product Hyperledger Fabric’s Fabtoken is a protocol which has a cross-chain ability as well as high code and data security. Also, the Fabtoken allows issuers to make and customize their token as thoroughly as they want to, including all the compliance and security features.
Metacoin is the first and quite significant coin made on Hyperledger’s platform. Metacoin consists of several projects — a block explorer, a wallet and a platform where issuers can create their own token. The Metacoin project is focusing on the development of the digital asset market and aiming to create its own blockchain ecosystem.
tZERO
Tzero protocol is made for connecting the traditional market with the digital asset market. tZero protocol was developed to build the first SEC approved exchange for tokenized securities. That is why it has high standards for security and compliance (KYC, AML).
Cat-20/Cat-721
Those 2 token platforms by Seccurency are interesting because they are not tied to the blockchain. It is for the issuer to decide what blockchain he wants to use — Ethereum, Ripple, EoS, GoChain or Stellar. They can also be freely transferred across the blockchains mentioned above. What is more, CAT protocols have in-built KYC, AML, KYB, KYW as well as the validation of investor’s accreditation.
ST20 v1/v2
St20 is a protocol built on Polymath’s own blockchain, however it is fully compliant with the ERC standard tokens. It was one of the first security token protocols on the market. ST20 has in-built KYC and AML services as well as various mechanisms for token customization available for issuers.
Polymath has partnered with several significant blockchain market players including tZero, Minthealth and Blockestate.
SRC-20
This protocol is created by Swarm and operates on its own blockchain. SRC-20 standard is quite significant due to its flexibility, integrated governance and a wide range of assets that can be tokenized. The protocol creators claim that almost everything can be tokenized with the use of their protocol including real estate, investment funds, businesses and development projects. The protocol has an in-built mechanism that secures the right for revenue streams of tokenized assets.
Swarm cooperated with OpenFinance to broaden the usage of SRC-20 protocols. OpenFinance is well-known as a blockchain for private equity and so, there are some collaboration projects based on SRC‑20 standard.
It is very important to ask why security tokens exist and how they are technically enabled. For investors, however, the question of what return Security Tokens offer is also relevant. When looking back at the STOs of the last few years, we see a very mixed picture here, which we would like to explore in more depth in next week’s article.
Valkyrie Digital Assets has announced today the launch of its fourth investment vehicle, the Valkyrie Dash Trust. This new trust for Dash will join Valkyrie’s growing investment product offerings that currently feature a Valkyrie Bitcoin Trust, Valkyrie Algorand Trust, and a Valkyrie Polkadot Trust.
The Trust is the first investment vehicle at Valkyrie to invest solely in Dash, the digital asset that powers the Dash Network. The primary investment objective of the Trust is to reflect the value of Dash held within, to offer investors access and exposure to the cryptocurrency in an insurable, cost-effective manner. BitGo is listed as the custodian for the Valkyrie Bitcoin Trust that will provide institutional grade quality and security. The Valkyrie Dash Trust SEC Registration filing can be found here.
The Dash Investment Foundation (DIF) invested in Valkyrie Investments during their initial seed round in December 2020 signing a SAFE agreement. Valkyrie has since then recently completed a Series A funding round raising $10 million which included an interesting roster of backers such as Tron founder Justin Sun, Litecoin founder Charlie Lee and former Major League pitcher C.J. Wilson. The DIF is the world’s first ownerless and memberless investment fund and is completely controlled by Dash’s decentralized Masternode Network.
–@DashInvests invests in the seed round of Valkyrie, which later gets investment from @SatoshiLite and @justinsuntron (which make's Dash's investment go up).
-Valkyrie debuts its own Dash trust#Dash doesn't rely on "institutions are coming", it builds its own. 💪 https://t.co/0owTGPUYpm
Valkyrie’s team is comprised of industry-leading investment professionals with a wealth of financial knowledge and investment management expertise who have previously launched multiple ETFs, publicly traded funds, and ETPs, including Bitcoin funds with backgrounds across Guggenheim Partners, UBS, Chicago Board of Trade, Chicago Mercantile Exchange, and The World Bank.
Valkyrie CEO, Leah Wald began her career working at the World Bank. Leah recently served as the VP of Portfolio Management at Exponential. Previously she served as a Partner at Lucid Investments, an asset management firm where she launched their Bitcoin investment arm. Leah has developed investment strategies for two of the world’s top-performing multi-billion dollar asset managers.
Valkyrie CIO, Steven McClurg is a former Managing Director at Galaxy Digital and has a long history in investment and portfolio management. Steven was previously the Founder and CEO of Theseus Capital that was founded in 2018 and was later acquired by Galaxy Digital.
How Will The Valkyrie Dash Trust And DIF Investment Help Dash?
The Valkyrie Dash Trust will provide several benefits including:
Institutional investors will now be able to purchase Dash through the fund.
increased accessibility to Dash through traditional financial markets.
Increase in Dash awareness and adoption.
Dash will benefit and profit from the growth of other products such as Valkyrie’s Bitcoin trust, or the launch of new products, such as ETFs or trusts in other digital assets in the future. As a partial owner, this means that as Valkyrie Investments grows, so will the value of Dash Investment Foundation’s shares in Valkyrie. Investment returns to the Dash Investment Foundation can then be reinvested in Dash’s ecosystem.
Ryan Taylor, CEO of Dash Core Group provided more insight as to why is it so important for institutional investors to have access to Dash:
“Institutional investors can help expand access to new jurisdictions and investors. For example, with a stock exchange listing through a Dash trust, it will be much easier for the public to hold Dash exposure in tax-advantaged accounts like retirement accounts, or gain access in jurisdictions like New York state. Institutions also have unique needs for services like custody that Valkyrie provides as part of the trust. This solves many issues surrounding asset security and controls that might otherwise prevent institutions from investing.”
Ryan Taylor, CEO at Dash Core Group
Is Dash Actually Being Used As “Digital Cash” For Payments?
The Valkyrie Dash Trust launch comes only one week after the launch of DashDirect, a groundbreaking instant-savings retail app that allows users to pay with Dash and obtain exclusive discounts up to 12% on everyday purchases at over 155,000 national chain retailers and 125 online stores in the U.S. featuring retailers such as Best Buy, DoorDash, Instacart, CVS, Lowe’s, Staples, The Home Depot, Autozone, GameStop, Chili’s, Ulta, Chipotle, Subway, American Eagle, and more.
“The DashDirect retail-saving app developed by CrayPay has transformed and revolutionized how I fulfill my everyday shopping needs within the United States. DashDirect provides unrivaled utility with the ability to perform payments with the cryptocurrency Dash coupled with significant discounts at the largest retailers in America. Paying for goods and services with Dash has never been so easy with increased accessibility to both in-store and online merchants. The DashDirect app is a game-changer for the crypto payments industry as it allows me to spend Dash at nearly seven times more merchant locations than Bitcoin’s global reported total.”
Mark Mason, Dash Media and Business Relations Manager
Tech journalist @naomibrockwell and host of @CoinDesk's "The Hash" reports on the launch of the #DashDirect 🛒🛍️ retail app, that allows users to pay with @Dashpay for everyday purchases at 155K+ national retailers & 125+ online stores in #USA with discounts up to 12%. 💸🙌 pic.twitter.com/1BfocjdRNQ
Dash is gaining incredible traction in the market for real-world use and adoption. In fact, Dash has experienced its 20th straight quarter of adoption growth. Dash as a decentralized network open source project is very much focused on expanding adoption and mainstream use. Dash’s development roadmap highlights the upcoming launch of DashPay, a wallet with a username-based payments experience to which mainstream consumers are already accustomed, in addition to enabling anyone to create their own decentralized applications with Dash Platform. These significant improvements in user experience will likely accelerate Dash’s user growth rate further.
When deciding on which blockchain to issue a security token, an important factor is the software protocol used to represent the asset on the blockchain. Each software protocol has different options for the issuer, and certain exchanges only work with certain protocol standards.
Ethereum remains by far the most popular platform for security token offerings, because it has huge liquidity, simply created smart contracts and well-known standards for token issuing. Moreover, there are lots of wallets, exchanges and platforms that are ERC compatible, where holders and issuers can easily store, transfer, and manage their tokens.1
Overstock, which is the largest security token project on the market, is made with the ERC-20 standard. Overstock is a large NASDAQ listed internet retailer which specializes in furniture sales. OSTKO token allows its holders to get dividends. Its market cap is more than $280 million and daily trading volume is around $100,000.2
Ethereum’s dominance is not as large as it was in previous years, and it seems that projects are looking for alternatives. Tezos is the second most popular blockchain for security token issuance and trading. There are now more than $2.5 billion STs announced with the usage of Tezos blockchain. Tezos smart-contracts are more flexible for security token offering needs, having compliance and regulation features built-in. Elevated Returns was a pioneer in the security token industry and issued one of the the first security token backed by a trophy real estate asset, the St Regis Resort in Aspen, in 2018.
The Aspen Coin, which was initially issued as an ERC20 token, is now hosted on the Tezos blockchain, deemed by Elevated Returns as the best blockchain for STO’s. The Aspen Coin is more significant by its structure than by its size. Since inception, a total of 12% have been paid out to token holders as distributions, both in fiat and cryptocurrency. The token is now trading on the tZERO ATS. Furthermore, Aspen Coin offers additional features like perks attached to the ownership of the token. The perks are financial such as up to 50% cash back on a hotel stay as well as access to unique experiences only available to members.
Elevated Returns has recently created a completely regulated digital finance ecosystem, which is going live this summer (July 2021) in South East Asia. The Elevated Returns team has spent 2 years acquiring licenses and made a major investment in Xspring Capital which owns a regulated security token platform in Thailand. This will bring to the market the first unrestricted regulated public offering with simultaneous listings on a regulated exchange. The token is backed by a real estate asset and will be listed on the ERX digital asset exchange. There are several large companies aiming to launch their future STOs using Tezos blockchain — tZERO, BTG Pactual, Dalma Capital, Fundament group and some others.3
Number of STO by issuing platform, 2017 – 2020
Source: Cointelegraph Research
Ethereum-based Security Tokens
Types of Ethereum-based Tokens
Source: Adapted from E&Y Tokenization of Assets report, Cointelegraph Research
In order to be compatible with wallets and blockchains, an issuer must use the same standards as the other players. However, the ERC-20 doesn’t allow for the enforcement of the rules and regulations that govern private securities. A few of the options that security token issuers are looking for when choosing an appropriate standard include:
1. Encoded Compliance — The transfer rules are embedded in the securities and can never be transferred to an ineligible individual in either the primary or secondary markets. 2. Reduced Costs — Fees to do with settlement and reconciliation are dramatically reduced with compliant P2P transfers. 3. Controlled Securities — Issuers remain in control of the tokens, even with investor self-custody. 4. Increased Transferability — the reduction of friction points across the value chain unlocks highly transferable assets.
The ERC-20 protocol is the original and oldest standard for issuing tokens. However, it has its own vulnerabilities and disadvantages. For example, tokens can be drained from the smart contract with no recovery possible, or an investor could not retrieve their tokens if they sent them to a non-ERC-20 wallet or smart contract or if the holder loses his private key. There are also compliance and regulatory issues such as being difficult to set all the necessary KYC and AML procedures inside the ERC-20 standard. For example, you cannot enforce KYC for secondary market trading. In that case, many alternative protocols were developed to help suit the security token market’s needs. All those alternatives (ERC-1400, ERC-721, ERC-1155, etc) are compliant with the ERC-20 standard which means that they can be easily stored, exchanged and transferred with ERC-20 infrastructure.4 5 6 7
Alternatives to Ethereum’s ERC-20 include:
DS Protocol
DS is an open-source protocol , which was designed by Securitize specifically for securities and supports third-party applications. It has special DS apps, which address relevant events connected to the tokenized economic rights (issuance, trading, cap-table generation, governance events, required pay-outs). This protocol also has integrated compliance and registry services. Tokens made with the use of this protocol are user-friendly — it is easy for holders to manage their tokens and they regularly receive various updates related to their tokens.
Current Media’s CRNC token. It is a token of a reward based streaming platform Current, which pays its users for using their service and providing data. The token is aimed at giving users better rewards while engaging the media.
Blockchain Capital token BCAP is also based on DS protocol. Blockchain Capital is a large venture capital firm specializing in investing in blockchain based projects. Blockchain Capital used DS protocol for their STO due to the compliance, regulations and security features offered by Securitize for their security token.
R-Token
R-token is an ERC-20 type token made by Harbor with some extra features added: in-built KYC, AML and taxation services as well as some flexible functionality which helps the issuer to make the necessary regulatory configuration. R-token standard allows the creation of tokenized regulated securities.
Harbor, which created R-token, was acquired by the most popular digital asset custodian BitGo in 2020 and gained broker-dealer and transfer agent licenses. BitGo, in turn, was recently acquired by Galaxy digital — one of the most significant digital asset focused VC. We see those acquisitions as a possibility for BitGo to become a clearing house for the security tokens.
iCap Equity which is a real estate firm based in Seattle is using Harbor R-token for tokenizing its assets.
T-REX
T-REX is a protocol built on the public Ethereum blockchain which was created by Tokeny Solutions, which has been recently been renamed Tokeny Sarl. Although T-REX is Based on the ERC-20 standard, it has more than 100 options that can be used by issuers in order to enforce compliance and manage control for the issuer, agents, and investors.
Tokeny Sarl state that they have more than $8.5 billion of tokenized assets with the help of their T-REX protocol.
For example, Metalstream — a South-East Asian precious metal company. Their tokens are backed by gold and as it is stated by the token issuers — 1000 MSGLD tokens can be exchanged for 1 kilo of gold. Also, the token holders can get a discount on purchasing gold of up to 40% of market spot price.
SFT
SFT protocol by Hyperlink Capital uses Solidity programming language which is used by ETH developers, that makes the SFT part of the ETH network. Basically, this protocol is similar to ERC-20 with the same comfy features which allow to easily build a smart contract. However, it is more complex and secure and that is why, allowing to tokenize debt and equity-based securities.
ERC-1404
ERC-1404 was developed by Tokensoft and based on the ERC-1400 standard and is the ETH based SEC approved standard for security tokens. Which means that it fulfils the necessary security and compliance requirements including in-built KYC and AML (both for primary and secondary market).
Tokensoft launched its own STO based on their ERC-1404 standard. Tokensoft is one of the most significant security token platforms on the market. It has a platform for launching STOs as well as asset management features. What is also interesting, Tokensoft is permitted to deal with SEC registered securities.
Nevertheless, Ethereum is not the only platform out there that allows its users to issue a Security Token. That is why we will dedicate another article to Tezos and other blockchain platforms next week.
Decentralized finance is flourishing. With no central parties involved and few regulations in place, tokens are springing up all over. But what about regulations and how are they affecting this new industry?
Practitioner Perspective with Dr. Lewin Boehnke of the Crypto Finance Group
Most commonly, a public blockchain is also the medium of choice when multiple financial intermediaries cooperate to issue a tokenized product. Public smart contract platforms are becoming a sweet spot for a whole class of centrally issued securities. However, tokenized real-world assets offered by centralized and regulated issuers require Anti-money Laundering and Know Your Customer policies, and this form of centralization opposes the decentralized nature of the network.
The precise obligations, which regulated financial institutions have, heavily depend on the details of the token. What is the role of the institution? Is it the issuer of a product? Is it a custodian or co-custodian? In addition, the regulatory situation of the asset itself, as well as the jurisdiction in question, factors in.
Standardizing asset types and the corresponding token functionality will ease the handling significantly, but for the time being, these are mostly customized considerations. Given these inconsistent obligations, it is difficult to build processes that integrate neatly with client wallets, have a familiar user experience for the holder, and enable well-established processes for banks.
Consider the traditional operations when a client initiates a transaction, for example. Some checks are executed immediately and automatically, but if a transaction is flagged, it may be stalled, and may or not be executed after the pending checks. Although such operations could be mimicked by a token smart contract, there are two drawbacks.
First, many of the automated checks cannot be completed with a smart contract because e.g. they require confidential internal information. This can limit the approvable transactions immediately to very few cases — e.g., transferring small amounts between users who are both asset holders already.
The ideal solution is doing checks during the transaction. This process of going from an on-chain & off-chain (hyphen use consistency in entire text) checks brings us to the second drawback: the user’s experience with the wallet will likely break completely. User wallets expect a transaction to either make it to the chain, in which case the balances should be changed to reflect that, or to fail, in which case, this is clearly indicated to the user. If a transaction check is pending off chain, the intermediate on chain state cannot be interpreted by the user’s wallet. The balances in the users’ wallets only change once a bank’s approval has been published on chain.
In other words, the blockchain simply cannot reach out to the bank, so the bank has to make an entry on the blockchain. Besides such post-checks, two more options exist:
1. Pre-checks improve the situation by feeding information about the transaction or addresses into the contract before the holder attempts the operation.
2. and finally, (2) there is the ideal solution of doing all checks during the transaction. When the holder includes the countersigning by the institution in the operation, the contract can check this and act accordingly. Despite being the best option, in our view, this does require some additional plumbing. An ERC-20 contract, for example, does not allow additional data to be provided. ERC-223 and ERC-777 do allow this, but they have very limited support from wallet software. The additional pre-check between the contract and the bank would ideally be included in the wallet as well.
There are still many challenges to solve before the plumbing is in place for blockchain technology to fully disrupt the financial industry, but we are on it.
Find out more about tokenization in the finance sector from the Crypto Finance Group: cryptofinance.ch
This article spoke about ERC-20 contracts as well as ERC-223 and ERC-777 contracts, but what is the technological meaning behind these terms and are there more forms of contracts that can be used when issuing a Security Token? Next weeks article will deal with this question.
How does a company raise capital? Even before the existence of blockchain technology, this question was one of the most important issues in modern business. However, the invention of this new type of technology has not only provided new answers to this old question, but it has also raised new questions, particularly when it comes to the regulatory status of such offerings.
Over the past few years, crowdfunding, private equity, initial coin offerings (ICOs), and security token offerings (STOs) have been some of the ways that investors have provided capital to small and medium-size enterprises (SMEs). Although the concept of crowdfunding goes back to 18th century book sales, the modern conception of crowdfunding is an internet phenomenon. Crowdfunding typically refers to entrepreneurs raising small amounts of capital from a large pool of investors online.1
There are several types of crowdfunding, but the two relevant ones are donation-based fundraising and equity. Donation-based equity crowdfunding is where investors give or “donate” capital to a startup in exchange for a future good or service or just to support the idea. Popular sites for donation-based crowdfunding include Kickstarter that has raised over $3.7 billion and Indiegogo, which has raised over $1 billion. In contrast, equity crowdfunding is the crowd-sale of securities such as equity, debt, membership units, and convertible units. Equity crowdfunding has raised approximately $500 million since its inception in the U.S. in 2015.2
One reason why equity crowdfunding has not garnered more attention is because the JOBS Act’s Regulation Crowdfunding (CF) initially allowed issuers to only raise up to $1 million, and the cost to receive approval from the SEC to raise capital with Reg CF often cost startups hundreds of thousands of dollars. However, this year, the SEC increased this amount to $5 million3, so more firms may use Reg CF in the future; however, this is still a paltry amount given the high costs associated with the regulatory hurdles in the US.
The blockchain technology has enabled six new methods for raising capital including: 1. Launching a free software protocol like Bitcoin (BTC), and then becoming an early miner of the coin when the difficulty is low 2. Doing an initial coin offering (ICO) like Ethereum (ETH) 3. Doing an initial exchange offering (IEO) like Band Protocol (BAND) 4. Garnering venture capital investment like Avalanche (AVAX) 5. Doing an initial decentralized exchange offering like Uniswap (UNI) 6. Launching a regulatory compliant security token like tZERO (TZROP)
However, each method does have unique benefits and disadvantages for issuers and investors. When an investor buys a token in an ICO, IEO, or IDO they are typically entitled to a bundle of digital rights (e.g. rights to use a platform or receive discounts on transaction fees). In contrast, security tokens represent investment contracts with legal protection and shareholder rights that can be enforced in traditional courts. Although ICOs have largely gone by the wayside due to regulatory crackdowns from financial market authorities and investor fatigue from the multitude of scams, there is growing demand for security tokens.
Security Tokens are combining the best of the cryptocurrency world and traditional markets. In comparison to traditional markets, security tokens allow for self-custody, instant settlement, 24/7 trading, higher liquidity via automated market makers, and a reduction in counterparty risk. There are, however, some drawbacks that still need to be worked out, including anti-money laundering (AML) compliance, something we will explore in depth in a practitioner perspective with Dr. Lewin Boehnke of Crypto Finance Group that will be published next week.
1 “Definition of Crowdfunding”. www.merriam-webster.com. Retrieved 2019-01-23. 2 Marks, Howard. How Crowdfunding Is Disrupting VCs. 2018. Forbes. 3 https://republic.co/blog/investor-education/huge-news-sec-raises-regulation-crowdfunding-limit-from-1-07mm-to-5mm
The Dash Investment Foundation (DIF) announced on social media that they have begun to purchase the digital asset RUNE in support and preparation for THORChain’s upcoming DEX. The Dash network elected DIF Supervisors voted to actively purchase THORChain’s native token RUNE with an initial investment of $100,000.
We have started buying RUNE. After Dash is added as a possible asset, the RUNE can vote for it to be given a market. After Dash is available on THORChain the DIF will provide liquidity for the DASH/RUNE pair.
Bring DASH to the DEXs!
— Dash Investment Foundation (@DashInvests) July 9, 2021
Why is the DIF buying RUNE?
Dr. Darren Tapp, a DIF Supervisor informed the Dash community on Discord that “The Rune will be used to vote to add Dash to THORChain once it’s available. We consider THORChain to be an up-and-coming DEX. After Dash is added the Rune will be used to provide liquidity to a DASH/RUNE pair on THORChain. We expect liquidity providing to be revenue positive, although there are risks, it should outperform 50/50 exposure to DASH and RUNE.”
What is the DIF?
The Dash Investment Foundation (DIF) is the world’s first ownerless and memberless investment fund. The DIF was incorporated on March 21st, 2019 as a Cayman Islands foundation company limited by guarantee and is completely controlled by Dash’s decentralized network. The Dash Investment Foundation is tasked with strengthening the Dash network through investment operations. By this, the foundation creates a bridge between the network protocol and the legacy financial and legal systems. This opens new possibilities for entrepreneurs and the Dash network to partner and mutually benefit from the funding available through the Dash network via Dash Investment Foundation.
Mark Mason, Communications Manager for Dash recently tweeted an update showcasing the Dash Investment Foundation’s investment portfolio emphasizing “Companies own Bitcoin,Dash owns companies!”.
The Dash Investment Foundation (DIF) @DashInvests continues to expand its investment portfolio investing on behalf of #Dash's open-source decentralized network, that legally owns 'real-world' property, including investments.
THORChain (RUNE) is a permissionless cross-chain liquidity platform that supports interoperable blockchain communication. It is a non-custodial liquidity marketplace for blockchains that allows users to swap assets freely through multiple networks (cross-chain transfers).
With THORChain’s decentralized liquidity protocol, cryptocurrency projects such as Dash can deposit native assets into Liquidity Pools to earn a yield. THORChain’s liquidity protocol is 100% autonomous and decentralized. Cryptocurrency projects such as Dash can deposit native assets into Liquidity Pools.
THORChain distributes rewards in the form of RUNE (the network’s native token) to any user that adds tokens to a liquidity pool. At the same time, token owners in this instance Dash can stake their assets and earn the fees accumulated from other users accessing the pool.
Dash Incubator Developers begin to implement THORChain
The Dash Incubator is an open-source app that connects users who want to earn rewards for working together to improve the Dash cryptocurrency. The Dash Incubator recently celebrated a 1,000 completed bounty milestone. Ash Francis, a Dash community developer and admin for the Dash Incubator commented about the work that has begun on implementing Dash with THORChain: “Yes this is really happening, we’re estimating around 2 months of development to give us good time to create the bifrost module (chain client) which involves porting a lot of dependencies to Dash. At that point, the THORchain team will need to merge our pull requests, and then once the nodes have upgraded we can create a Dash <> RUNE pool that will get us listed if we’re the highest staked pool in any 3 day period.”
Are DEX’s like THORChain the future of Crypto?
The THORChain project was founded in 2018 under the premise that the use of centralized exchanges to transfer crypto-assets between different blockchains was flawed. Non-custodial exchanges, otherwise known as decentralized exchanges (DEXs), were the long-term solution. Therefore, the THORChain team set out to build an independent blockchain that could bridge to external networks and thus facilitate cross-chain transfers, functioning similarly to a DEX.
The problem often facing DEXs is finding sufficient liquidity. Traders gravitate towards platforms where they won’t lose any value due to slippage. But these same traders are the ones to provide enough liquidity to prevent slippage in the first place. In response, the THORChain team plans to implement an adapted model of Bancor’s “smart token” to create what it calls Continuous Liquidity Pools (CLPs). These pools of available assets give traders access to liquidity without needing to find or contact another buyer or seller.
A wide variety of use cases can be found among security tokens. While we have highlighted a number of these use cases in two previous articles, in this article we would now like to look at the tokenization of private and publicly traded companies.
Tokenization of a Private Company
The shares of a Delaware LLC in the US can already be tokenized, and those tokens represent what the company holds on its balance sheet. In the German-speaking countries, several firms are working on streamlining the tokenization process for the shares of an AG or GmbH including Amazing Blocks in Liechtenstein.1
RealT
Each RealT token represents the tokenized shares of a Delaware-based LLC that holds a specific investment property. This token offers a percent of the rent collected from the property after expenses are paid, and the dividend payment is made daily to each investor in the form of cryptographic assets. RealT has successfully tokenized 75 properties over the last 2 years, and has enabled whitelisted investors to trade security tokens on Uniswap.
tZERO
The tZERO token pays 10% of adjusted gross revenue of the tZERO exchange to token holders on a quarterly basis, subject to board approval and the conditions outlined in the offering memorandum. The token sale collected more than $130 million.
MERJ
The MERJ Exchange is an international securities token exchange. While the tZERO exchange caters to the US, MERJ focuses on non-US investors. Therefore, both exchanges can list the same securities and arbitrage opportunities can arise. The MERJ Exchange token (MERJ-S) is an equity token for the Seychelles-incorporated company, and the token lives on Ethereum as an ERC-20. They hope to raise $4 million and accept accredited investors only. The ERC-20 tokens will be distributed once the security token offering sale closes. The sale is currently still open.
Tokenization of a Publicly Traded Company
The shares of a publicly traded company can be tokenized. The anti-Wall Street renegade Patrick Byrne was behind the first company to do this. His company Overstock.com (OSTKO) tokenized their shares and launched the first ever security token airdrop in 2019. A digital dividend was paid out to each OSTKO investor at a ratio of 1:10, meaning that one share of Series A-1 was issued for every ten shares of common stock, Series A-1 or Voting Series B Preferred Stock.2 This helped onboard thousands of users to the new security token exchange tZERO, because investors had to make an account on tZERO in order to claim their new digital share.
Overstock
Overstock.com is a big e-commerce NASDAQ listed company in the US. Their security token OSTKO allows its holders to earn annual dividends. Since the token is listed on both a traditional securities exchange and on a security token exchange (tZero), an arbitrage opportunity exists between the shares.
There are many security tokens that are issued in the course of a Security Token Offering (STO). In many respects, these STOs are similar to the traditional ICOs that have been popular in the crypto community in recent years, but they are also different from them in significant ways, which we will look at in another article next week.
Virtually any asset can be tokenized, although not all tokenization is done in the same way. Security Tokens also come into play in a variety of different use cases. Here we have highlighted a number of these use cases, and in this article we would now like to look at three more, having already observed various use cases last week.
Tokenization of the Ownership of Tangible or Intangible Assets
These are often referred to as asset-backed securities and can be tokenized ownership of precious metals, apartment buildings, or royalties from music for example.
Blockchain Capital
Blockchain Capital Token is one of the oldest security tokens. Launched in 2017, token holders benefit from exposure to the underlying assets of the fund, which invests in the digital assets and equity securities of some of the most recognized emerging companies building blockchain and digital asset platforms.
22x
22X Fund Token is a security token offering backed by real assets i.e., equity investments in Silicon Valley’s top companies.
In addition to the four common ways that economic interest can be pulled from tangible and intangible assets, there are four common ways that the investment contract can be structured from a legal perspective including:
Tokenized Subordinated Loans or Structured Products
A subordinated loan allows the security token issuer to raise capital by issuing a debt instrument that promises to pay an interest rate with principal repayment at the end of a fixed term. Subordinate refers to the loan being inferior to any non-subordinated loans outstanding, because security token investors may only demand payment of the coupon payment after all other non–subordinated creditors have been paid. Also, they are paid out after non-subordinated creditors in the case of bankruptcy, and if the company does not pay out the promised interest payments or principal repayments to the security token holders, insolvency proceedings can not be forced by subordinate creditors. Although this is an extremely high risk type of bond, it is one of the most common bond types used in the crowdfunding industry.1
Crowdlitoken
The Liechtenstein-based Crowdlitoken is structured as a subordinate bond (“CRT”) that has an initial term of 25 years. When traders want to go in and out of their Crowdlitoken investment, they can sell the purchased token to another interested party on secondary markets.2
Tokenization of a Special Purpose Vehicle
Many cryptocurrency investment products are structured as notes that are issued by an SPV. However, the shares of an SPV can also be directly tokenized. Regardless of being tokenized shares of an SPV or a note issued by an SPV, there is risk with this structure and it is not sensical for an SPV to go public, although, this is legally possible. SPVs were traditionally set up by larger corporations that wanted to engage in risky investments. The structure of the SPV means that the parent company is protected from the risky investments made by the SPV, because they are different companies. However, the solvency of the SPV depends on the parent company’s wellbeing. If the parent company is in trouble, the SPV’s investors are in trouble too, because the assets held by the SPV are not ringfenced on the parent company’s balance sheet. Another problem is that SPV’s often buy assets with lines of credit provided by the parent company. If the SPV loses money, it may draw on the guaranteed liquidity lines offered by the parent company, which can put the parent company in an increasingly precarious position, especially if multiple high risk SPVs are dependent on the capital of the parent.3
Brickblock
Brickblock in Germany tokenized the participation shares of an SPV in order to sell a property worth approximately €2 million in Wiesbaden, Germany.4 Each share entitles the token holder to the economic benefits of the underlying real estate asset (e.g. dividends from rent, interest, principal distributions).
This is far from all that can be tokenized. Even publicly traded companies, such as Overstock have been tokenized, with the number of tokenized private companies being even larger. This is the type of tokenization we will look at in another article next week!
Virtually any asset can be tokenized. However, not all tokenization proceeds in the same way. There are a number of different use cases even in the area of security tokens. We have highlighted a few of these use cases and will now focus on the first 3 in this article.
Source: Adapted from EY’s Tokenization of Assets Report
EY’s Tokenization of Assets Report describes five main categories of assets that are being made into security tokens including collectibles, financial instruments, consumables, precious metals, and intangible assets. However, this list does not describe the most popular ways in which security token issuers extract economic interest from these tangible and intangible assets in practice. The security token can represent one of these four economic interests:
Tokenized Profit Participation Rights
Tokenized profit sharing was originally not very popular for ICO investors, because a firm could hypothetically increase their costs up until the point that the company showed no profit. However, companies with compliant security tokens that follow disclosure requirements and subject themselves to supervision from financial market authorities can garner trust for this type of investment contract.
Republic
The Republic note, structured as a debt instrument, pays out a portion of its profits in the form of a dividend to investors. However, the dividend is only paid out when a startup company that raised capital on their platform has a successful exit by being acquired or going public. This is because Republic charges a 2% commission and 1 – 16% carry interest to the startup. The note managed to raise more than $16 million despite the risks associated with the security token i.e. that the startups may never have a successful exit or the website Republic.co does not stay in business long enough to see the startups have a successful exit, which can take up to 10 – 20 years.
Bitbond | STO
Bitbond Finance GmbH’s security token is structured as a subordinate bond/loan/note, and they pay out 60% of their company’s pretax profits to token holders over the life of the bond. Bitbond revenue comes from charging 2 – 3% loan origination fees to borrowers and pays out 0.5 – 1.5% to the investors that gave Bitbond the capital to lend out to borrowers.1
Tokenized Revenue Participation Rights
Similar to profit sharing rights, revenue sharing rights are often structured as notes (debt instruments) that give the investor a right to receive a share of top line revenue from a company rather than a fixed periodic payment based on a percentage of the monies loaned to a company.2 Also, similar to profit sharing rights, the investors are not buying the equity of the issuing company. The security token explicitly states the percentage of revenue that investors will receive. However, the dividends each period will be variable as well as the length of the note’s maturity.
INX
The Gibraltar-based securities trading platform that recently merged with Open Finance Network, INX Limited, launched an initial public offering in 2020, which recently ended in April 2021.3 However, the IPO was not really an IPO, because INX was not offering equity. Rather, they offered a revenue share from their operations. Their goal was to raise $10 million in this funding round. INX’s revenue share security token offering in the US is for both retail and professional investors. Currently, INX is also using a SPAC to list their equity on the Canadian stock exchange. A public company owned by a private equity firm bought all INX’s equity and is now listing the equity on the Canadian Stock exchange.
Tokenized Commitments to Use or Voucher
A security token issuer can sell tokens that can be redeemed in the future for a certain good or service. This investment type is popular with ICOs and initial exchange offerings (IEOs). The funds collected from investors are used to finance the company in its early stages. However, if this investment type is deemed to be an investment contract by financial market authorities, it becomes an unregistered security. Therefore, it may behoove companies to have legal experts determine if their tokenized commitment to use or voucher is a utility token or a security token prior to doing the sale. A voucher can also be structured to manage accounting and tax consequences or it can be linked to the other instruments presented above, such as a profit participation right in a corporation.4
Blockstream
The recently announced Blockstream Bitcoin mining security token Blockstream Mining Unit (BMN) represents the use of Blockstream’s mining equipment. The investment contract is structured as a note with a minimum investment of €200,000 that only qualified investors can buy. Each note entitles the security token investor to the BTC mined by up to 2,000 TH/s of hashrate.5 The bitcoin is paid out at the end of the note, and the note’s maturity is set to 36 months. The note is issued by a Luxembourg Securities Vehicle, which is a unique type of fund that can sell shares or issue debt to qualified investors with lighter compliance requirements. 6 Although the structure is not extremely risky, the BMN states that no return is guaranteed due to how fast mining equipment degrades.
And what else can be tokenized? To further explore this question, we will look at various practical examples next week as well. These will include the tokenization of property and the tokenization of organizations.
