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Is tokenization going mainstream in the 20s?

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Crypto Research
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The benefits of tokenization are inevitable. Efficiency gains, automation, transparency, fractional ownership, increased liquidity, and direct access to investors are some but a few examples of why this emerging blockchain and DLT-enabled wave of innovation is increasingly gaining global traction. Will the 2020s be defining years in blockchain history where tokenization finally goes mainstream?

Practitioner Perspective with Marius Smith of Finoa

Tokenization promises to fundamentally disrupt financial markets as we know them today and is a topic that Finoa has covered and researched extensively since its inception in 2018. 1,2

Despite its promises, however, mainstream tokenization or “the tokenization of everything” is still in its early days, and the anticipated boom and wide-spread adoption are yet to be seen. With positive developments globally, the market volume is still expected to grow significantly in the coming years, with innovative use cases emerging everywhere and positive regulatory developments forming on both national and international levels.

Taking into consideration the developments over the past two years, we have revised our initial tokenization forecast and outlined below findings from an extensive overhaul of our initial computations and models that projects that the tokenized asset market will constitute a $14.7-trillion opportunity by 2025.

Projected Tokenized Market Volume until 2025

With a $1-trillion market capitalization of blockchain-based assets, and this being predominantly attributed to cryptocurrencies, in 2020 (accounting for approximately 0.6% of the global GDP), we expect a significant increase in projected market volume over the coming years. Overall, we project that the tokenized market volume will reach $2 trillion, or 1.3% of global GDP in 2021, and $4 trillion (2.5% of the global GDP) in 2022. This year, we anticipate an acceleration in mainstream adoption of blockchain technologies, leading to an additional 0.7% of GDP to be stored on the blockchain. Overall, this will trigger a market growth from $4.4 trillion in 2022 to $14.7 trillion in only 3 years (2025) — an average of an additional $3.4 billion per year.

Current developments in more detail

Despite 2020 marking a pivotal year for cryptocurrency growth and adoption, leading up to total market capitalization exceeding 2018 highs, we still observe a lower-than-anticipated growth traction for tokenization. With positive developments in both the fintech and startup ecosystems and also increasing interest from traditional financial institutions, regulatory uncertainty still poses as one of the main obstacles hindering asset take-up and, combined with an ongoing pandemic, has put a spoke in the wheel on the otherwise bullish developments anticipated globally.

We have witnessed many attempts and examples of blueprints and tokenization of different asset classes, with bonds emerging as the most common product thus far. We find this mainly to be correlated with the legal foundations being most developed and fitting for this asset class compared to equities, for instance, and evidently, the case in countries such as Germany. If we consider the wider developments in regulating tokenization going forward, we expect to see positive advancements for other asset classes in the coming years; however, expect some to take a longer time to form and develop. Consequently, we expect that bonds will continue to accelerate and will be preferred over equities initially, as existing legal frameworks will seek to accommodate these first and by 2025, will be the leading tokenized financial asset class (disregarding cryptocurrencies) constituting 18% of the total tokenized financial asset market on the blockchain. We find recent examples of that both in Germany, where the “Gesetz über elektronische Wertpapiere (eWpG)” — the electronic securities act — was recently passed to provide legal certainty around the issuance of securities, as well as the European Commission’s introduction of Market in Crypto Asset (MiCA), both marking important steps for innovation in the capital markets on a national and European level.

While positive developments for tokenization are anticipated in the coming years, we still expect that cryptocurrencies will be the main driving force of growth for tokenized assets. Institutional adoption is on the rise, and we have seen many examples of large corporations and investors recently entering this space to get exposure to, diversify and seek out alpha from emerging asset classes and crypto projects. The interest from large investors, such as Mass Mutual and Tudor Group and platforms like PayPal, are just a few examples of this new wave of institutional adoption that will have a fundamental impact on the future of market development and growth expectations. Combined with a continuous acceleration of innovation in base-layer protocols and layer-two applications as well as ingenious use cases such as decentralized finance, we are particularly bullish on the growth trajectory for cryptocurrencies and conservatively estimate that they will have constituted 57% of the total tokenized financial assets by 2025. We do believe that these developments will have positive spillovers to some of the other asset classes we considered, and thus remain very positive for the years ahead for tokenization generally.

We delimited ourselves to look at a five-year horizon — an exercise that, with the current level of innovation and uncertainty, is already inherently difficult. We are still in the very early days of tokenization, as well as wider blockchain adoption and application. Extending the forecasted horizon to five, 10, or even 20 years, is, therefore, nearly impossible. What we can say with certainty, however, especially with the very positive developments we are currently seeing on a global level, is that the technology has an immense potential to disrupt, and we have seen only a fraction of its full application yet. We are confident that use cases for tokenization will continue to unfold and are strong advocates of its full realization — an evolution that is not only incredibly exciting but also one that we are very proud to take part in and support. We are just getting started.

Methodology: Projection of tokenized assets 2020 – 2025

As our initial methodology proved to be a very accurate reflection of the market developments, we decided to sophisticate it further by differentiating between different asset classes and including more recent sources.

Research and surveys from institutions, such as the World Economic Forum (WEF), Deloitte and McKinsey (see table of sources for more detail), project that up to 10% of the global gross domestic product will be stored and transacted with the help of blockchain technology by 2025 – 27. With this in mind, we triangulated and ran a market simulation to determine (a conservative) potential market size of a global tokenized market.

We delimited ourselves to financial assets as well as real assets clustered into: listed equity, unlisted equity, other equity, investment funds, bonds, other financial assets (i.e., insurance policies, pensions and alternative investments), home equity and cryptocurrencies. Currencies and deposits were excluded, and our study thus does not consider potential central bank digital currencies.

Based on factors such as the past performance and future growth expectations per asset class, we projected the market size of the individual assets using a bottom-up methodology. In subsequent steps, we applied different assumptions of the individual rate of tokenization per asset class and finally matched our bottom-up results with the top-down research from the WEF.

Following this methodology, we project a tokenized asset market of $14.7 trillion of financial assets by 2025. This does not include currently unmeasured (or nonexistent) asset classes or unidentified tokenization use cases of intangible assets — e.g., patents, usage rights — where we expect significant innovation and growth.

1 The Era of Tokenization — market outlook on a $24trn business opportunity
2 Cost disruption in the issuance market: The case for tokenization

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

How Big Will the Security Token Market Become?

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Crypto Research
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Raiffeisen Bank International’s Blockchain Hub team including Head of Strategic Partnerships & Ecosystems Christian Wolf, Senior Partnerships & Ecosystem Manager at RBI Gernot Prettenthaler, and Digital Banking Analyst Vid Hribar joined us for an exclusive interview about security tokens and to answer the question if they see demand for security tokens from their clients.

Various estimates of the security token market exist. KPMG and WEF project that the market will grow to $8 trillion by 2025.1 Benjamin Schaub and Stefan Schmitt of the Frankfurt School Blockchain Center (FSBC) predict the European market will account for $1.5 trillion by 2024.2 This chapter discusses a new estimate by Finoa, a German digital asset platform for institutional investors. Their calculations estimate that the tokenized asset market will have $14.7 trillion in assets under management by 2025; however, their estimate does include cryptocurrencies such as Bitcoin in addition to security tokens. The not cryptocurrency part of their tokenized asset market estimate is $9.5 trillion by 2025.

Finoa Estimate of Global Tokenized Security Market by 2025, $ trillions

With €176 million total assets, 17.4 million customers, and presence in 25 countries3, RBI’s forward thinking corporate culture has a huge impact. In the beginning of our interview with one of Europe’s largest banks, we established that RBI is seeing increased demand for cryptocurrencies from both retail and professional clients. RBI’s client demand for digital assets ranges from high in politically unstable regions to none in Russia where cryptocurrencies are prohibited. They noted there are regional differences in interest. Slovakia and the Czech Republic are willing to invest more in cryptocurrencies whereas Austria is more conservative when holding variables such as household income constant.

Christian Wolf stated that although clients are not directly asking for security tokens, they are asking for a better trading experience when handling traditional securities like stocks and bonds. Clients want cheaper, faster, and more transparent security trading. Wolf said, “the way we currently trade securities will be gone within 10 years.”

However, compliance with the new Anti-Money Laundering Directive (AMLD5) that came into effect on January 10th, 2020, may have made working with cryptocurrencies more difficult for the bank, although, AMLD5 also brought regulatory clarity which is a positive development. AMLD5 says that any business that exchanges fiat currency for a crypto asset (brokers, exchanges) or stores crypto assets on the behalf of customers (custodians, wallets) is required to register with financial market authorities where they are doing business and implement money laundering policies such as collecting and safely storing the identification data of users, monitoring user transactions, and reporting suspicious activity.

The trio mentioned that RBI is rethinking their compliance’s approach to digital assets. RBI is currently very cautious, but demand from clients, regulators, and the technology are all maturing, which gives them the impetus to progress as well.
Luckily, AMLD5 is most likely not applicable to security tokens, because they do not constitute a means of exchange. However, this is not the case in all countries. For example, the UK expanded the scope of its regulation by referring to crypto assets instead of virtual currencies and the new term can be interpreted to encompass security tokens. France is following a similar approach.

RBI is emerging from an experimental phase to market ready phase. They are working on a host of white-labeled products and digital asset custody for institutional and professional investors. One of their most exciting products is their tokenization of fund shares.

Gernot Prettenthaler mentioned that RBI has experimented with the tokenization of fund shares, debt, equity, and the euro with their REST (Raiffeisen Euro-backed stable token). “We now understand the technology, we just need to see what is possible from a legal perspective in Austria.”

Looking ahead, the next decade will be critical to the success of tokenized securities. That is why next week we will take an in-depth look at whether the 2020s will be the pivotal years in blockchain history when tokenization finally goes mainstream.

1 https://blockstate.com/global-sto-study-en/
2 https://dailyhodl.com/2020/03/05/tokenization-in-europe-market-size-to-reach-1-5-trillion-in-2024/
3 https://www.rbinternational.com/en/who-we-are/facts-figures.html

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Fines for Conducting Unregistered Security Offerings

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Crypto Research
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While the legal battle between the SEC and Ripple is being discussed a lot right now and has taken some surprising turns in recent months, looking at the SEC’s actions against companies that have conducted unregistered ICOs, it’s striking that the regulator has charged many different companies of varying sizes.

The United States solidified its position as the most popular jurisdiction for the incorporation of STOs, with Switzerland being a distant second.

STO Count by Country of Incorporation, 2017 – 2020

“In simple words, tokenization can turn almost any asset, either real or virtual, into a digital token and enables the digital transfer, ownership and storage without the necessary need of a central third party / intermediary.”

E&Y Tokenization of Assets

Largest Fines for Conducting Unregistered Security Offerings

Looking at the SEC’s charges against companies that completed unregistered ICOs, we can say that the Securities and Exchange Commission goes after companies of all stripes. Indeed, while the largest ICO that faced the allegations from the SEC brought in a whopping $4 billion, there are much smaller companies that were also charged with fraudulent ICOs.

A vivid example is the SEC case against B2B blockchain marketplace Opporty. The company completed an ICO in 2018 and raised $600,000.43 Nevertheless, the company did break the law as it conducted unregistered securities offering by selling OPP tokens in an ICO and misleading the investors, according to the SEC.44

Although some cases are still pending, many cases have already finished and some companies have been forced to pay civil fines. However, the fine is a light penalty in comparison to the companies that were forced to return the raised funds to investors. (Table 3)

However, there is a second tool that the SEC uses to punish companies that host illegal security sales: disgorgement. This type of punishment seems to be used by the SEC more often, and it is more severe as the value of disgorgement and prejudgement interest usually outstrips the proceeds from an ICO. (Table 4)

With many surprising plot twists packed into a few months, the SEC versus Ripple lawsuit tends to be the most-talked about of the ongoing litigations. The essence of the SEC claim is that Ripple was conducting an unregistered sale of securities.45 However, Ripple’s position is based on the fact that XRP tokens should be classified as commodities, not securities, like Bitcoin and Ethereum. Ripple seems to be sure of its high chances to win the case as the company announced its plan to go public once the agreement with the SEC is settled.46

Another ongoing case is against LBRY, a decentralized video content platform, which is accused of hosting a four-year-long unregistered securities sale. After the SEC complaint in March, 2021, the company tried to raise a wave of publicity to support the project. The advocates for LBRY stressed that the project tokens, LBRY Credits, are not investment contracts, while the SEC highlighted that the company tokens are indeed securities according to the Howey test. The litigation continues, but it seems like the SEC will win the case.

The crypto industry advances, and so does the crypto regulation. The SEC is closely following the development of the industry: Hester Pierce, the SEC’s “crypto mom”, recently commented on the NFTs gold rush. Potentially subject to speculative activities, NFTs could be easily turned into securities if they are fractionalized.47 Due to grey areas in the regulation, the companies that offer such investment vehicles could get under the SEC’s fire.

Completed Cases Without Disgorgement

Completed Cases With Disgorgement

There are several estimates on the size of the security token market, but even more complex are the projections for the future development of the same. Therefore we will look at different assumptions that have been made by financial institutions over the last few months in the next week.

43 https://cointelegraph.com/news/sec-charges-600-000-ico-project-opporty-for-fraudulent-security-offering
44 https://www.sec.gov/litigation/litreleases/2020/lr24723.htm
45 https://www.sec.gov/news/press-release/2020-338
46 https://cointelegraph.com/news/ripple-wants-go-public-after-settling-sec-lawsuit-sbi-ceo-says
47 https://cointelegraph.com/news/sec-s-crypto-mom-warns-selling-fractionalized-nfts-could-break-the-law

48 https://www.wsj.com/articles/investors-bet-4-billion-on-a-cryptocurrency-startup-1527591600
49 https://www.sec.gov/news/press-release/2019-202
50 https://www.sec.gov/news/press-release/2019-164
51 https://www.sec.gov/news/press-release/2019-164
52 https://www.sec.gov/news/press-release/2020-211
53 https://www.sec.gov/news/press-release/2020-211
54 https://www.sec.gov/news/press-release/2019-87
55 https://www.sec.gov/news/press-release/2020-262
56 https://www.sec.gov/litigation/admin/2020/33-10909.pdf
57 https://www.sec.gov/litigation/admin/2020/33-10909.pdf
58 https://www.sec.gov/news/press-release/2019-212
59 https://www.sec.gov/news/press-release/2020-124
60 https://www.sec.gov/litigation/litreleases/2020/lr24763.htm
61 https://www.sec.gov/litigation/litreleases/2020/lr24763.htm
62 https://www.sec.gov/news/press-release/2019-15
63 https://www.sec.gov/divisions/enforce/claims/reginald-middleton.htm
64 https://www.sec.gov/news/press-release/2020-181
65 https://www.sec.gov/news/press-release/2017-219
66 https://www.coindesk.com/plexcorps-reaches-settlement-with-sec-following-extended-legal-woes

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Tokenizing a Bond: Pain or Gain?

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Crypto Research
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Tokenized Securities are shaping up as one of the most promising applications for public blockchains, but in which case do they represent an opportunity and in which case do they represent more of a risk?

Practitioner Perspective with Dominik Spicher of the Crypto Finance Group

Within the security universe, interest is strongest in tokenized bond offerings. This investment category is estimated to be worth ~$2.6 trillion by 2025.1 It is worth looking into the mechanics of tokenized bonds and the challenges that arise in a blockchain context. Overall, the specific advantages that tokenized bonds offer stakeholders compared to their traditional form outweigh these factors.

The main challenges facing tokenized bond offerings are the rules and regulations that issuers and other participants are subject to. None of these are fundamental by nature, but they require more tooling and standardization. One of the main opportunities is the advent of multiple institutions cooperating on bond issuance in a transparent way without reliance on trust.

The Tokenised Bond Lifecycle

Pre-issuance

In a tokenized bond offering, similar to a traditional bond offering, pertinent loan parameters — the offering volume, coupon rate and duration — need to be set. These parameters are directly expressed in the smart contract logic, typically within a contract template. The trustless execution on a public smart contract platform ensures adherence to these terms.

It is possible to move the entire offering, book-building and subscription process on-chain, but it is more common and practical to apply the same procedures as traditional offerings do. The advent of stablecoins, however, has made it more attractive to move the actual bond purchase on-chain. Final delivery of the bond tokens is then trustless and atomic, alleviating the need for payment agents and escrow services, thus reducing issuing costs. However, fulfilling regulations for Know Your Customer rules in the smart contract functions poses the main challenge here. 2

Post-issuance

As for almost all digital assets, bond tokens need to be securely storable, transferable, tradable and recoverable during the bond’s lifetime. Financial institutions have many options for digital asset custody and storage, and these options are also available for bond tokens. For those purposes, it is an advantage for the smart contract to adhere to standards, such as the ERC-20 specification. Unfortunately, however, the ecosystem is still in a consolidation phase when it comes to standards supporting more complex functionality, such as permissioned transfers.

Tokens that are not classified as securities typically enjoy completely permissionless transfers. Because the issuing institutions for tokenized bonds are subject to various regulations in virtually all jurisdictions, this is typically unfeasible. In response, approaches have emerged to reconcile compliant behavior and the censorship-resistant nature of public blockchains from simple whitelisting to flexible just-in-time transfer approval. Finding the right trade-off between the end-user experience and the scalability of the underlying platform remains a challenge.

A fundamental requirement when tokenizing bonds is the ability to price the underlying security and its risks in a secondary market. For many security tokens, this can happen off-chain on centralized exchanges or, more interestingly, on-chain on decentralized exchanges, such as Uniswap. However, avoiding liquidity fragmentation across platforms is even more important with tokenized bond offerings, which typically suffer from a lack of liquidity.

Even though smart contract security has made big advances, bond token contracts typically contain an administrator functionality to allow for reactions to unforeseen circumstances, e.g. pausing all transfers. In addition, it is advisable for issuers to be able to handle private key loss by bond token holders. This is especially relevant when coupon and redemption payments happen on-chain.

Finally, bonds usually exhibit regular coupon payments. The public blockchain as the final source of truth makes it convenient for issuers to determine the ultimate beneficiaries of coupon payments: The very same addresses holding the bond token at a particular date in time, which may be expressed in terms of block height, can receive the appropriate amount of stablecoin tokens or some other suitable means of payment on-chain. The flexible nature of smart contracts allows for corporate calendar events to be integrated into the asset itself.

Redemption

After the bond has expired, the principal is returned to the current token holders. Similar to coupon payments, this can be handled elegantly on-chain with the use of stablecoins, typically after bond token transfers have been disabled.

In order for the on-chain state to reflect the expired bond state, tokens are typically reclaimed by the issuer and subsequently burned — i.e., sent to an address where nobody can spend from — and it could even involve the destruction of the smart contract itself, thus removing all bond artifacts.

Challenges in an On-chain Environment

The main challenge is balancing the manifold possibilities of a public smart contract platform on the one hand and the regulatory environment on the other hand. Today, there is still substantial regulatory uncertainty with respect to the legal status of blockchain-based securities and the legal claims that holders may make, although developments, such as the Swiss DLT bill 3, clarify many previously open questions.

Well-established compliance requirements also apply to tokenized securities and need to be adhered to. Among the most salient ones are KYC rules and Anti-Money Laundering legislation. The inherently open and global nature of blockchains poses an especially pertinent problem here, as legislative details vary across jurisdictions. For example, it is customary to apply specific rules for potential U.S. investors in a security.

Such rules need to be included in a tokenized security offering. Typically, completely on-chain solutions are undesirable for usability, privacy and cost reasons. Instead, most approaches opt for a hybrid on- and off-chain workflow. For example, transfer requests could be required to provide additional associated data that establishes approval by an off-chain entity.

The most important advance needed in this regard is standardization. International bodies, such as the Financial Action Task Force, are starting to propose minimal standards for regulatory requirements in the digital asset space — the Travel Rule being the most well-known example. Technology standardization is also developing for smart contract functionality, enabling a better interplay between end-user wallets, custody solutions and other participants.

Until this standardization and consolidation continues to progress, designers, issuers and users of tokenized security products need to involve legal and compliance experts.

Opportunities: Why Tokenized Bonds

Given the challenges, why involve a public blockchain platform at all in regulated security offerings?

One benefit for tokenized securities: more efficient interactions (such as transfers) and consequential cost reductions. These gains can be small if the processes involved are handled through a single financial institution. The public nature of blockchains shines when multiple entities cooperate in the issuance and handling of tokenized securities. Instead of developing ad-hoc integrations between the different parties, it can then be very attractive to lay down the terms of cooperation in a smart contract and subsequently rely on the blockchain to enforce those terms and synchronize between parties.

A good example is a simple whitelisting functionality to enforce permissioned transfers. Before an address may receive tokens, it needs to be explicitly whitelisted. Having a single administrator role that can whitelist addresses would pose a significant bottleneck for day-to-day operations. A recently developed token standard for the Tezos Blockchain 4 introduced a hierarchical system where administrators could nominate addresses that could subsequently whitelist addresses. Thus, the issuing institution can allow an exchange to whitelist customer addresses independently. An audit trail that records who allowed transfers to a particular address is then readily available.

This example demonstrates how public blockchains can enable defining “the rules of engagement” between financial institutions, allowing them to cooperate on a flexible basis and consider a diverse range of securities and institutional arrangements.

Tokenization can transform almost any asset, real or virtual, into a digital token, but not everywhere in the world is already using this new technology. In 2020, the U.S. took a pioneering role again, but other countries are also already experimenting with the possibilities of these financial instruments. We will deal with this topic in another article next week.

1 Source: “Projection of Tokenized Asset Market 2021 – 2025,” Finoa, page 43
2 Source: “Plumbing for the future of security tokens: Implementing KYC in bank transaction processes.” Dr. Lewin Boehnke, Crypto Finance Group, page 20
3 https://www.admin.ch/gov/de/start/dokumentation/medienmitteilungen.msg-id-77252.html
4 https://github.com/rogerdarin/Digital-Asset-Rules/raw/main/Digital_Asset_Rules_S1_v0.3.pdf

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Corporate and Government Debt as Security Token

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Crypto Research
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The increasing number of STOs issued by established institutions indicates the potential of this fundraising mechanism. As the mechanism ripens, more countries and corporations tap into piloting STOs for bond issuance.

Key efficiencies observed within the pilots include elimination of settlement risk (for issuer, arranger and investors), reduction in primary issuance settlement (from 5 days to 2 days), as well as automation of coupon and redemption payments and registrar functionality.1

Thanks to the provided benefits in improving liquidity and transparency in the bond markets, debt tokens could disrupt the bond issuance process worldwide. The European digital asset custodian Finoa estimates that $2.65 trillion will be invested in securitized debt tokens by 2025 (see Chapter 3).

“The marriage of a digital order taking platform and backend infrastructure driven by tokens is the future of retail bonds. We are keen to see the day when investors can buy and sell bonds, even on the secondary markets at a click of a button on their phones.”

UnionBank Executive Vice President and Chief Finance Officer, Jose Emmanuel Hilado 2

Most Notable STOs by Institutions, 2017 – 2020

Source: Cointelegraph Research

Between 2017 and 2020, STOs were most frequently used for financial services, and this category includes bonds issuance.

Number of STOs by Sector, 2017 – 2020

Source: Cointelegraph Research

Asset Classes Offered in STOs, 2017 – 2020

Source: Cointelegraph Research

Looking across the asset types that are being tokenized, equity remains king, although asset backed securities saw a steady increase (mainly due to real estate).

Type of Asset offered by the STOs by year, 2017 – 2020

Source: Cointelegraph Research

Is the tokenization of a security an all around opportunity or does it also pose a risk to certain institutions and companies? This is a question we intend to explore in another article next week.

1 https://www.sgx.com/media-centre/20200901-sgx-collaboration-hsbc-and-temasek-completes-pilot-digital-bond-olam
2 https://av.sc.com/…/SCB_PR-UnionBank-Standard-Chartered-pioneer-blockchain-enabled-bond-issuance-in-the-Philippines-.pdf

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Real Estate Tokens are leading among Security Tokens

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Crypto Research
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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.

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Swiss Bitcoin Startup Relai Appoints Former Bitpanda Exec as New CMO

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Crypto Research
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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.   

Media Contact

Julian Liniger

julian@relai.ch 

What Returns Have Security Tokens Provided?

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Crypto Research
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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 research@cointelegraph.com
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

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Non-Ethereum Blockchains and Protocol Standards

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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.

This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.

Valkyrie Investments Launch The Valkyrie Dash Trust

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Crypto Research
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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.

Screenshot of Valkyrie Dash Trust webpage. Source – https://trusts.valkyrieinvest.com/dash

Dash Investment Foundation Invests in Valkyrie

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.

Who Are The People Behind Valkyrie?

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.

Quote from Leah Wald, CEO of Valkyrie Digital Assets. Source – https://newsroom.dash.org/150242-valkyrie-investments-announces-launch-of-the-valkyrie-dash-trust

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

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.

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