The Premise and Promise of Digital Securities
What they are, how they improve
on existing models, and what makes them different from utility
tokens. (Part 1 of 3 in a series about Digital Securities)
From the CoinMarketCap editorial desk: Continuing with our exploration of
security tokens, we asked the Securitize team to share their facts
and opinions about digital securities, the landscape and what
challenges lie ahead. This is the first part of a three-part series! To
understand why digital securities (DS), or security
tokens, are such a big deal, it’s a good idea to first understand some
basics about the securities industry itself. Essentially,
securities are a fungible and negotiable financial instrument that holds
monetary value. More specifically, they represent an ownership position
in one of two asset classes: equity or debt. Equity is represented
by a stock or share in an asset class such as a business, fund, or real estate.
An example of an equity security would be stock in a company like
Apple, for instance. Another example more suited for DSs would be the
private placement offering, such as the private company
UBER, which has raised $24.4B in private markets (in debt and
equity), and yet none of its stock is tradeable on public exchanges or
marketplaces. Debt securities are represented by bonds or fractional
ownership in some form of debt (private or public). An
example of this would be when a municipality issues a bond to build a bridge
where they guarantee a fixed interest rate over time for bondholders. Note:
Because DS and digital securities offerings (DSOs) are most
commonly applied to private placements, we will focus on this
subset of securities that according to an SEC report the amounted to
$1.7T, with over 40,000 new private placement offerings in 2017 alone.
For a sense of how early we are in this process, the Website Security Token
Market lists only 63 DSOs and our reviewed of those shows that many are
not active and only a handful have actually successfully issued DSs on
the blockchain in 2018. Without getting more complex, it is important to
understand that securities and securities markets like the
ones described above have been around for centuries, long before there were
computers, blockchains, distributed ledger technologies, or
cryptocurrencies. The securities industry has been a massive industry for
a long time, with somewhere between 12 and 20 specialized fields all working
together to create a functional ecosystem. The current system for issuing and
managing private placements is mostly analog and controlled by any
number of insulated legacy systems that do not communicate easily with each
other. A few examples are: Today’s markets are a mishmash of legacy
systems and inefficient. Overall, it is expensive and complicated for both
issuers and investors. The ecosystem is ripe for a revolutionary
upgrade and DSs present a well-rounded solution. Simply put, a DS is a
digital version of a paper stock that enables low-risk management,
proxy votes, liquidity and seamless dividend distributions among other
features. Individuals own digital shares of a traditional security (eg.
stocks, bonds and real estate) through tokens which can be coded to allow
for instant settlements so there is no counterparty risk,
eliminating billions of dollars in intermediary fees. It’s main selling point is
that DSs enables investors to invest in private companies and
startups and also have instant liquidity in global markets.
Enter DSs. Well, almost. In March of 2016, the ICO explosion was born on the
heels of Vitalik Buterin’s launch of the first stable version of the Ethereum
blockchain. We all witnessed the power of distributed ledger technology
as a platform for issuing, managing, and trading the so called “utility tokens”.
The only problem — ICOs were not being sold as securities; they were
being sold and marketed as network incentives or pre-sold rights to products yet
to be delivered. Regardless, by definition, they were actually securities
(see above) – something the SEC has recently been keen to reconcile. But ICOs
did something else besides causing a lot of heartache for investors and
issuers. They proved that private placement markets were
ripe for takeover by a new technology that provided easier asset discovery,
instant settlements, complete transparency, autonomous ownership, and
global 24/7 liquidity. The concept was so wildly successful that
the combined blockchain market cap went from $16B in Q1 2017 to
$323B in Q4 (2000% increase) in a single year. Then the value of
cryptocurrencies and utility tokens came crashing down. The answer: nothing. The
plummeting price of Bitcoin and any other cryptocurrency has no effect on the DS
market. How is that possible, you ask? Because, as we’ve learned, DSs are
actually just “analog securities” whose cap tables and trades are
recorded on the blockchain. Instead of the onerous manual
processes that the current centralized human-dependent model rely on
(think errors and corruption), smart contracts are used to automate processes,
making settlements instantaneous and most key transactions completely trustless
for both the issuer and investor. DSs can help to improve transparency measures
by providing issuers with an almost real-time cap table and simplify
governance processes through voting or payout distribution. Blockchains are also
public, meaning anyone (including regulators) can get a full audit of the cap
table and trades instantly. What Bitcoin was to currencies, DSs are to
ownership. 2019 needs to be the year of increased liquidity of digital
securities. DSs offer so many regulatory (automated compliance), administrative
advantages and ultimately more liquidity over traditional analog securities (see
table), so it is logical that issuers and investors will
ultimately prefer the digital version over the analog one. This trend is similar
to any number of examples, such as e-mail supplanting snail mail, DVDs scooching
out VHS tapes, etc. And, because all assets, not just private placements, have
the potential to be turned into DSs, the true limits of the DS market is
impossible to predict. If the ICO craze is any indication of how investors will
react to being able to discover, invest in, and trade private DSs on a
blockchain in a compliant and trustless way, we will truly see global
capital markets transform in profound ways. But until then we can look at what’s
true today. What’s true today is that DSs exist on public blockchains, have been
issued by existing companies (Blockchain Capital, SPiCE VC, 22x, Augmate,
Science Blockchain). They work as advertised, and are very quickly fulfilling
their promise to transform how issuers and investors interact in compliant ways
across global markets. Carlos Domingo is the founder and CEO of Securitize, an
end-to-end platform for issuers seeking to tokenize assets. He is also the
founder and crypto capitalist of SPiCE VC the first truly liquid, inclusive and
transparent tokenized VC on the blockchain. He was formerly CEO of Telefonica
R&D and CEO of New Business and Innovation at Telefonica Digital.
What they are, how they improve
on existing models, and what makes them different from utility
tokens. (Part 1 of 3 in a series about Digital Securities)
From the CoinMarketCap editorial desk: Continuing with our exploration of
security tokens, we asked the Securitize team to share their facts
and opinions about digital securities, the landscape and what
challenges lie ahead. This is the first part of a three-part series! To
understand why digital securities (DS), or security
tokens, are such a big deal, it’s a good idea to first understand some
basics about the securities industry itself. Essentially,
securities are a fungible and negotiable financial instrument that holds
monetary value. More specifically, they represent an ownership position
in one of two asset classes: equity or debt. Equity is represented
by a stock or share in an asset class such as a business, fund, or real estate.
An example of an equity security would be stock in a company like
Apple, for instance. Another example more suited for DSs would be the
private placement offering, such as the private company
UBER, which has raised $24.4B in private markets (in debt and
equity), and yet none of its stock is tradeable on public exchanges or
marketplaces. Debt securities are represented by bonds or fractional
ownership in some form of debt (private or public). An
example of this would be when a municipality issues a bond to build a bridge
where they guarantee a fixed interest rate over time for bondholders. Note:
Because DS and digital securities offerings (DSOs) are most
commonly applied to private placements, we will focus on this
subset of securities that according to an SEC report the amounted to
$1.7T, with over 40,000 new private placement offerings in 2017 alone.
For a sense of how early we are in this process, the Website Security Token
Market lists only 63 DSOs and our reviewed of those shows that many are
not active and only a handful have actually successfully issued DSs on
the blockchain in 2018. Without getting more complex, it is important to
understand that securities and securities markets like the
ones described above have been around for centuries, long before there were
computers, blockchains, distributed ledger technologies, or
cryptocurrencies. The securities industry has been a massive industry for
a long time, with somewhere between 12 and 20 specialized fields all working
together to create a functional ecosystem. The current system for issuing and
managing private placements is mostly analog and controlled by any
number of insulated legacy systems that do not communicate easily with each
other. A few examples are: Today’s markets are a mishmash of legacy
systems and inefficient. Overall, it is expensive and complicated for both
issuers and investors. The ecosystem is ripe for a revolutionary
upgrade and DSs present a well-rounded solution. Simply put, a DS is a
digital version of a paper stock that enables low-risk management,
proxy votes, liquidity and seamless dividend distributions among other
features. Individuals own digital shares of a traditional security (eg.
stocks, bonds and real estate) through tokens which can be coded to allow
for instant settlements so there is no counterparty risk,
eliminating billions of dollars in intermediary fees. It’s main selling point is
that DSs enables investors to invest in private companies and
startups and also have instant liquidity in global markets.
Enter DSs. Well, almost. In March of 2016, the ICO explosion was born on the
heels of Vitalik Buterin’s launch of the first stable version of the Ethereum
blockchain. We all witnessed the power of distributed ledger technology
as a platform for issuing, managing, and trading the so called “utility tokens”.
The only problem — ICOs were not being sold as securities; they were
being sold and marketed as network incentives or pre-sold rights to products yet
to be delivered. Regardless, by definition, they were actually securities
(see above) – something the SEC has recently been keen to reconcile. But ICOs
did something else besides causing a lot of heartache for investors and
issuers. They proved that private placement markets were
ripe for takeover by a new technology that provided easier asset discovery,
instant settlements, complete transparency, autonomous ownership, and
global 24/7 liquidity. The concept was so wildly successful that
the combined blockchain market cap went from $16B in Q1 2017 to
$323B in Q4 (2000% increase) in a single year. Then the value of
cryptocurrencies and utility tokens came crashing down. The answer: nothing. The
plummeting price of Bitcoin and any other cryptocurrency has no effect on the DS
market. How is that possible, you ask? Because, as we’ve learned, DSs are
actually just “analog securities” whose cap tables and trades are
recorded on the blockchain. Instead of the onerous manual
processes that the current centralized human-dependent model rely on
(think errors and corruption), smart contracts are used to automate processes,
making settlements instantaneous and most key transactions completely trustless
for both the issuer and investor. DSs can help to improve transparency measures
by providing issuers with an almost real-time cap table and simplify
governance processes through voting or payout distribution. Blockchains are also
public, meaning anyone (including regulators) can get a full audit of the cap
table and trades instantly. What Bitcoin was to currencies, DSs are to
ownership. 2019 needs to be the year of increased liquidity of digital
securities. DSs offer so many regulatory (automated compliance), administrative
advantages and ultimately more liquidity over traditional analog securities (see
table), so it is logical that issuers and investors will
ultimately prefer the digital version over the analog one. This trend is similar
to any number of examples, such as e-mail supplanting snail mail, DVDs scooching
out VHS tapes, etc. And, because all assets, not just private placements, have
the potential to be turned into DSs, the true limits of the DS market is
impossible to predict. If the ICO craze is any indication of how investors will
react to being able to discover, invest in, and trade private DSs on a
blockchain in a compliant and trustless way, we will truly see global
capital markets transform in profound ways. But until then we can look at what’s
true today. What’s true today is that DSs exist on public blockchains, have been
issued by existing companies (Blockchain Capital, SPiCE VC, 22x, Augmate,
Science Blockchain). They work as advertised, and are very quickly fulfilling
their promise to transform how issuers and investors interact in compliant ways
across global markets. Carlos Domingo is the founder and CEO of Securitize, an
end-to-end platform for issuers seeking to tokenize assets. He is also the
founder and crypto capitalist of SPiCE VC the first truly liquid, inclusive and
transparent tokenized VC on the blockchain. He was formerly CEO of Telefonica
R&D and CEO of New Business and Innovation at Telefonica Digital.
