INSUBCONTINENT EXCLUSIVE:
Sunny Dhillon
Contributor
Sunny Dhillon is a partner at Signia Venture Partners.
More posts by this
contributor
Amazon next conquest will be apparel
The rise of experiential commerce
While cryptocurrencies have generated the
lion share of investment and attention to date, I&m more excited about the potential for another blockchain-based digital asset: security
tokens.
Security tokens are defined as &any blockchain-based representation of value that is subject to regulation under security laws.& In
other words, they represent ownership in a real-world asset, whether that is equity, debt or even real estate
(They also encompass certain pre-launch utility tokens.)
With $256 trillion of real-world assets in the world, the opportunity for
crypto-securities is truly massive, especially with regards to asset classes like real estate and fine art that have historically suffered
from limited commerce and liquidity
As I&ve written previously, imagine if real estate was tokenized into security tokens that you could trade as safely and easily as you do
That where we&re headed.
There a lot of forward momentum around tokenized securities, so much so that based on their current trajectory, I
believe security tokens are going to become a common part of Wall Street parlance in the near future
Investors won''t just be able to buy and sell tokens on mainstream exchanges, however; &crypto-native& companies are also throwing their
hats into this ring.
The starter pistol has been fired
The race is on to bring security tokens to the masses
Because Bitcoin and other
cryptocurrencies are not classified as securities, it been much easier to facilitate trading on a large scale
Security tokens are more complex, requiring not just capabilities around trading, but also issuance and, critically, compliance
(See more of my thoughts on compliance here.) It a major undertaking, which is why we haven''t seen the Coinbase or Circle of security token
trading emerge yet (or seen these companies expand their platforms to address this — more on that later).
Meanwhile, regular exchanges are
blazing the trail and moving into providing tokens trading
The founder and chairman of the company that owns the NYSE announced a new venture, Bakkt, that would provide an on-ramp for institutional
investors interested in purchasing cryptocurrencies
Last month, the SIX Swiss Exchange — Switzerland principal stock trading exchange — announced plans to build a regulated exchange for
The trading and issuing platform, SIX Digital Exchange, will adhere to the same regulatory standards as the non-digital exchanges and be
overseen by Swiss financial regulators.
This announcement confirms a few things:
Most assets (stocks, bonds, real estate, etc.) will be
tokenized and supported on regulated trading platforms.
Incumbents like SIX have a head start due to their size, regulatory licensing and
They are likely to use this advantage to defend their position of power.
Most investors will never know they are using distributed ledger
technology, let alone trading tokenized assets
They will simply buy and sell assets as they always have.
I expect other major financial exchanges to follow SIX lead and onboard crypto
I can imagine them salivating over the trading fees now, Homer Simpson-style.
Live shot of financial exchanges drooling over crypto trading
fees
Crypto companies are revving their engines
The big crypto companies are preparing to enter the security token arena
Stock exchanges
won''t have the space to themselves, however
Crypto companies like Polymath and tZERO have already debuted dedicated platforms for security tokens, and all signs indicate announcements
from Circle and Coinbase unveiling their own tokenized asset exchanges are not far behind.
Coinbase is much closer to offering security
token products after acquiring a FINRA-registered broker-dealer in June, effectively backward-somersaulting its way into a state of
President and COO Asiff Hirji all but confirmed crypto-securities are in the company roadmap, saying that Coinbase &can envision a world
where we may even work with regulators to tokenize existing types of securities.
Circle is also laser-focused on security tokens
Circle CEO and co-founder Jeremy Allaire explained the company acquisition of crypto exchange Poloniex and launch of app Circle Invest in
terms of the ''tokenization of everything.& In addition, it is pursuing registration as a broker-dealer with the SEC to facilitate token
trading — it could also attempt to take the same backdoor acquisition approach as Coinbase.
If there a reason Circle and Coinbase haven''t
moved into security token services even more rapidly, it that there simply aren''t that many security tokens yet
Much of this is due to the lack of compliance and issuance platforms, keeping high-quality securities on legacy systems with which issuers
As projects like Harbor ramp up more, this comfort gap will grow smaller and smaller, driving the big crypto players deeper into security
token services.
The old guard versus the new wave
Expect a battle between traditional and crypto exchanges
This showdown between
traditional finance incumbents and crypto giants will be worth watching
One is incentivized to preserve the status quo, while the other is looking to create a new, more global financial system.
The Swiss SIX
Exchanges of the world enjoy some distinct advantages over the likes of Coinbase — they have decades of traditional financial operating
experience, deep relationships throughout the industry and a head start on regulatory compliance
Those advantages probably mean that such incumbents will probably be the first to make infrastructural and logistical upgrades to their
systems using security tokens
The first time you interact with a security token, it is likely to be through the Nasdaq.
Having said that, incumbents& greatest
disadvantage will be transporting an old-finance-world mentality to these innovations
Coinbase, Circle, Polymath, Robinhood and other newer players are better suited to harnessing the stepchange elements of security tokens
— particularly asset interoperability and imaginative security design.
University of Oregon professor Stephen McKeon, an authority on
security tokens, told me that ''the potential for programmable securities to enable the expression of new investment types is the most
exciting feature.& Harbor CEO Josh Stein explained why private securities in particular will be transformed: &by automating compliance,
issuers can allow their investors to trade to the limit of their liquidity across multiple exchanges
Now imagine a world where buyers and sellers around the world can trade 24/7/365 with near instantaneous settlement and no counterparty risk
— that is something only possible through blockchain.
Those hypergrowth startups are going to experiment with these new paradigms in ways
that older firms won''t think of
You can see evidence of this forward thinking in Circle efforts to build a payment network that allows Venmo users to send value to Alipay
users — exactly embracing interoperability, if not in an asset sense.
The race is on
As Polymath Trevor Koverko and Anthony &Pomp&
Pompliano have been saying for the past year, the financial services world is moving toward security tokens
As the crypto economy matures, we&re inching closer to a new era of real-world assets being securitized on the blockchain in a regulatory
compliant manner.
The challenge for both traditional and crypto exchanges will be to educate investors about this new way to buy and sell
investments while powering these securities transactions via a smooth, seamless experience
Ultimately, security tokens lay the groundwork for granting investors their biggest wish — the ability to trade equity, debt, real estate
and digital assets all on the same platform.
