Thursday, July 12, 2018

The future of tokenized securities explored at CoinDesk webinar

By Brad Rosen, J.D.

In a CoinDesk webinar titled How to Tokenize Securities, a group of leaders and pioneers in the nascent asset tokenization industry explored a number of hot topics and developments in the emerging world of tokenized securities.

Webinar panelists included Howard Marks, CEO at StartEngine, a platform for transacting ICOs, Scott Purcell, CEO at Prime Trust, a bank providing technology and services for the crypto community, and Timo Lehes, CIO and co-founder at the Swarm, a security token platform that focuses on bridging digital currency and real assets. Peter Ryan, a CoinDesk research analyst, moderated the event. Some of the topics and issues discussed at the webinar include the following:

Optimism surrounds recent SEC pronouncements. All of the panelists were encouraged by the recent comments of SEC Corporation Finance Director William Hinman at the Yahoo All Markets Summit where he indicated that a security token can transform into a utility token, as in the case of Ether. Howard Marks welcomed these remarks and believe they reflect an increasingly moderate stance by the SEC with respect to digital assets.

Many CoinDesk users believe more graduations from security token to utility token willing be coming. Moderator Peter Ryan noted that 81 percent of respondents in a recent CoinDesk community survey indicated that additional security to utility graduations is likely in the future.

Basic security tokenization mechanics. Scott Purcell provided a simple explanation for how shares can be tokenized. “Basically, you can put shares with trustee and then you can create a smart contract around those shares; the shares have been tokenized.” He noted that these types of undertakings are happening and accelerating with respect to real estate, currencies, and stock. “This is the future of what we are doing in my opinion,” he noted.

Security concerns remain center stage. Scott Purcell also observed that security concerns remain paramount. As with virtual currencies like Bitcoin, a token holder is vulnerable to losing tokens via hacks or a loss of private keys. “It is important that a token holder keeps his wallet safe, and while some solutions have emerged, security issues remain very real,” he stated.

Emergence of the ATS. Timo Lehes pointed to the increasing role that ATSs (alternative trading systems) will play in facilitating trade in security tokens. An ATS is an SEC-regulated electronic trading system that matches orders for buyers and sellers of securities. Lehes noted there were approximately 35 ATSs in existence and about 20 more are in the application process. Lehes indicated ATSs accommodating security tokens will be good for investors, noting “not much is happening in this space yet, but we are getting close.”

Greater access for non-accredited investors. Howard Marks observed that non-accredited investors will be able to participate in many security token offerings as a result of the Jobs Act, which provided for Regulation Crowdfunding and Regulation A+. Regulation Crowdfunding allows for a company up to raise up to $1 million without regard to the investor’s accreditation status. Reg A+ allows a private company to raise up to $50 million from the general public and not just accredited investors.

The development of stable coins is key. All of the panelists see the emergence of a stable coin as a key factor in the growth of blockchain-related commerce. Scott Purcell described a stable coin as “having the value of what it purports to be with the backing of real assets in a trust.” A stable coin can be tied to the dollar or any other fiat currency. Purcell noted that Tether was supposed to be a stable currency tied to the dollar but seriously questions whether that has occurred. Purcell also observed that virtual currencies Bitcoin, Ether, and Ripple are simply too volatile to use in commerce. “A stable coin is the lynchpin in the future commercial development on the blockchain,” he stated.

Winners and losers. According to Timo Lehes, the growth of securities tokenization will result in many incumbents like investment banks losing out, while the winners will be disruptive startups and newcomers to the tokenization space. However, Lehes noted that some of the traditional players are looking for acquisitions in the tokenization space so they will not be left out in the cold. Howard Marks believes that investors will be the ultimate winners by virtue of their gaining access to a varied assortment of investment opportunities. “There are dramatically fewer publicly traded companies compared to 20 years ago. Tokenization will create many opportunities for all investors,” he observed.