Major technology disruptions are like gravity…there is no stopping them.
One challenge for the Security Token Industry (STO) since inception is that many investment firms looking to issue STOs believe they are only looking for new money and that is the only value. This couldn’t be further from the truth.
Fundraising, a crucial part of any investment business, is going to be required for every new project, with or without STOs. Whilst new technology has the potential to open up many more investment channels, issuers are the creators of their own destiny and must drive the primary investment and fundraising process to success. Issuers are responsible for planning and managing their investment projects, including the investment returns, and leading the capital raising efforts. Platforms can certainly help add value in this respect, but there is much more value to unlock with tokenization of real world assets that issuers should understand to stay relevant and win in the new world and convergence of Traditional Finance (TradFi) and Decentralized Finance (DeFi). In the year 2023, we believe that every investment firm needs to have a tokenization strategy.
Taking this from the Bain report below, “With the development of Ethereum starting in 2014, blockchains allowed users to securely execute lines of code—known as smart contracts—“on chain.” Tokens, meanwhile, are digital representations of data or assets registered on the blockchain ledger. They can be imbued with clearly defined terms of use (such as trading or governance restrictions) and can carry with them reams of data (escrow information for a real estate asset, say, or gaming assets that can be moved from platform to platform).
From these building blocks come many core web3 concepts and tools. They include dApps (decentralized applications built on blockchain networks), DeFi (decentralized finance networks enabled by smart contracts), DAOs (decentralized autonomous organizations), digital wallets enabling persistent digital identity, and open metaverses (see Figure 2).”
Tokenization is a digital share versus a paper share with the benefits of such detailed in our previous thoughts “How to get the most out of Tokenizing your Real Assets”. At a very basic level, digital is better than paper. In relation to STOs, investment firms should look past “how much can I raise” (which is needed every time they issue a new offering regardless whether it’s digital or paper) to see the exponential value that using a STO can bring their firm that far supersedes fundraising only. With STOs, you are able to bundle and unbundle interests in a single asset and make it multi-dimensional.
Benefits of issuing STOs include:
- They have intrinsic value and usually backed by real world assets
- They provide more transparency and liquidity for investors and issuers
- They enable access to global markets and reduce intermediaries
- They are more efficient and scalable due to smart contracts and blockchain technology
- Connection and integration with the digital asset universe
- Ability to leverage automated market making services (AMM)
- Ability to design and create new financial products and instruments (think REITs and ETFs)
Tokenization of your real world assets connect them to the innovation and value of all things Web 3 related.
What is an automated market maker (AMM):
An automated market maker (AMM) is a type of decentralized exchange (DEX) protocol that relies on a mathematical formula to price assets. Instead of using an order book like a traditional exchange, assets are priced according to a pricing algorithm.
Traditional market making usually works with firms with vast resources and complex strategies. Market makers help you get a good price and tight bid-ask spread on an order book exchange like Nasdaq or Coinbase. Automated market makers decentralize this process and let essentially anyone create a market on a blockchain. How do liquidity pools work explainer video
What is IX Swap:
IX Swap is the world’s first AMM for Security tokens. It is plugged into a broker dealer and custodian to facilitate legal pools and trades but is blockchain enabled and allows any investor to start a liquidity pool and is the killer app for the STO industry. Learn more about IX Swap here.
Watch the Security Token LifeCycle Management including setting up liquidity pools on IX Swap here. This live demo shows the world’s first legal and compliant liquidity pools ever created for STOs.
This recent report from Bain and Company “Web 3 remains highly relevant for Private Equity” states that Web3 will have important implications for how funds invest, underwrite risk, and raise new capital. The message is clear that the private markets are huge and ripe for disruption through blockchain. All the important Web3 concepts and tools are being developed on public blockchains, this is of structural importance, because all the digital assets that matter live on public, not private blockchains. Bitcoin, Ethereum, Stablecoins, NFTs, DAO, STOs can trade if they “talk the same language”, which translates into being issued on the same underlying technology. We remain extremely bullish on public blockchain for issuing STOs and connecting to the innovation and value creation in Web 3.
It should be stated that there are token standards that allow the creation of permission controls around assets issued on public protocols that ensure any KYC/AML compliance requirements.
Why does all this matter?
We have coined the term Web 2 investment firms to define any investment firm today that is not utilizing any blockchain technologies, this means tens of thousands of real estate, private equity and venture capital firms as well as family offices, wealth managers and anyone else who hasn’t touched blockchain yet. When a Web 2 firm starts to adopt blockchain technologies, we believe they are becoming Web 3 compatible and can reap huge benefits as outlined below.
The market opportunity is simply huge.
Another major value proposition for STOs is creating new and better investment vehicles using smart contracts and blockchain technologies. When you research the history of the public markets, you can witness the explosion of value created when new technology marries a marketplace. New technology allowed the creation of new investment products offering a wide range of benefits compared to their traditional counterparts. The development of the first ETF, which raised single digit million dollars has ballooned into a multi trillion dollar industry. In contrast to costly, illiquid, and complicated mutual funds, ETFs offered new ways of passive investing. New technology transforms markets. Tokenization delivers similar opportunities to the trillion dollar private markets. We are developing next generation real estate and VC tokenized funds with dramatically improved benefits for both issuers and investors.
A third and important value proposition for STOs is the ability to give multidimensional value to single dimensional assets. Lending, borrowing and staking services laid across the STO industry will significantly increase the usage, and therefore, value of those private market assets. You should be able to use a share in a private real estate asset as easily as lending on your public stocks portfolio.
To make your firm web 3 compatible, you must look at the applications and infrastructure being built now.
We think this report from Binance "Real World Assets the bridge between TradFi + DeFi" would help explain the story and opportunity further. In a world of digital currencies, the natural evolution is to see the development and convergence of digital securities interacting and fueling growth and volume, which essentially also means these assets should be issued on public protocols. I recorded a podcast on this critical topic.
Bain recently launched their latest report " Web3 Remains Highly Relevant to Private Equity", as well as JPMorgan and DBS latest report titled "Institutional DeFi the Next Generation of Finance", which all further bolster our belief and our mission. The convergence of TradFi and DeFi is the core of our positioning at InvestaX and IX Swap, and the DNA of our platforms.
Infrastructure takes years to build and licenses are difficult to obtain, so we started earlier than most, back in 2018. We now have, including through relationships with affiliates, every license needed in the digital asset industry, to launch and trade any token legally, including STO, NFT, DAO, Crypto, ITO, Stablecoins and other forms of digital assets which are yet to be developed.
TL/DR Binance
In conclusion, Real World Assets (RWAs) are truly becoming the bridge between TradFi and DeFi. An increasing number of DeFi and TradFi entities appear to recognize the numerous benefits that DeFi and more specifically RWAs provide, such as tokenization, ease of distribution, and transparency. More broadly, the RWA narrative is particularly notable for the crypto space as it serves as an example between a more interconnected world. No longer is DeFi isolated from the real world and TradFi. Blockchain is increasingly having real world use cases and proving its worth as a transformative technology. Download the report here.
TL/DR Bain
For most, the right approach may be to work with the innovative fund administrators and technology providers capable of developing tools and solutions for them, and we believe we have developed the optimal business model for those looking to invest into the STO industry now. UBS, State Street and other investment banks have all taken the initiative to understand the value of tokenization by working with us. Download the full Bain report here.
TL/DR JP Morgan
The cost savings and new business opportunities of creating a “tokenized” version of real-world assets for transacting through DeFi protocols could be significant for issuers and investors, as well as for financial institutions that can adapt their technology and business models. Download the report here.
The 3 Tokenization Models in Market
The STO market was born in 2018. Since then, there has been significant growth and progress around the world. However, until recently there has only been 2 models available for an investment firm that would like to issue an STO.
The first model is called token issuance and it is a pure service offering with the value proposition being that an asset owner can use the token issuance company, a technology only company, to issue the STO on behalf of the owner. This was the first model in the industry and provided some value, however, as STOs are securities, most investment firms are looking for additional licensed services needed in the issuance and trading of a security such as broker-dealers, exchanges or custodians (note these all require financial licenses and are regulated activities for STOs). Token issuance alone is not the end game.
The second model we call the security token exchange model, and it brings the technology and necessary licenses to facilitate the life cycle management of issuing and trading an STO. Think of this model as a “tokenized version” of the traditional stock exchange, where there are lots of services and fees, and asset owners must send their assets and their investors to the exchange. Many STO exchanges are also built on private blockchains and are disconnected from the entire ecosystem of digital currencies, cryptocurrencies and other innovations from the Decentralized Finance industry, which all use public blockchains. This model adds value but again is not the end game.
The third model, and in our opinion, the far superior model, is “Licensed” Tokenization SaaS (Software as a Service). You reap the benefits of both of the above models “token issuance” and “security token exchange”, without the disadvantages. Additionally you receive the added features of customization and control over your assets and investors, this is key. You can utilize broker-dealer, OTC and exchange services without needing licenses of your own. It is the best of both worlds and the end game from a market solution perspective.
Tokenize your assets on top of our infrastructure
Our Tokenization SaaS platform is a software-as-a-service solution that enables the issuance, trading, and custody of security tokens for private market assets. We have been granted a Capital Markets Services and Recognized Market Operator license by the Monetary Authority of Singapore to deal in and operate an organised market for securities, respectively. Our service offers a one-stop solution for all your security token needs, including seamless banking integration, thorough user verification with our KYC module, flexible OTC trading options, primary issuance services, cutting-edge blockchain technology, and smart contract deployment.
Benefits of Using our Tokenization SaaS Platform:
All-inclusive one-stop-shop solution: Tokenization SaaS platforms offer everything an investment firm needs to get started with tokenization, including issuance, trading, and custody solutions.
Latest blockchain technologies: Tokenization SaaS platforms use the latest blockchain technologies to ensure the security and integrity of tokenized assets and a choice of blockchains as well.
Fast integration time: Tokenization SaaS platforms are designed to be easy to integrate and onboard, allowing investment firms to get started immediately.
Low cost: Tokenization SaaS platforms offer the most cost-effective solution.
At InvestaX, we offer the leading Singapore Licensed Tokenization Service-as-a-Software (SaaS) platform for Real World Asset Tokens (RWA) and Security Token Offerings (STO). We provide a one stop shop for tokenized assets for global investors, including real estate, private equity, venture, ESG, startup, private credit/debt and more. We also provide IX Swap, the first legal and compliant Automated Market Maker (AMM) for RWA and STO.
If you are interested to learn more about how you can build your business on top of our infrastructure and what we can offer you as your tokenization partner, then contact us here. Thank you.