One of the key events of the year took place last week in Zurich´s “Crypto Valley”. The Cryptosummit was — for me — both engaging and stimulating because the broad focus and main topic of it was the tokenization of securities, which is where — with Untitled-INC — I am more involved.
Among the high level speakers were ConsenSys Joseph Lubin in video streaming, Charles Hoskinson, CoinDesk´s Michael Casey, VC investor Jalak Jobanputra, Outlier Venture´s Jamie Burke and many other top businesspeople.
Of course, with such a packed agenda and thought-provoking panels running simultaneously on 3 stages, I had to make a choice and follow only those which were — for me at least — the most compelling. Most certainly I have missed interesting stuff, but the following were for me the key “take-aways” from the event.
Charles Hoskinson, formerly Ethereum CEO and currently at Input Output HK, gave me comfort that the global adoption path of crypto is nowadays irreversible. He captivated the audience mentioning his experiences while travelling for crypto projects in lands such as Mongolia where — perhaps not surprisingly — cryptocurrency adoption is progressing at a faster rate than in many western countries. He emphasized that Securities Token Offerings (STOs) will be the key instrument for driving the growth and capital allocation to developing countries. This is the first time in history that developing countries are not constrained in accessing capital for development. And of course this will be a radical shift for those countries which will have the unique opportunity to free themselves from the chokehold of western powers and financial institutions such as the IMF. For the first time in history those countries can now sell tokenized bonds backed up by their commodities and rare earth resources, without the need to sell them out to multinationals in exchange of “peanuts”. The first time in history that they can access a global, decentralized market of investors to fuel their growth. I find this is pretty exciting.
Juwan Lee, founder and CEO of Nexchange, presented interesting datasets to show where crypto investments stand today when compared with the hedge funds in the 90s. Crypto investments stand today where the hedge funds sector stood back in 1997, at the very beginning of its growth phase. Since then the hedge fund sector has grown in volume more than 15 times, going from the early phases, through institutionalization, consolidation and finally to the current maturity phase.
Crypto funds are also still quite minuscule in terms of managed funds. The large majority (approx. 208) have less than US$10m under management. Only the largest funds — approx. 28 — manage over US$200m. This is laughable compared to traditional hedge funds. The main point here to be made is that there is still tremendous growth opportunity for crypto assets and for penetration of crypto funds, considering that global capital markets and other assets classes are worth approx US$ 513trillion and the crypto sector only US$ 0,2trillion.
Of course some of this data must be taken with caution — specially in such a young and fast evolving sector — but you surely get the point, even when a few billions can be added or deducted to those numbers the prospects are still extremely exciting. Finally, because many funds are deep in the red at this juncture, one can expect that they will be compelled to liquidate their assets by year end. This could possibly cause the crypto market to drop lower before it can start trading higher. Definitely something worth keeping in mind.
Throughout the event you could feel a justified excitement for the perspectives of the sector but also some unrealistic expectations and — at times — superficiality and a lack of in-depth analysis of what could be really achieved today with a security token. This was obviously from companies touting their products and services. But the “we tokenize the world” mantra is — for now at least — still unrealistic.
Jesus Rodriguez, chief scientist and Managing Director at Invector Labs, brilliantly cut through the hype to make clear what is still needed before security tokenization can fulfil the expectations. To summarize his excellent presentation and his many slides in a few words is not easy, but that is in essence what is needed: liquidity and market makers, decentralised exchanges, on-chain programmability, trustless disclosure mechanisms about the underlying and possibly even ad hoc blockchains. As you can see we are not quite there yet.
Let´s draw then some conclusions on the complex topic of security tokenization.
The going live of the first decentralized exchanges for trading security tokens is to be expected sometime in the next 6 to 18 months, together with some traditional centralized exchanges — such as the Swiss SIX, the LSE, the Bakkt platform of the ICE — and some specialized crypto exchanges such as the GBX or SCX , just to name a few, who are also hard at work to go live as soon as possible. The STO-go-live of innovative (decentralized) exchanges together with large traditional exchanges — which can bring vital liquidity pools to the market — will inevitably shake the sector and will likely cause a concentration among the numerous tokenization platforms which sprung up recently and which offer little value proposal for tokenizing securities; the majority are basically no more than a window for token sales, with little or no liquidity and do not differ substantially from a crowd-funding platform. Many of them will likely disappear, the best few maybe will be consolidated. Therefore some level of disruption in the sector is to be expected.
Despite the current hype on tokenized equity issuances, I would rather expect tokenized debt securities or other types of non-equity profit participation to become the broadest use-case for tokenized securities. The reason is — as I wrote here — that debt or other forms of non-equity profit participation can be easily tokenized, made freely transferable on the blockchain and efficiently programmed to automatically execute “smart contract” functions such as paying dividend-yields. All this without the need for third party off-chain trusted entities — such as Companies´ Registries, Notaries, Land Registries or complex settlement and custody mechanisms — which instead come into play when transferring company shares or real assets.
Yet, in this fast evolving sector there are few certainties, both on the technical and regulatory side.
This is indeed the main concern when advising an STO project. We must always walk a fine line to balance out all the pros and cons of every technical and regulatory choice and try to maintain as much flexibility as possible, just in case we need to rapidly change the project’s course of action.
Easier said than done.