🤝 Security Token Prime Insights: 1/29/2024

Exclusive Intelligence for Security Token Prime Members

January 29, 2024

Summary and Key Takeaways

1. R3 Digital Markets launches as white-label tokenization infrastructure

Blockchain firm R3 has already been extremely active in the tokenization and DLT space through clients like Vanguard, SDX, Euroclear, Grow Inc., HQLAx, and numerous others since its 2014 inception. Using these clients as precedent, R3 launched R3 Digital Markets as an out-of-the-box Corda blockchain-based framework for capital markets infrastructure.

The framework offers capabilities for the issuance and trading of digital currencies and CBDCs, tokenized assets and products, and interoperability with Ethereum-based solutions and environments (not to mention, eventual support by Chainlink’s Cross-Chain Interoperability Protocol (CCIP) if not yet active). Within this product suite, R3 offers Digital Connect to facilitate integrations with legacy financial technologies, with partners like the development shop responsible for Fnality (who recently closed $95 million in institutional funding).

2. Mauve launches its first real-world asset decentralized exchange (DEX) with Backed’s bIB01 Treasury fund

As the industry continues to explore the promise of the DeFi <> RWA intersection, Mauve has made a breakthrough on its planned decentralized exchange offering, creating its first DEX trading pair with Backed’s bIB01 product. The Backed product, which names iShares $ Treasury Bond 0–1yr UCITS ETF as the underlying fund, will be paired with USDC for non-US investors to access through the VioletID onboarding process. Mauve is a non-custodial automated market maker (AMM) - forked from Uniswap V3 - that’s recognized as a licensed Virtual Asset Service Provider (VASP) by the Cayman Islands Monetary Authority.

3. Taurus receives FINMA approval for retail-issued tokenized securities in Switzerland

Roughly a year after its initial $65 million capital raise from Credit Suisse and Deutsche Bank, Taurus received Swiss Financial Market Supervisory Authority (FINMA) approval to open its TDX marketplace up to retail investors who are looking into digital assets and tokenized products. Taurus’ mission is to “make buying a private company share as easy as buying a book on Amazon.” Taurus already has 30 banking clients on the general technology side (i.e. tokenization issuance, development services, workflow integrations) and is accepting and issuing tokenized assets from Swiss real estate groups Investis and Swissroc, and the insurance firm La Mobilière.

Taurus co-founder Lamine Brahimi notes that roughly 80% of Taurus’ banking clients are already using tokenization with the expectation of listing their assets on the TDX marketplace for secondary trading. Taurus primarily targets clients in London, Paris, Frankfurt, and Dubai, including sell-side banks, buy-side managers, and mid-level corporations alike.

4. Figure files S-1 for publicly-registered interest-bearing stablecoin

Figure, whose lending-as-a-service arm (Figure Lending) is primed for its own IPO in Q1 or Q2 2024, has filed an S-1 registration with the Securities and Exchange Commission (SEC) for an interest-bearing stablecoin through Figure Certificate Co. The firm’s intention is to register the stablecoin as face-amount certificates (guaranteed stated amount payments over a period of time), with each contract representing 1 cent ($0.01). Pending approval, this would be available to retail, accredited, and institutional investors alike.

Interest on each certificate will accrue daily and be distributed monthly, with interest deriving from reserves including treasury, commercial paper, corporate debt and other assets. These will be a crucial part of Figure Marketplace for tokenized products as the certificate-backed stablecoins will ultimately be the payments and settlement mechanism for the marketplace infrastructure

5. $13 billion GF Securities issues Ethereum-based bond as Hong Kong’s Securities and Futures Commission (SFC) outlines 3-year plan for tokenization

Hong Kong is making quite the push to become the tokenization hub, with strong competition from current frontrunners like Singapore, the UAE, and even the UK (among others). Last week, the Hong Kong arm of China’s GF Securities (securities broker with $13 billion market cap listed on the Hong Kong and Shenzhen stock exchanges) issued its own Ethereum native bond through issuance platform ABT Tech.

Broadly speaking, Hong Kong’s Securities and Futures Commission (SFC) also believes tokenized assets, securities, and products can fall within the existing regulatory scope, and are working to embrace the technology and its capital market applications over the next 3 years per this roundup.

Notable Market Headlines

Institutional Activity

STM Data

Engage with This Graph on Security Token Prime

Building on last week's portion covering private credit, this graph highlights its market cap of issuances specifically on Ethereum, straight from The Ethereum Investment Framework: Q4-2023 edition authored by Michael Nadeau. 

Our very own Peter Gaffney and Caleigh Crossman were featured in this holistic framework which covers the history of the most popular Layer 1 blockchain, its valuation metrics and comparables, economics of its scalability and Layer 2 complements, DeFi activity, and real world assets and tokenization applications courtesy of our very own data and research team.

Excerpt from The Ethereum Investment Framework: Q4-2023:

Looking at private credit offerings and originations from a pure growth perspective (i.e. not analyzing yield and maturity profiles as investment products), the class rose by 94% from $223 million to $435 million over the year, peaking at $462 million in November 2023. Again, these protocols are primarily available to non-US users and corporations issuing credit offerings of varying profiles, although some are available to US accredited investors on the demand side. Collective market growth and individual protocol sizes are shown in the visuals below.

Much of the private credit cohort’s growth stemmed from Centrifuge and Maple, adding $167 million and $56 million of newly issued credit to the market, respectively. Goldfinch acted as an anchor around the $100 million in outstanding principal loans for the majority of the year. As a newcomer, Florence Finance added $4.4 million of loans into the market while Ribbon Lend, HomeCoin, and TrueFi reduced their supplies by roughly $1 million.

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This past week, STA’s conversations took us international more often than domestic, largely looking at private credit and fixed-income products and associated distribution. While I don’t think “regulation is unclear” is strong enough of a reason to avoid US tokenized product issuances - for example, a Reg D is relatively simple and will enable issuers to raise unlimited capital from accredited US investors through a digital twin or feeder fund products - I do believe products must find their best distribution channels prior to issuance. And in some instances, that lies within the brokers or marketplaces’ connections and investor appetite themselves. What this does is shift preference to platforms who are comfortable and confident in placing products, rather than those that are shifting capital raise responsibilities to the issuer itself.

It looks like short-term fixed-income opportunities are in demand by Japanese investors in this industry, based on our conversations specifically. For any private credit, MBS, or other fixed-income issuers reading, reach out and we can discuss more. Other options that seem tobe interest to corporates rather than institutions include direct private credit organizations through services like Maple and Centrifuge, although the golden goose that many fund managers are after are digitally-native 1940 Act Funds or comparable international vehicles.

Peter Gaffney, Head of Research at Security Token Advisors

Security Token Advisors Client Highlights:

STA has elected to spotlight a couple of our advisory & consulting clients here.

Blue Water FinTech - STA is working with Blue Water, an SEC-registered investment adviser and FinTech platform dedicated to Mortgage Servicing Rights (MSRs) and loan servicing with 100+ originators onboarded. STA has been evaluating the tokenization ecosystem on behalf of Blue Water, who is seeking to distribute MSR and associated cash flows to investors as compliant tokens. Blue Water is one of (if not the) leader in MSR secondary trades by volume which could contribute to a very notable listing on tokenized secondary marketplaces when the time is right.

Arctic Digital Mining - STA is working with Arctic Digital Mining (ADM) to develop a tokenization platform geared towards Alaskan gold miners under the mission of unlocking the value of in-ground gold deposits via digital securities, and thus bringing utility to unmined gold and precious metals. Targeting a range up to 100 million gold ounces, ADM seeks to bridge the gap between in-ground gold valuations and mined & listed gold (i.e. ETFs and gold-backed stablecoins) through the GiG token. Eventually, we may see price convergence as miners,investors, and users along the value-chain elect to tap into this market directly at the source through the miners on Arctic Digital Mining’s platform.

For Consulting Inquiries or Client Details: please email [email protected] 

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Hello members,

A lot of you are making it down to our home in Miami for iConnections Global Alts 2024. Let me know so we can connect! The year is now officially in full swing and the considerable uptick in offerings, fundraise announcements, new issuance platforms and marketplaces launching, PoC trial announcements, and more are all proving that the wave of tokenization has begun and is here to stay. Weekly fund tokenizations, bond issuances, and traditional STOs are now commonplace while the DeFi support and ecosystem partnerships continue to take form. What all this means is that the RWA tokenization industry is ready for investors to participate. Will the right offerings come to market this year to attract a million investors into holding security tokens? 

Republic won the Security Token Show Company of the Year award for 2023, following previous winners like tZERO, INX, and JP Morgan. Why did they win? Republic Crypto has been building the infrastructure to merge in its core business. Their plan is to enable the Reg Cf offerings being hosted on their platforms to tokenize and even list on INX - all in a self-custody environment. Skipping past the compliance nightmare I’m sure they went through to approve all this, they also launched custody technology and even tokenized their own investment opportunity into Republic’s portfolio of investments that went through the platform over the years (over 700 of them!) just to prove it all out themselves. I love it when people eat their own cooking! Throw in the potential full acquisition of INX they hinted at, and you’re starting to see a mini Coinbase in the making but with an edge on primary fundraising through RegCf. Mind you Coinbase has a way larger brand and customer base with the ability to catch up on licenses and compete while also having its own BASE blockchain to support RWA adoption. All that will come to fruition this year like Republic’s work from the past years did in 2023. Expect to see a lot more tokenization news, offerings, and support from both of these companies. Congratulations again to Republic for winning our Company of the Year! 

Happy tokenizing,
Herwig
CEO, Security Token Group 
@tokenwig

Herwig’s Pick: Sygnum

Kyle’s Pick: Deka Investments

Find out why and more every Monday live at 10am EST on LinkedIn or X/ Twitter. Past episodes available on Youtube or your favorite podcast platform! 

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