🤝 Security Token Prime Insights: 2/12/2024

Exclusive Intelligence for Security Token Prime Members

February 12, 2024

Summary and Key Takeaways

1. Hashnote’s US Treasury Token available to 300 Institutional Buyers through digital assets custodian Copper

Hashnote, who launched its US treasury-backed USYC token on the Noble blockchain in the Cosmos ecosystem in January 2024, recently saw its USYC token accepted by the digital assets custody provider Copper. This integration with Copper brings Hashnote’s USYC to the custody firm’s client base of around 300 large institutions and crypto trading platforms; Hashnote already counts Cumberland as a market maker since Hasnhnote was the first Web 3.0 firm to emerge from the Cumberland Labs incubator. Also significant, Copper purchased Securrency Capital (licensed brokerage in the UAE under ADGM) in November 2023. USYC may be a mere stone’s throw away from the clientele and capital pools in this Middle East region that's certainly gaining headway as a potential tokenization juggernaut.

One of the advantages and differentiating factors to Hashnote’s treasury offering is the fact that USYC is based on the reverse repo yielding about 4.8%. Hashnote and its partners offer access to the reverse repo window (holding Treasury Bills overnight with a guaranteed price the next day) by proxy of the tokens - something most other offerings in the on-chain treasury space do not as they simply wrap existing T-Bills or treasury ETFs in a token format. One of the value drivers behind tokenization is the idea of new and democratized investment access. Near direct access to institutional-level activities like repos and reverse repos is a wise and powerful story for tokenized products here.

2. BitGo Strengthens with Brassica Acquisition

BitGo made another strategic move to bolster its tokenization (and general institutional digital asset offering) through its acquisition of SEC-registered Transfer Agent Brassica. Though the purchase price and terms are currently undisclosed, BitGo is valued at $1.75 billion per its 2023 $100 million Series C; Brassica’s existing footprint within private markets makes this a clear play for BitGo’s push towards the alternative investment industry - namely, through tokenization services.

Brassica CEO stated, “Our strength lies in our ‘one-stop-shop’ approach of providing API-enabled infrastructure for the alternative assets industry.” BitGo is already integrated as a custodian across the ecosystem including INX and supports a variety of blockchains. As 2023 saw a number of custody takeovers (i.e. Ripple acquiring Metaco, Fireblocks acquiring Blockfold), BitGo is positioned to have a clearer path to monetization through real-world asset tokenization activities.

3. UBS Issues Ethereum-based Warrant; purchased by OSL Digital

UBS Tokenize has another headline client & deal in Hong Kong through the Ethereum-based call warrant on Xiaomi stock (Xiaomi Corporation (1810.HK). The February 2024 ETH-based warrant was fully sold to OSL Digital Securities, an online digital assets investment platform for institutions, corporates, professional and retail investors in Hong Kong. This suggests that OSL Digital will be distributing the on-chain warrants to interested and qualified buyers; it;’s not necessarily the ‘direct-to-retail’ approach that most think of when they hear tokenization, but frankly this is a strong case to see and something we will want further details on with regards to the end buyers. Should OSL Digital find success placing the Xiaomi warrants with its own user base (whether institutional or smaller buyers), then the rest of the industry has some precedent to look at and model after when it comes to tokenized product distribution.

4. DTCC’s Take on Tokenization and its Future Course

The Depository Trust and Clearing Corporation (DTCC) is no stranger when it comes to DLT and blockchain workflows. Having piloted its Digital Securities Management (DSM) protocol in 2020 and acquired Securrency in 2023, the DTCC is quite forward thinking when it comes to securities transactions and the future makeup of public capital markets. The organization responsible for $2.5 quadrillion in securities transactions in 2022 states that blockchain likely will not be the end-all be-all to achieve T1 settlement within the public markets. Please note, the SEC is working towards a May 2024 shift to T+1 settlement versus the existing T+2. Our own research covering groups like Equilend and JP Morgan suggested that blockchain workflows could help capital market firms reach this solution. However; the DTCC reiterates that tokenization and blockchain are too far removed from the public market infrastructure to even be in that conversation at this time.

The article states, “One of the key advantages of blockchain is the ability to have atomic settlement in which the asset and payment exchange simultaneously, delivery versus payment (DvP). That doesn’t have to be instant. It can happen one day after a trade.” That’s very true - while instant settlement sounds great, the new mandate only requires a 50% reduction in settlement time (2 days to 1 day). Nonetheless, the release emphasizes the potential for improved transacting in the private market worlds where settlement and investment operations could take up to a full quarter. Even in these lower-volume venues, there are worthwhile value-adds to explore through tokenization. These statements may feel like a gut-punch to some in the industry who were hoping for immediate DTCC tokenization adoption after Securrecny, but keep in mind the sheer scale and pace needed to capture public market securities and infrastructure. STA still expects smaller T+1 pilots and cases to be shown through blockchain workflows in accordance with the SEC’s mandates. 

5. Paxos & PayPal team up with Chainlink to Improve Real-World Asset Onramp through PayPal USD (PYUSD)

While much of the industry is looking at money markets and treasuries as the initial product rendition, Paxos, one of the original stablecoin issuers and infrastructure providers in the crypto space, is fortifying its stablecoin offering with PayPal. The PayPal USD (PYUSD) token is now integrated with Chainlink Price Feed, something that other issuers in the industry started like Backed Finance and Base blockchain. The goal here is to securely deliver accurate PYUSD data on-chain to attract quality buyers and liquidity players. All of this is working towards the next goal of these players’ involvements in the real-world assets space.

Notable Market Headlines

Institutional Activity

STM Data

Engage with This Graph on Security Token Prime

This week Security Token Market would like to shine some light on tZERO. Not surprisingly, over the course of 2023 tZERO’s own token, $TZROP, experienced the most volume in terms of number of tokens traded. This was followed by Aspen Coin, representing equity in the St. Regis Aspen. 

There was a spike across the board at the end of June 2023 going into July, which may have been influenced through onboarding new investors on their primary side as they closed out Aurox’s RegCF. Aurox is a software company focused on DeFi. This RegCF raised around $310,000 from nearly 400 investors. 

You’ll notice the famous Exodus token is no longer shown as trading ceased on both tZERO and Securitize Markets after the close of trading on Monday, December 11, 2023 in preparation for their OTC Markets OTCQB listing. While tZERO may miss those investors’ participation, they’ll continue listing new tokens for both primary and secondary markets, just as they did with listing EnergyFunders Yield Fund I ($ENFD) in March 2023.

The hope is that as more investors are onboarded through the primary side, they’ll discover other investment opportunities on the secondary market and participate, growing the potential for liquidity across the board.

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I’m very interested in the OSL Digital Securities and UBS collaboration on tokenized warrants. Much of my conversations these past few months have been surrounding product distribution, and seeking to avoid industry saturation with simple tech solutions that shift all or most of the responsibilities to the issuers. For companies to be successful in this space, and for the space itself to be successful, meaningful capital must be placed across novel and traditional products on-chain alike. It seems simpler for the non-US products offering treasury exposure to international investors and plugging in to the broader DeFi ecosystem; it seems tougher for US-registered firms to reach their fundraising goals. Nonetheless, platforms and headlines like this one are building the precedent day by day. We will also be including a brief section detailing “Where are the Buyers?” in our upcoming industry report, which we hope will shine light on the demand side and help craft issuer strategies as a result.

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 the (if not the) leaders 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,

Every financial asset will be tokenized. It’s simply too powerful of technology that only compounds in value the more the lifecycle and every related transaction is natively executed on chain. That's exactly why tokenized warrants also serve their place. Without tokenized warrants, shares, debt contracts, etc. we couldn’t take advantage of a loan collateralized by warrants that track a liquid and accessible equity  which can then be settled via atomic swap pending payback schedules to repay the lender or assign ownership to the warrants instantly in the event of default. 

The greater the universe of tokenized financial products, the greater the benefit for portfolio management including greater diversification benefits thanks to owning smaller, fractional positions. With an on chain portfolio, we can now tie credit card payments that pay merchants instantly out of an investment account thanks to instant settlement capabilities. Want to assign a discount at checkout for your customer shareholders? It CANNOT be done without an underlying blockchain directing data flows and record keeping based on smart contract functions. 

Want to automatically rebalance a portfolio based on price movements? Eager to receive dividends digitally that automatically go and purchase a different stock the moment it arrives in your wallet? Perhaps you’d like to qualify for a mortgage using more than just a credit score to improve your rates? A tokenized future means all these capabilities become a reality. 

This year’s list of endorsements continues to grow as we hear CEOs from BlackRock, JP Morgan, WisdomTree, Chainlink,  and Circle endorse tokenization publicly and proudly! Still not convinced? I’d love to hear from you and understand why you still prefer to use a  horse carriage over a car! 

Happy tokenizing,
Herwig
CEO, Security Token Group 
@tokenwig

Herwig’s Pick: UBS Tokenize

 Kyle’s Pick: Rialto Markets

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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