🤝 Security Token Prime Insights: 2/19/2024

Exclusive Intelligence for Security Token Prime Members

February 19, 2024

Summary and Key Takeaways

1. Citi, Wellington Management, WisdomTree, ABN AMRO + Avalanche, Tokeny: Private Fund Lending Trial

Avalanche extended its entrenchment in the tokenization industry with another headlining proof-of-concept - this time, alongside financial partners:

  • Citi: issuer of ERC-20 compliant tokens from its agent wallet 

  • ABN AMRO: wealth manager asking Citi to tokenized its existing fund holding (move it from traditional form to Avalanche)

  • Wellington Management: Issuer of the fund

  • WisdomTree: onboarding investors and associated compliance as distribution

  • DTCC Digital Assets: deployed lending and collateral management smart contract

  • Tokeny: played its technology provider role as tokenization engine and ONCHAINID supporter

The February 2024 project tested the tokenization of a Wellington-sponsored private fund on the Avalanche blockchain in its institutional testnet, Spruce. The workflow included ABN AMRO simulating the role of a traditional investor as a hypothetical client of WisdomTree, who can be viewed as a blockchain-enabled distribution channel within this initiative.

Once the private fund was on Avalanche, Citi moved the collateral to an automated lending contract setup and validated by DTCC Digital Assets. The ability to swap collateral with other permissioned parties is a key tenet of Spruce’s permission-only structure, and something that institutions seem to require to begin making any tangible progress with their tokenization efforts. After all, tokenization is the next technology overlay across capital markets as a whole, not just within one firm’s tech stack itself. Success here will enable greater interaction between issuers, distribution networks, and end-user investors on both the raw subscription & redemption side and the lending and borrowing side, which are the two most forefront forms of liquidity. Additional details can be found in Citi’s summary report.

2. Ripple adds to its Portfolio of Regulatory Licenses through Acquisition of Standard Custody & Trust Company

Ripple, who’s no stranger to acquisitions in recent times, added another well-known platform to its tool chest. This undisclosed acquisition of Standard Custody & Trust Company gives Ripples access to Standard Custdoy’s New York BitLicense, which is on the more difficult end of the spectrum to receive. On top of this, Standard Custody & Trust is approved for custody and escrow services under a charter granted by the New York State Department of Financial Services (NYSDFS), and is a qualified custodian in accordance with federal legislation. What’s more is that Standard Custody is already in a joint partnership with GSR, a prominent decade old market maker in the digital assets space, to bolster its escrow and collateral management service. These points all strengthen Ripple’s positioning to follow through on its stated intention to host “financial use cases building institutional-grade solutions to tokenize, store, move, and exchange value.”

3. Leave Tokenized Assets out of SAB 121 Mandate: a Letter to the SEC

The Securities and Exchange Commision (SEC) set up the Staff Accounting Bulletin (SAB 121) in 2022 to govern and develop frameworks for digital assets custody. The strange rule that always stood out was the requirement of custodians to list the digital assets in which they custody on their own balance sheets. This is quite limiting to custodians and banks holding digital assets on balance sheets as it makes it more challenging to meet certain reserve requirements, meaning to hold additional capital on hand necessary for these digital assets will displace financing for other lines of business within the custodians.

A group consisting of Securities Industry and Financial Markets Association (SIFMA), Financial Services Forum (FSF), the American Bankers Association (ABA), and the Bank Policy Institute (BPI) penned a letter to the SEC requesting the SEC to omit tokenized assets from the SAB 121 custody designations. In essence, even if cryptocurrencies continue to fall under this custody ruling, the cohort insists that use cases combining DLT and traditional assets be treated differently, like existing securities would.

While this letter is currently merely an opinion of request, it sums up what most in the industry recognize: that tokenized assets are not cryptos. Tokenized assets are simply on-chain representations of some underlying financial instrument, whether digitally-native or a digital twin. Logically, it doesn’t add up for the custody provider of a tokenized money market fund to have to hold that excess value on its balance sheet when its traditional counterpart - which may even BE the underlying asset - is not subject to that same classification. This would be a key win on the classification side for tokenized real-world assets, and a win here would reduce barriers to entry and bring greater favor to the industry for incumbent giants like Fidelity, BNY Mellon, and State Street.

4. BitGo Increasing its Tokenized Cash Equivalent Footprint with Ondo’s OUSG and USDY

Speaking of custody, BitGo launched support for Ondo Finance’s two main products, Ondo US Dollar Yield (USDY) and Ondo US Short-Term Government Bond Fund (OUSG), just a week after announcing its acquisition of Brassica. Beyond supporting these two assets with AUM totalling $120 million, USDY will be supported in BitGo’s Go Network enabling collateral movement and transfer between qualified parties. This could be another key towards Ondo and USDY adoption as BitGo becomes more active in the lending plumbing that we constantly see headlines on (See: Citi, Wellington, Avalanche Headline #1 above).

Notable Market Headlines

Institutional Activity

STM Data

This week’s Security Token Market graph reflects aggregate on-chain Redwood Trust SEMT securitizations using Liquid Mortgage technology, boasting an 8.67% monthly growth rate. Liquid Mortgage gives investors transparent and efficient access to data, tracking amount borrowed, payment history, documents, loan-level data, and more. Redwood Trust now uses Liquid Mortgage for 15 of their SEMT securitizations, with the latest being SEMT 2024-2 announced this past week, valued at $366.4M and bringing their total loan securitization balance as of today to $5,422,400,000.

Why do these residential mortgage backed securities make sense to be on-chain? 
The blockchain can help reduce friction points throughout the life of the loan thanks to streamlined diligence, reporting, and data providing more consistent insight such as borrower payment and prepayment activity. Daily reporting rather than the traditional monthly in the case of Ian Ferreira’s Liquid Mortgage.

This loan-level data would enable more efficient processes in the RMBS space, as Fred Matera, Managing Director and Head of Residential at Redwood Trust expressed in a press release relating to a 2021 securitization:

With a permanent digital record of loan data, mortgages should be able to be bought and sold in a much more commoditized manner, with a level of accuracy and transparency that surpasses current industry processes.

Fred Matera, Managing Director and Head of Residential at Redwood Trust

This sentiment was also observed and elaborated on from Provenance’s Anthony Moro at TokenizeThis 2023 which you can find on page 22 of our Conference Breakdown and Key Highlights report.

Redwood Trust’s venture arm, RWT Horizons, has invested in the industry as well including Oasis Pro, Vesta Equity, and of course Liquid Mortgage.

Keep an eye out for a new feature coming soon on STM.Co! Can you guess what it is? Leave your guesses in the Security Token Prime general chat.

Security Token Prime is Made Possible Thanks to Our Enterprise Partners

The STA team is very close to getting one of our recent clients into the market with its inaugural mortgage servicing token. As listed below, Blue Water FinTech has a robust loan servicing platform and associated investment adviser arm providing buyers with a very tailored suite of products and yield profiles. As the tokenization lead, we have been seeing noticeable interest from broker-dealers, citing short-term duration yield opportunities as something their clients are among the most interested in.

For any platforms, brokers, money managers, and third-parties interested in hearing more about the Blue Water vision, send us an email ([email protected]) or drop me a Direct Message on Security Token Prime, LinkedIn, or Twitter. As shown in the STM Data section and in previous reporting, Mortgage Assets have already eclipsed $12 billion in on-chain workflows - whether that includes blockchain-based origination or simply provenance of data trails, that’s a super impressive number relative to the broader tokenization industry. We intend on positioning Blue Water right there and doubling the sizing estimates through the firm’s pre-existing inventory and reach. This will be a very serious case for the industry to model after pending success, and a quality asset for the platforms to bring to their own clients.

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 500+ 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,

It’s obvious that the Citi tokenization news is a big deal. It may not mean much to those familiar with the technology and how it works but there is a reason I chose them as my Company of the Week. Firstly, this news got 3-5x more coverage than the JPM-led Project Guardian for a very similar proof of concept. Secondly, they actually are quite different, the latest from Citi notably being here in the US (not Singapore), even leveraging the DTCC’s new digital asset unit and Tokeny’s ID management. This is a BIG deal that will absolutely spur more interest into this technology by Wall St so kudos to everyone involved!

However, we must now go the complete opposite direction and look at RealT and the retail crypto sector. The announcement they made to tokenize themselves via a Swiss SVP is one that could also be quite revolutionary. Interestingly, Swiss Law enables private companies to essentially trade equity with anyone (some rules like OFAC are supposedly enforced) in a permissionless environment. The rationale regulators use is that once you decide to interact with the security itself such as vote on company governance, receive a dividend, etc. it is then that you will be required to KYC and have the correct ownership details. Therefore, leveraging the incredible and vast DeFi ecosystem of RealT we can now see the equity of the company itself trade just like any other DeFi coin. 

Given that RealT has shown potential to trade 20% of its total AUM annually based on current data (see our interview with them on the show linked below!) then we could be talking about something pretty special here. This model was pioneered by Mt. Pelerin, a Swiss tokenization company. RealT may just blow the lid off this and might just have started crypto's latest new trend.

Happy tokenizing,
Herwig
CEO, Security Token Group 
@tokenwig

Herwig’s Pick: Citi

 Kyle’s Pick: Backed

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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