🤝 Security Token Prime Insights: 2/5/2024

Exclusive Intelligence for Security Token Prime Members

February 05, 2024

Summary and Key Takeaways

1. Security Token Advisors unveils Blue Water FinTech as Mortgage Servicing Client bringing Tokenized Mortgage Assets to the Ecosystem

Security Token Advisors, our very own consulting and advisory arm, announced one of our recent clients: Blue Water FinTech. Blue Water is a mortgage servicing platform and SEC-registered investment adviser owned by the real estate analytics firm Voxtur. STA has been working with Blue Water on the tokenization of its Mortgage Servicing Rights (MSR) cash flows, relying on our ecosystem partners for proper distribution and fit to their respective investor bases. As mortgage assets are typically difficult to obtain in the primary markets without extensive licensing, we believe this is a very sensible use-case for tokenization and one that actually helps the democratization of investing given this.

“This is a key strategic relationship for Blue Water,” said Al Qureshi, Managing Partner at Blue Water. “Security Token Advisors has 95% of the token market covered. Tokenization provides liquidity, scale and diversification. It represents the future. In the past year, we have expanded our mortgage product set to all digital servicing, whole loan, second lien and now non-QM solutions. For our part, we have the product, we have the technology, and now we will be able to augment our investor liquidity base to include token-based investors. It’s all part of a coherent plan to first deliver industry-leading technology, second to lock up product and operational partners, and lastly to source investor scale. We continue to execute.”

The full press release can be found here and additional details may be available upon request to the Security Token Advisors team.

2. Bitfinex Securities goes live in El Salvador after Volcano Bond

El Salvador just received its first registered and licensed digital assets service provider: Bitfinex Securities. Previously issuing the Blockstream Mining Note (BMN) tokens, Bitfinex Securities won the bid to issue $1 billion in El Salvador’s Volcano Bonds (BTC-backed) in December 2023, which now look ready to begin the primary capital raise in El Salvador given this recent announcement. It is unclear the exact reach and activity that Bitfinex Securities has on its primary and secondary venues, although for a country that is so pro-digital assets, it would not be wise to underestimate Bitfinex’s platform and abilities to generate activity in this field. Our research team will be following on with updates to the Volcano Bonds and associated listings on Bitfinex Securities El Salvador and Bitfinex Securities itself (as it’s previously registered and operational in Kazakhstan). Congrats to the team on this and very excited to see how the market receives the BTC-backed Volcano bonds.

3. Superstate Launches its inaugural Treasury Product

Superstate is a real-world asset management firm that raised a $14 million Series A in November 2023. Last week, the firm came out with its first product: Superstate Short Duration U.S. Government Securities Fund (USTB). USTB is a private Ethereum-based treasury and agency securities fund available solely to US Qualified Purchasers (QBs). As an Exempt Reporting Adviser, Superstate works with NAV Consulting to calculate daily net asset value of the fund and provides investors with their choice of BitGo or Anchorage Digital as custodians. While not yet available, the plan is to enable peer-to-peer transfers of the fund’s units to other members of Ethereum’s Allowlist (a white-listing and permissioning mechanism for compliance).

4. VanEck’s Take on Tokenization

The industry has seen a number of blue-chip CEOs like Larry Fink of BlackRock and Jenny Johnson of Franklin Templeton come out and support the concept of tokenizing stocks and assets. After January’s Bitcoin ETF approvals and activity, Jan van Eck, CEO of VanECK (one of the prominent ETF issuers), stated two facets that are holding the tokenization and real-world assets industry back.

  • Market Making

  • Regulation

First the liquidity standpoint: somebody needs to make a market in tokenized assets and that market maker needs to make money doing so. Currently, there is little to no incentive for issuers to list assets on secondary trading platforms because any liquidity needs to be self-supplied or hoped for, which simply won’t work for serious players. The bridge needs to come from the BTC ETF, for example. Take some of the common Authorized Participants (APs) on the BTC ETFs like Jane Street, Macquarie Capital, Virtu and more, or even smaller market makers and trading firms willing to look at these spreads. We already track $25 billion worth of tokenized assets and their trading activity at Security Token Market; it’s worth it for the Alternative Trading Systems (ATSs) and regulated international venues to open their routes up to market makers and offer well above average spreads and compensation, as this newfound liquidity will almost undoubtedly bring billions of dollars in sideline capital to the tokenization space (first-hand feedback from our own consulting clients).

Secondly, Jan van Eck believes regulation from a markers perspective is a serious consideration, and this goes hand-in-hand with the liquidity point. While tokenization is moving nicely in the headlines, the trading and issuance sides are still in an elementary phase and scale, and the trading venues themselves are quite limited. In the US, everything trades on an Alternative Trading System (ATS) - not a national exchange. This presents some limitations for market makers and traders as order flow runs through Broker-Dealers and their listed assets. Overseas, Europe may have a more accommodating framework and a strong retail user base to couple that with, as do regions like Japan, Abu Dhabi, and Singapore with regards to openness of on-chain assets. 

Both are questions that will continue to need iteration to answer over the rest of this decade, and they’re nothing new to us. Many in the space have been urging platforms to form relationships with and incentivize market makers for the good of the industry and for their own future roadmaps.

5. Dinari and Camelot Partner to offer tokenized stock DEX

Aside from traditional market making, SEC-registered transfer agent Dinari is working with Arbitrum-based decentralized exchange (DEX) Camelot to offer a USDC trading pair on its tokenized Coinbase stock. Dinari’s token-wrapped stocks, transactions, backing, and other data can all be viewed on their platform here.

6. DigiShares becomes a Node Operator on Polymesh (POLYX)

DigiShares expanded its role in the ecosystem from a tokenization issuance platform to a node operator on Polymesh this past week. As a public-permissioned blockchain, Polymesh now has 18 node operators consisting of “licensed financial entities managing the nodes that keep the Polymesh blockchain secure and operational in accordance with proof-of-stake consensus.” Polymesh and DigiShares have both been expanding their footprints throughout 2023 and are keeping momentum moving here in early 2024. With these incentives and partnerships in place, it will be very interesting to see if any DigiShares clients begin issuing assets on Polymesh, or even elect to become node operators themselves for cases that make sense.

Notable Market Headlines

Institutional Activity

STM Data

Engage with This Graph on Security Token Prime

This week the STM team would like to put an emphasis specifically on the HELOC space. HELOC stands for Home Equity Line of Credit - essentially a loan against the equity you have in your home. These have been around for decades, but now we’re seeing them be securitized on-chain, mainly through Figure Technologies and Provenance Blockchain. In the past few years these on-chain assets have grown in origination size from roughly half a billion in 2020 to around $7 billion by the end of 2023.
*Please note data in the above visual is not indicative of 2023 in its entirety and ends at 11/30/2023. 

Now that Figure has proven the model, in November 2023 we saw them launch their Lending-as-a-Service product with Guaranteed Rate being their first customer. This lets other big players in the mortgage space use Figure Lending’s technology as a white-label solution rather than developing their own framework to achieve the same outcome - originate HELOCs based on a lender’s desired loan terms, pricing parameters, and fulfillment requirements.

“Through Figure’s LaaS model, we are able to create a HELOC offering specifically targeted to the needs of our customers and loan buyers,” Victor Ciardelli, President and CEO of Guaranteed Rate.

Here are a couple of the originations to check out on STM.Co: 

Keep an eye out for more as we continue onboarding them!

Security Token Prime is Made Possible Thanks to Our Enterprise Partners

This past week, we were able to unveil our client: Blue Water FinTech. As noted in the Market Headlines section of this, we were really excited to begin working with and bringing Blue Water’s mission to market. While the tokenization space continues to slowly grow with additional money market and treasury products creeping their way to a collective $1 billion market sizing, Security Token Advisors seeks to dive deeper and bring unique quality products to the ecosystem. As mentioned in the VanEck summary earlier, liquidity is such a challenge in this space. What’s unique about Blue Water is the firm already has 1) product inventory in the exclusive mortgage servicing market and 2) existing liquidity and trading activity from its active user base. The matter of shifting these over to the blockchain world will begin creating great value and validation to the tokenization ecosystem itself, while offering Blue Water with a new channel for product placement. This cannot be a one-sided industry in which service providers simply charge fees and shift the legwork to the issuers; it must be a collaborative approach and for this to happen, the offerings must be attractive enough to get the service providers excited and willing to go above and beyond for success. That success will come in the form of strong product placement, reliable secondary trades, and a beautiful case study at the end of it proving out the capabilities of this industry and what could be for other asset managers, issuers, and associated parties. THAT is how we cycle capital from the sidelines onto the field, one client at a time.

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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Recent Recordings

Hello members,

As we enter February we are also seeing a continued spread of RWA adoption bricks being cemented through ecosystem partnerships and more new offerings. Last year we saw a lot of experimentation and Proof of Concept studies be released around fund tokenization, primarily via Project Guardian with JPM, Apollo, and WisdomTree (among other participants) as well as via the investment association and capital markets players in the UK. Unsurprisingly, this is leading to a surge in LP tokenization interest. This is a more nuanced and sophisticated form given the participants tend to be institutional and represent bigger money for few overall investors. Therefore, the spike in interest isn’t primarily to create stock-like liquidity as the primary goal. Administrators and GPs are waking up to the efficiency in managing investors instead.

What it also means is that this year we will see more conversations around digitization without using tokenization in its truest potential or form. I’m talking about token dressing of course, which is what I call projects that tokenize a security or asset without enabling self-custody, without the use of public blockchain, without visible transactions or opportunities for DeFi protocol support. These projects get a lot of snark from the crypto crowd despite still offering appeal (and real value!) to the participants themselves. Though simply applying token dressing doesn't mean you are fully utilizing the technology, it doesn't mean it’s inherently negative value or a waste of time to do it. In most cases this is the first step in a crawl, walk, run adoption of tokenization. 

So get ready to see a whole lot more token dressing mixed with truly decentralized (but permissioned!) RWAs and tokenization projects this year, many among them the newly trending art form of fund tokenization. Meanwhile, get ready for a BIG announcement for TokenizeThis this week, stay tuned.

Happy tokenizing,
Herwig
CEO, Security Token Group 
@tokenwig

Herwig’s Pick: Superstate

 Kyle’s Pick: Obligate

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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