🤝 Security Token Prime Insights: 3/4/2024

Exclusive Intelligence for Security Token Prime Members

March 04, 2024

Summary and Key Takeaways

1. Ondo GM: Two-Way Solution for Brokers & Blockchain

Ondo Finance, well-known in the space for its massive 2023 consisting of the Ondo Ondo Short-Term US Government Treasuries (OUSG) token, Flux Finance for lending, and Ondo US Dollar Yield (USDY) interest-generating stablecoin with market making partner Wintermute, announced its largest infrastructure upgrade to date this past week. Ondo Global Markets (Ondo GM) is designed to aggregate liquidity bridging the real-world asset and traditional spaces, rather than forcing investors to pick and choose.

As OUSG’s underlying holdings are shares in the Blackrock iShares Short Treasury Bond ETF (SHV), Ondo’s approach was to take existing traditional products with proven liquidity and wrap them in a token for DeFi usage and utility, such as lending, swapping, and on-chain treasury diversification. With Ondo GM, the team is looking to interact with investors and household name venues like Nasdaq, NYSE, and London Stock Exchange. Ondo GM is a broker-dealer with accounts at traditional trading, clearing, and settlement venues enabling both DeFi and traditional investors to place orders through Ondo GM for back-and-forth usage.

Ondo GM has the ability to lock shares purchased through traditional channels, mint a token representing them, and allow the end investor to make use of those tokens in applicable DeFi venues. Upon redemption, sales, or swaps, the investor is dealing with liquidity from traditional venues rather than from newer and thinner real-world asset order books. So if an investor chooses to purchase Tesla (TSLA) shares through Ondo GM, they’ll place the order, receive tokens representative of TSLA stock held by Ondo GM, and make use of the tokens in Flux Finance or other applicable marketplaces. Upon sale, the investor’s TSLA ask will be routed to Nasdaq rather than a pop-up exchange or another smaller liquidity pool, should the investor prefer.

2. Credora Updates its On-Chain Ratings to Benchmark against S&P, Moody’s, Fitch

On-chain asset rating firm Credora, who’s backed by S&P Global and Coinbase Ventures, is making an effort for more apples-to-apples ratings through its most recent platform update. In its Benchmarking to Traditional Ratings piece Credora details its Credora Credit Reports will now contain a Ratings Agency Equivalent (“RAE”) and Implied Probability of Default (“Implied PD”) for borrower, lender, and partner clarity. Its numeric system rating on-chain assets on a scale of 0-1,000 will now come with equivalent ratings in the S&P, Moody’s, and Fitch formats. Its initial overlay shows that Credora users currently tend to work within a range of S&P/Moody’s/Fitch ratings between a BBB+/Baa1/BBB+ and a CCC-/Caa3/CCC.

As assets continue to shift to a blockchain basis, whether natively or as a representation, transparency and actual understanding will be a necessity for any serious capital allocators. By making it easy on traditional investors and investment managers with rating mandates (i.e. nothing below a BBB), Credora is playing a key role in ushering in quality issuers and investors alike, while also ensuring the tokenization and real-world asset spaces are taken more seriously by traditional players across fixed income, mortgages, and bespoke products.

3. Securitize to Enable Collateralization of Digital Securities through Securitize Credit

Securitize launched its own division focused on providing crypto-based loans and loans backed by its issued tokenized products including investment funds, startup equities, real estate, and fixed income. Securitize Credit is seeking to fill a void in which tokenized products are limited in scope to borrow against for large-scale investors (international DeFi would be the closest fit), and the firm’s new group is offering short-term and long-term financing in the form of USDC stablecoin against funds issued by managers like Hamilton Lane and KKR. 

Additionally, Securitize Credit will manage and run Securitize Earn, the operation focused on enabling its users to lend and borrow cryptocurrency itself (BTC, ETH for example). Securitize Earn is set up in the British Virgin Islands and accessible to non-US investors, as well as certain other jurisdictions. The significant piece here to us is Securitize Credit enabling overcollateralized loans to tokenized product investors, as we have been calling for Broker-Dealers to help make their own markets rather than relying on organic liquidity that simply hasn’t shown up in strength. This is a very strong move by Securitize to differentiate itself and further position itself as a more full-service platform to issuers and investors.

4. Digital Bonds in Repo Activity: HSBC Orion in Action

Blockchain-based repurchase agreements (repos) have been a wise theme for institutional use all 2023 and into 2024. While usually facilitated by digital cash, treasuries, or other high quality liquid assets (HQLA), this past week demonstrated something that our team has been projecting since the inception of these repo transfers: alternative assets as short-term financing collateral. HSBC and the Bank of East Asia used a $756 million green bond previously issued by the Hong Kong Monetary Authority (HKMA) in a repo transaction.

The sizable bond was issued through HSBC’s Orion platform, which also integrated Hong Kong’s Central Moneymarkets Unit (CMU) as the central securities depository. This integration created a standardization that enables asset flows fully on-chain from the CMU to investors through Orion. It is unclear the type of trading and lending requests Orion is getting, although HSBC’s team notes an “unprecedented” amount of demand and activity that encouraged expansion to the repo side.

Notable Market Headlines

Institutional Activity

STM Data

Today’s Security Token Market data chart reflects last week’s trading activity - a more active one than the previous week’s by both market cap and volume. Since last week we covered a top performer in volume, this week we’ll be highlighting the security token with the most growth in market cap and that goes to XY Labs ($XYLB)!

XYLB displayed a 31.58% increase in market cap, starting at $0.38/token and closing out the week at $0.50/token. Keeping in mind that the outstanding supply is 44,280,175 this means the market cap grew from ~$16.8M to ~$22.1M throughout the week.

About XY Labs:

Founded in 2012, XY Labs’ extensive experience with consumer hardware, global community, and app development has allowed it to become an expansive company offering a significant variety of tools and technologies to change the user’s experience and interactions with the physical world. 

These tools and technologies include a distributed blockchain network of nodes that introduces additional certainty and information in real-time and validates real-world data using geospatial, temporal, and other metadata.

Security Token Prime is Made Possible Thanks to Our Enterprise Partners

We covered this in the Key Takeaways section but it is really nice to see some of our expected predictions now coming to fruition. Specifically, a US-registered Broker-Dealer and Alternative Trading System helping create its own liquidity for issuers through the form of lending. Even in our own client meetings and industry discussions, the Security Token Advisors team likes to note that not everything needs to be done “DeFi” to start. By that, we meant service providers in the tokenization space and even traditional groups looking to dip their toes should begin accepting tokenized assets as collateral for simple loans. Again, this requires limited digital asset interaction - it’s not like an alternative lender would need to deal with or learn Aave mechanics - instead, they’d just need a proper wallet and infrastructure integration with the issuing platform. In this case, Securitize is doing it itself through a subsidiary. It’s only March 2024 but should Securitize successfully issue, collect, and retire loans against digital securities through their new arm in the near-term, this will go down as one of the most significant headline developments of the year. It’ll set precedent for other BDs and of course international equivalents, as well as apply pressure on permissioned lending protocols for integrations as the next step.

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] 

Upcoming Events

  • Weekly Industry Updates Breakdown - Tuesday March 5th at 3:30pm EST

  • Office Hours with Security Token Prime - Thursday March 7th at 11am EST

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Recent Recordings

  • Platform Spotlight: Block Time Financial (Recording Link)

  • The TradFi/DeFi Hybrid with Maple, Centrifuge and Swarm (Recording Link)

  • Platform Spotlight: REtokens' New Platform with Tyler Vinson and David Kirschbaum (Recording Link)

  • Powers Hour: New SEC “Dealer” Rule Expansion and DeFi Impacts (Recording Link)

Hello members,

Off-chain liquidity has always been an untapped force until now with Ondo GM. I believe OTC Markets Group may have something similar but they aren’t going around tokenizing public shares like the Tesla example they give.

Could this be the secret to driving sector growth? I believe tokenized public shares are a small part of the overall equation. Though it’s worth pointing out that when FTX, Binance, and Bittrex had tokenized stocks available to international investors there was usually between $100K to sometimes millions in daily volume. Perhaps public shares tapped into traditional liquidity provides the right pair for private securities?

Whether it’s RealT innovating, Ondo launching new markets, or Citi proving out the benefits of tokenization, we know that all of it is headed on-chain and STM will be your one stop shop to see it all on a single platform. 

Happy tokenizing,
Herwig
CEO, Security Token Group 
@tokenwig

Herwig’s Pick: RSRV

Kyle’s Pick: Ondo Finance

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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