🤝 STA Insights 3/6/23

Exclusive Intelligence for STA Success Network

Author

Security Token Advisors
March 06, 2023

It’s been an amazing year of The ReCap and we hope you’ve enjoyed our monthly editions thus far! The team has been diligently curating these newsletters for everyone interested in tokenization while helping our clients and partners navigate the waters toward great offerings and exciting developments.

That being said, in response to growing demand we’re excited to announce the Security Token Advisors Success Network! This will be a members-only platform for stakeholders in the tokenization space to connect with each other & the STA team, receive exclusive industry insights, have access to our direct resources, and more all in one place.

As one of the Success Network benefits, members are going to receive weekly emails with exclusive research and commentary which will replace The ReCap. So without further ado, here’s the first week’s email for everyone to enjoy. We hope to see you in the network - Founding Member status is available only until April 1st, 2023!

Summary and Key Takeaways

  1. Layer 1 Blockchains vie for Real-World Asset (RWA) traction

  2. Bond Tokenization leads investment banking focuses

  3. Public market products meet tokenization via Exchange-Traded Funds (ETFs)

  1. Layer 1 blockchains vie for Real-World Action (RWA) traction

The Real-World Asset (RWA) theme has been shaping up to be the talk of the digital assets industry in 2023. Many crypto-centric firms are realizing that digital assets SHOULD be backed by something more tangible, if possible, and many traditional asset managers are realizing they can tap into the already-built crypto ecosystem with their trillions of dollars in real assets. Win-win.

At the base layer of this are the blockchains themselves; the plumbing that allows all of these RWA concepts to come to fruition. Without indicating which chains are “better” than others, as that’s quite opinionated, it’s important to note the blockchains that are progressing this narrative forward.

Provenance Blockchain already has over $9 billion of on-chain real world assets across digital mortgages & HELOCs, private investment funds (including Hamilton Lane 1940 Act digital share classes and Apollo Global’s similar play), tokenized money and payments, and other debt products. Assets can be issued on Provenance with its associated $HASH, and have a clear path forward to work with Figure Technologies on the Broker-Dealer (BD) and Alternative Trading System (ATS) sides for capital raising and secondary trading purposes.

Avalanche ($AVAX) has been on a tear integrating with prominent issuance platforms and infrastructure providers (i.e. Transfer Agents, Broker-Dealers, Custodians) including the likes of Securitize, INX, Intain, Tokeny, tZERO, and Fireblocks, among others. Avalanche has done a fine job working on both the retail-oriented and institutional sides of the markets, and comes up often in conversation.

Ethereum ($ETH) should obviously be mentioned here as it still is the most prevalent Layer 1 blockchain to build upon within the general digital assets ecosystem. Service providers like INX ONE and Tokeny have designed their own security token protocols on top of ETH, adding in certain regulatory and compliance features that the blockchain would not typically support on its own. Most of the platforms also support ETH as the vast majority of stablecoin assets are on Ethereum-based stablecoins, as is the demand from issuers.

  1. Bond Tokenization leads investment banking focuses

Goldman Sachs. Societe Generale. UBS. HSBC. BBVA. ABN AMRO. European Investment Bank. Deutsche Bank. Santander. Credit Suisse. More.

All of these firms are involved in bond tokenization whether through their own platforms or through syndicate groups, which even include additional buyers and partners not included above. Especially in Europe and Asia, investment banks began playing around with digital bonds as early as 2018, and ramped that up over the course of 2021 and 2022.

These bonds are largely still being used “internally,” where other groups within the issuing banks acting as the buying parties simply to get that bank familiar with the end-to-end tokenization and management process. For example, UBS issued a 375 million Swiss francs ($370,000,000) bond in November 2022 with Six Digital Exchange (SDX). This issuance was targeted for other wealth management and private banking groups within UBS itself. This is a great start as it’ll get UBS AG familiar with the origination, tokenization, and issuance process while also getting its other buying divisions familiar with the subscription and holding process. Many of the bond issuances to date have this type of playbook.

However, this narrative is moving towards a true “product” nature, as the industry saw through ABN AMRO’s corporate bond issuance on behalf of the aviation firm APOC. APOC, who has existing equity investors, offered the digital bond worth €450,000 (roughly $500,000) to those investors first, who subscribed to the offering directly themselves in January 2023. That’s wild. Until that point, most of the bond headlines came from other banking parties filling those subscriptions. Here, ABN AMRO successfully issued a tokenized bond to real buyers.

Security Token Market notes over $12 billion of corporate, investment bank, government entity, and on-chain bonds issued to date, not accounting for the hundreds of billions of dollars of volume being transacted across collateral management and treasury programs through entities like JP Morgan’s Onyx and HQLAx.

  1. Public market yield-generating products meet tokenization via Exchange-Traded Funds (ETFs)

A common discussion topic among asset managers looking to implement digital asset strategies surrounds the concept of compliant and risk-mitigated yield generation. Stablecoins such as USD Coin (USDC) and Tether (USDT) are largely based on cash and cash equivalents, but do not organically push any yield-generating activities through to investors (stablecoin holders). This forces investors to rely on various third-party services through the likes of BlockFi, Celsius, or similar lending programs. This may be okay for individuals who are comfortable with the program, but is quite the unideal option for large institutions. It would be surprising to have an asset manager park $300 million of client money in USDC when treasury yields are hovering over 4%.

In comes Ondo Finance with an on-chain solution to this exact topic. Rather than relying on generating yield FOR stablecoin holders, Ondo offers a seamless alternative TO stablecoin holders. Ondo Finance established multiple Special Purpose Vehicles (SPVs) that hold underlying BlackRock and PIMCO treasury and money market ETFs generating a range of yields. Interests in these SPVs were then tokenized and offered to qualified investors with a minimum buy-in amount of $100,000 via USDC stablecoin.

Essentially, Ondo is offering an easier rotation from USDC into these yield-generating products, fully on-chain. There is no other known solution for deploying stablecoin or cryptocurrency capital into ETFs or comparable yield-generating products, especially not with the pedigree and the brand of BlackRock and PIMCO. Ondo worked with Coinbase (custody), Clear Street (prime brokerage), Richey May (audit), and NAV Consulting (accounting) to launch in January 2023.

More recently, to further tie the Real-World Asset (RWA) theme in with Decentralized Finance (DeFi), Ondo launched Flux Finance, a decentralized lending service that enables investors to collateralize and borrow against their tokenized holdings. Flux is live as of February 2023 with the Ondo Short Term US Government Bond Fund ($OUSG), which has roughly $25 million in liquidity on the platform at the time of writing.

Notable Market Headlines

Institutional Activity

  • Global Asset Managers Explore Tokenization Buckets

  • Digitally-Native vs. Digitally-Enhanced Products

One of the most exciting facets to contribute to and to organically observe is the adoption of asset tokenization across household financial services names. In our State of Security Tokens 2022, amidst the metaverse, NFT, and general Web 3.0 buzzword booms, we proclaimed that “the true firepower of blockchain technology and ‘tokenization’ is not in Non-Fungible Tokens, but rather in bringing all existing assets to the blockchain via a security token,” followed up by “It’s time that capital flows back into real assets - but digitally.”

That thesis gains strength and validation by the day as the number of active institutional tokenization cases continue to climb - so much so that we were able to dedicate almost 40 pages solely to banking and asset manager endeavors in our State of Security Tokens 2023 - Institutional Edition. For years, I’ve thought that ‘crypto trading desk’ announcements from the big banks were just noise. I understand there’s plenty to be made on that trading side, but could never understand why key players ignore the trillions of dollars of assets already in existence that could simply move from Excel sheets and representations to the blockchain.

It seems that thought has caught up with these key players, and it’s become extra prevalent that asset managers “need to do something” - their words, not mine. When looking at what to do, the common themes come down to 1) issuing an investable product, 2) working with blockchain service providers on the backend of operations, and 3) exploring new infrastructure opportunities. Now, a number of initiatives in the space may hit on 1, 2, or all 3 of these points (look at Arca’s US Treasury Fund as a great example); individual samples are shown below:

  • Product: Hamilton Lane Private Assets Fund with digitally-native 1940 Act share classes on Provenance blockchain

  • Operational: Allfunds Blockchain running AllianceBernstein’s fund management and end-to-end lifecycle on-chain

  • Infrastructure: Special Purpose Broker-Dealer (BD) approval to monetize an asset manager’s own network like WisdomTree Asset Management will do through WisdomTree Prime

I noted the distinction of “digitally-native” share classes above in that Provenance blockchain mention. This is another hot topic among those on the deeper, more technical side of things in the industry - those more behind the scenes than the public headlines. The distinction between “digitally-native” and “digitally-enhanced” is one that will soon enough become prevalent to the ecosystem as a whole, if it already isn’t a common talking point.

When looking at the number of Broker-Dealers (BD), Alternative Trading Systems (ATS), Transfer Agents (TA), and other service providers in the industry AND the structures of products rolling out, semantics become even more important. In the eyes of the SEC, semantics are key. Where are we going with this?

It will become more important to decipher and determine listing venues and platforms of products that are digitally-enhanced, such as a tokenized representation of an existing investment fund, and products that are digitally-native, such as newly-formed share classes that can only be accessed in tokenized form. Eventually, when these products aim to list, they will be limited or guided towards the infrastructure licensing that matches up with their own product nomenclature - digitally-native or digitally-enhanced. This is where the choice of platform becomes ever more important, and is where Security Token Advisors has been fortunate to see the differences, understand the nuances, and ultimately help navigate the waters on behalf of clients and prospective issuers.

Peter Gaffney, Head of Research at Security Token Advisors

Secondary Activity

Source: STM.Co

Source: STM.Co

Upcoming Success Network Events

Webinars + Events

Member Updates

  • Freeport launches fractional fine art platform

  • TurnCoin opens $70 million primary capital raise with INX

Security Token Advisors client Freeport is in the process of launching its fractional art platform geared towards both retail and accredited investors looking for exposure to fine art and museum-quality art pieces - namely, Andy Warhols. The platform’s waitlist can be found here ahead of its Spring 2023 launch.

INX, a prevalent broker-dealer and issuance platform in the digital security space, seeks to help raise $70 million from accredited investors for TurnCoin, an initiative designed to close the gaps between celebrities, athletes, creators, and other groups and their loyal fans and following. TurnCoin and its proprietary VirtualStaX will be using INX for the capital raising, and likely eventual secondary trading listing, on its mission to “turn likes into dollars” across ambassadors including Patrick Mahomes, Drew Brees, Luke Bryan, and Randy Jackson.

For many who have been participating in the industry for years, or were just on the periphery, you’ll have noticed a resurgence in security tokens. Taking on the nomenclature of tokenization, we’re seeing a surge in adoptions from major financial institutions while the industry continues slowly to add more primary offerings, secondary listings, and new service providers.

While I expect 2023 to be a paradigm shift for the space, I do believe it won’t take on the same interest as other crypto fads have. Tokenization will start to look bigger to those working in it, but still very small to the rest of the world. While services like ChatGPT can enable anyone to instantly sign up as users, the process of leveraging blockchain for financial activities is far more complicated, difficult, and slow to adopt in comparison. Still, that doesn’t mean when the biggest banks and asset managers are saying that security token technology is the future, we can’t ignore that there is a lot more happening behind the scenes that will take hold in the second half of this year and next year. This could be accelerated by regulators and legislators due to continued FTX fallout like we see with Silvergate bank.

What I expect in the short term is continued venture investing activity into infrastructure in the space. We’re seeing Series A-C opportunities in issuance platforms, marketplaces, and other service providers and I anticipate a lot of these announcements in the coming months.

Meanwhile, we’re launching the STA Success Network to bring all the stakeholders together in one place. Leading intelligence like this weekly email, community tools, member and vendor directories, event lists and more will be available to the membership. Since you decided to join, the first opportunity to participate is to tell us feedback! What do you want to see covered in this newsletter? What features matter the most to you? We want to provide 100x the value covered in the monthly fee and the only way to do that is by letting us know. Until next week - Happy Tokenizing!

Herwig Konings, CEO at Security Token Advisors

Helpful Resources

We hope you enjoyed the first STA Insights email for Success Network members - if you have any feedback on either what you liked or what you’d like to see, please reply to this email with it!

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