Surprise! The team at STA has decided to extend our ReCap subscribers another free edition of what will be the weekly STA Insights email, exclusively for members of the STA Success Network.

For those that missed it last week, the Success Network 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. We’ll also be having our weekly office hours for members, although this week’s is open to all.

So without further ado, here’s the second 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. Distribution Remains King

2. Settlement Tokens to Underpin the Ecosystem

1. Distribution Remains King

There seems to be no shortage in interest in tokenization from the prospective issuer’s side. So many asset owners are exploring and thinking about tokenization as is, and that will continue to strengthen. Look around: people see what Hamilton Lane and Apollo and KKR are initiating on the private equity side, and even see how startups like Exodus and INX previously raised capital across retail, accredited, and institutional angles through Regulation A+, Regulation D, and F-1 offerings. For those curious, Exodus raised $75 million via Reg A+ and INX raised $85 million via digital IPO. These rounds both closed in 2021, followed thereafter by listing on Alternative Trading Systems (ATS) for secondary trading and immediate liquidity opportunities to investors.

Here in 2023, even after these sizable successful rounds over the past few years, the missing ingredient within the tokenization ecosystem is on the demand and distribution side. We touched upon this in last week’s edition when referencing the world of bond issuances, specifically how the majority of digital bond issues were subscribed to by other divisions within the issuing bank and/or partners, rather than what we’ll call organic buyers. Looking at things from a more public perspective, such as investable products through registered digital broker-dealers, we see a few avenues of distribution.

Direct-to-consumer methods in which an issuing company itself, which would be a corporation that issues or lists a security token for investment, finds its investors directly. This is pretty much the ethos of the JOBS Act of 2012 and the concept of Web 3.0 - consumers become more aligned with the brands and corporations in which they already actively participate. A company with 100 million customers may have a realistic chance at raising up to $75 million via Reg A+ offering. Why? Because the loyalty and brand recognition is already there. A company with 100,000 customers could even find success raising a certain amount of capital from its retail user base - maybe even up to $5 million under a Regulation Crowdfund (Reg CF) offering.

That works great on paper, but as the 2023 macroeconomic backdrop has shown, it’s tough to lead the horse to water AND make them sip. Just because someone is a customer and likes the idea of investing alongside brands does NOT make it an automatic conversion. This is where the need for traditional capital raising partners like investment banks and placement agents comes in. This is where strong opportunity lies.

Investment banks, broker-dealers, and placements agents have the opportunity to maintain their competitive edges and positions within the capital markets as the industry continues to digitize. One of the realizations across the security token side of things is that the digital broker-dealers work very well as tech platforms. As capital raising partners? That’s really to be determined… Until we see another sizable ($50 million+) deal closed it will be difficult to have strong confidence in raising capital through these platforms alone.

It is for these reasons I believe traditional investment banks, broker-dealers, and placement agents still hold tremendous power and can continue to hold that power BY getting comfortable with and more active in tokenized deal offerings. Tokenization is simply a technology overlay, and at the end of the day money talks; this means the well-known and well-trusted partners will be the ones who clients WANT to go to when exploring tokenization.

Still, being more forward looking, there are indeed solutions designed to bridge the multiple platforms that exist on both the primary and secondary sides of the security token equation with the end goal of bringing products and investors together more efficiently. One such example is Ownera, who developed its FIN P2P routing system to enable broker-dealers, asset owners, and investors to communicate in order to match bids. Again, this will ultimately be reliant upon the underlying platforms in which Ownera has agreement with, but a cohort of multiple platforms together will inherently offer a deeper pool of capital and products and likely act as a net positive.

The holy grail for distribution of tokenized products is through Registered Investment Advisers (RIA) and wealth management shops. Tokenization is usually associated with private products, which can be difficult for wealth managers and RIAs to secure for their clients in traditional methods. Simplicity of security tokens may unlock this to a greater extent, and ultimately would unleash that eager client capital. Similarly to the investment bank statement a couple paragraphs earlier, THIS is a differentiating factor for RIAs and wealth managers alike.

2. Settlement Tokens to Underpin the Ecosystem

Aside from the product side, the topic of settlement is a common one among the commercial banks looking at this technology. Things may get even more hectic following the Silicon Valley Bank, Silvergate, and Signature Bank news. Let’s keep the topic on tokenization though.

A key piece of the tokenization ecosystem is the settlement of all of these transactions. After all, if things have to revert into fiat currency on each and every transaction, then it’s not a true digital ecosystem. This begs the question: how do we properly settle transactions? The context of this question is really geared towards banks and related institutions rather than to one-off platforms. Two prominent examples come to mind - ones that deserve more recognition than they have.

JP Morgan’s Onyx division, which is the umbrella for all of the blue-chip bank’s blockchain initiatives, built JPM Coin (JPMC) back in 2018 to address the exact question we posed here: settlement. Rather than relying on an external stablecoin or a cryptocurrency, JP Morgan was confident they would be working with a range of blockchain initiatives and decided to create an internal tool, which turned out to be an exceptional decision. JPMC is responsible for settling the $430 billion worth of blockchain-based repo transactions that Onyx has completed since 2020, as well as anything else on the Tokenized Collateral Network (TCN).

Simply put, JPMC is a stablecoin backed by JPM’s cash and cash equivalent holdings for the designated amount. The firm seems to be evolving that and coining deposit tokens as the new term - a more sensible and prevalent one to the banking sector. Stablecoins by nature should be backed in a 1:1 fashion by the underlying collateral. As we know, this is NOT how banks operate under fractional reserve policies. Instead, deposit tokens are more fitted to the current model as they’ll be determined and issued based on reserve requirements, ratios, and related criteria. JPM published a whitepaper on Deposit Tokens to act as a better stablecoin without being as radical as a Central Bank Digital Currency (CBDC).

Provenance Blockchain has a similar yet more open-ecosystem approach to a widespread accepted digital deposit called USDF. USDF is a bank-minted tokenized deposit grown by a consortium of FDIC-insured banks including First Bank, Atlantic Union Bank, New York Community Bank, and roughly 10 others. On Thursday of last week (March 9, 2023), the USDF Consortium submitted a statement to the House Committee of Financial Services for review specifically on the topic of digital dollars. The end goal here is to have an accepted and FDIC-backed tokenized form of money that can be rolled out and confidently used by financial institutions.

It would not surprise me if banks decide to build their own forms of tokenized money during the early proof-of-concept phases that most of them are in. If they want to dabble and get familiar with the technology internally first, that is totally cool and plausible. Still, looking to the future, things will need to be interoperable and it’s more likely that a uniform, consortium style approach will become more popular simply because it’ll find strength in numbers. Keep an eye on banks and parties joining both JP Morgan’s Onyx division and Provenance’s USDF consortium as an indicator for where adoption is heading.

Notable Market Headlines

• 3/6/2023 - Hashrate Asset Group (HAG) and INX Announce Strategic Alliance to Offer Bitcoin Mining Security Token

• 3/7/2023 - Kaiser Partner Privatbank Joins SDX as First Liechtenstein-based CSD Member

• 3/8/2023 - Finhaven signs an MOU with Woori FIS to license its Security Token Platform to Companies in South Korea

• 3/8/2023 - Finoa Gets Three Crypto License Approvals From BaFin

• 3/8/2023 - Tax Breaks for Security Tokens in Thailand

• 3/9/2023 - DigiShares announces the launch of its own Security Token Offering

Institutional Activity

• 3/6/2023 - Nasdaq Overview on Tokenization

• 3/9/2023 - USDF Consortium submits FDIC-insured deposit token proposal to House Committee of Financial Services

• 3/9/2023 - Securities Platform DEFYCA to Release Tokenized Private Debt Protocol on Avalanche

• Stablecoins will eventually lose market share to more regulatory-friendly products like deposit tokens and even tokenized money market funds or CDs

• The question of closed- or open-ecosystem approach remains

• Nomenclature around the settlement token will become more pressing

Secondary Activity

Securitize Markets

Securitize Markets currently offers the following tokens for secondary trading:

• 22X Fund ($22x)

• Blockchain Capital ($BCAP)

• Protos ($PRTS)

• Science ($SCI2)

• SPiCE VC ($SPICE)

• Exodus ($EXOD)

The first 5 listings offer investors equity interests in their respective underlying investment funds, while Exodus offers equity shares in the company itself. Blockchain Capital and SPiCE VC’s tokens account for the lion’s share of trading volume on Securitize Markets (99% cumulatively). This frequency of trading bodes well for these assets, given that both Blockchain Capital and SPiCE VC have reported sizable boosts in their token prices, increasing 4.17% and 6.67% over the past 6 months, respectively.

INX ONE

With the launch of its new platform INX ONE, INX Limited has been slowly relisting security tokens that have been available for trading on INX’s secondary platform in the past. As of right now, INX ONE offers both the INX token ($INX) and Millennium Sapphire ($MSTO) for trading, although $MSTO is a newer listing with limited available data, and therefore this analysis only takes into account the $INX token and omits $MSTO activity.

Ownership of the INX token entitles holders to an annual pro rata distribution of 40% of the issuing company’s (INX Limited) cumulative adjusted net operating cash flow, while also serving a utility function with decreased trading fees; this effectively makes $INX a dual-function profit-sharing security token. Over the past 6 months, the INX token’s price has decreased by approximately 50% while the trading volume has remained relatively consistent monthly. Referring to the above graph “Cumulative Market Cap of Security Tokens by ATS,” we notice that Securitize Markets’ cumulative market cap flipped that of INX ONE’s around the $65 million mark towards the end of 2022.

tZERO ATS

The Intercontinental Exchange-backed tZERO ATS lists the following assets available for secondary trading:

• tZERO’s token ($TZROP)

• AspenCoin – St. Regis Aspen ($ASPD)

• Curzio Equity research ($CURZ)

• Exodus ($EXOD)

• The Spot at Myra Park – Marketspace Capital ($MYRA)

• XY Labs ($XYLB)

Among the US-based marketplaces covered today, the tZERO ATS provides the most variety in terms of listed assets and their associated industries. The issuing companies behind these tokens specialize in a myriad of industries, ranging from real estate to technology and media, but how have these security tokens fared during this recent economic downturn? Whereas the tZERO token ($TZROP) itself has decreased by almost 22% over the past 6 months, the average price change for a security token listed on the tZERO ATS sits at a comfortable and positive 7.70%.

In contrast, the average price change of security tokens trading in the United States Month-over-Month (MoM) for the past 6 months has been -2.16%, which may largely be attributed to $INX’s 50% dip as one of the larger tokens by market cap. However, the activity on both Securitize Markets and the tZERO ATS has been pleasant during this downturn, yielding an average price change of 1.96% and 7.70% across listed assets, respectively.

For reference, BTC has experienced a 12.72% rally over the past 6 months, whereas the NASDAQ and the NYSE have reported more moderate gains of 0.50% and 7.02%, respectively.

Upcoming Success Network Events

• STA Office Hours - Analyst call Thursday March 16, 2023 at 9am EST

  • Sign up on the form where you can submit your questions for us to cover.

    • Ask about STA, help with your own company/offering, clarification questions, anything else you’d like to discuss!

  • We’ll send a calendar invite with Zoom information soon before the event. See you there!

    • Here’s last week’s office hours, take a look!

    • This week will be on Zoom instead of Demio, so you can ask us talk with us directly

Webinars + Events

• Tokenization of Securities: Custody Challenges in a Multi-Chain Environment - Inveniam - March 16, 2023 9am EST

• STM Featured Community Member: March 2023 - Brian Esposito, Esposito Intellectual Enterprises and TurnCoin - March 16th, 2023 1pm EST

Member Updates

Be sure to let us know your announcements!

Much of the ecosystem was gathered in Miami, FL this past week thanks to Inveniam and its Data 3.0 for Web 3.0 Working Summit. The close-combat event brought key personnel from some of the largest investment banks to technology providers to advisory groups and issuers to the table, literally, to get a more boots on the ground feel. Goldman Sachs, Bain & Company, US Bank, Blackstone, Coinbase, and Deloitte were some names in action, as were existing trailblazers like DigiShares, Tokeny, Oasis Pro Markets, and Ownera.

It was a productive week understanding and evaluating many of the ecosystem’s pain points and how the convergence of traditional capital markets and compliant blockchain solutions is actually happening behind the scenes. We look forward to sharing updates on these solutions and the overall landscape as it continues to develop.

Helpful Resources

• Tokenizing an Asset in 3 Easy Steps - Security Token Show

• Rich Data in Private Assets - STM

• State of Security Tokens 2022 - STA

• State of Security Tokens 2023 - Institutional Edition - STA

• Tokenization for Institutions - What You Need to Know - STM, Arca (YouTube)

We hope you enjoyed the second 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! 

Don’t forget to sign up for our Office Hours on Thursday, March 16th at 9am EST which is open to all this week! On that form you can submit your questions for us to cover. We’ll send a calendar invite with Zoom information soon before the event. See you there!

• Ask about STA, help with your own company/offering, clarification questions, anything else you’d like to discuss!

• Here’s last week’s office hours, take a look!

  • This week will be on Zoom, therefore you can ask us questions and talk with us directly

3/