🤝 STA Insights: 07/17/2023

Exclusive Intelligence for STA Success Network Members

🤝 STA Insights: 07/17/2023

Exclusive Intelligence for STA Success Network Members

Summary and Key Takeaways

1. Implications of XRP Ruling on Tokenization

Rather than breaking down the XRP vs. SEC case from a crypto and legal perspective, let’s focus on what the decision means for tokenization and for XRP in the real-world assets (RWA) space. One of the hesitations for issuers and even platform integrations with XRP has been the question of its status in the eyes of the law. By being deemed NOT a security beyond the institutional private offering - so looking at any trades and listings on secondary marketplaces - XRP now has a higher likelihood of integration within the tokenization space.

This ruling that largely removes XRP’s designation as a security now opens up sideline issuers and platforms to begin tokenizing and issuing interests in real-world assets on the XRP ledger. Back in the day, Ripple and XRP were always mentioned head-to-head against Stellar and XLM. Well, Stellar already has some marquee products and clients in the tokenization space, like WisdomTree, Franklin Templeton, and ABN AMRO. XRP was always touted as the “Swift” of the digital assets space, mainly for its institutional focus and high-volume payments skeleton. It’s plausible to think issuers will begin exploring this thesis for high-volume trading and transactions of some off-chain products - probably another money market or treasury fund product to start with and immediately complement the Stellar and Polygon-based products the industry has so far.

All in all, this is a green light for XRP in the world of asset tokenization. The original thesis and gameplan for XRP was secure and fast payments, which is a component that of course may have application to the world of professionally-managed and rated products on-chain. Now XRP may once again compete directly with XLM and with comparable chains for tokenization bids (this week already has a couple news headline announcements, in fact). For any questions and interests in tokenizing or integrating with XRP, please reach out to Matt Donovan here in the Success Network.

2. Tokenization Lessons from Institutions

We see a LedgerInsights article breaking down some lessons and takeaways shared through HSBC, BNY Mellon, and Siemens’ tokenization initiatives. One of the key facets is the need for interoperability. And this type of interoperability goes way beyond the typical chatter in the digital asset space of chain-to-chain compatibility, now extending to digital-to-legacy infrastructure compatibility.

One thing we are seeing quite often in 2023 on our advisory side is the balance between a standalone proof of concept tokenization product and its application to the greater firm - whether that’s an asset manager, an index provider, or a commercial bank. Perhaps the simplest and sensible solution is rolling out a separate, standalone entity to run any blockchain channels through. One great (now public) example is WisdomTree Prime. WisdomTree Inc and its $90+ billion in ETF assets are demarcated from anything blockchain-native or oriented. As the blockchain-native products grow and the suite expands, WisdomTree can simply feed and route products through WisdomTree Prime. Again, the idea is that none of the current operations are affected. Nothing has changed on the legacy side while the firm gets a first-hand look at the future, essentially making WisdomTree Prime a deeper R&D initiative.

Eventually, as WisdomTree (knock on wood) sees very attractive efficiencies and success milestones through WisdomTree Prime and its blockchain-oriented operations, the asset manager may make the decision for a much larger overhaul, and begin upgrading its legacy arm with blockchain tech. That’s the playbook we have been preaching ourselves, so we’re big fans of WisdomTree’s bet here. One way or another, so many of these institutional players are going to have to get their hands dirty with a small poof-of-concept, pilot, or sandbox tester. This separate build out is one of the most pertinent methods of going about it.

Back to HSBC, BNY Mellon, and Siemens. The takeaway is that DLT is not the driver, per se, but rather the enabler. Now that some of these bonds, money market funds, and private offerings are on-chain, what do we do with them? Well, to fully capture the transaction and life-cycle efficiencies that the technology promises, these groups are going to need to work with legacy railroads like Swift. Or with central securities depositories (CSD) to and their approved and integrated exchanges like SIX Digital Exchanges (SDX) and its dual-connection with SIX Swiss Exchange - SDX as the primary issuance side, SIX Swiss as the active trading venue with a mutual CSD. Even the Polygon-based Siemens bond is more or less limited in what investors can do until there is a proper, permissioned swap pool, trading venue, collateralization service, or other liquidity avenue. Until then, bond holders will simply be holding until maturity and collecting their on-chain interest payments.

Notable Market Headlines

Institutional Activity

With distribution being the tough nut to crack on this side of digital assets, it’s been an exploratory phase of figuring out where we can build the industry’s product distribution channels. That’s why Onramp Invest’s partnership with Securitize back in Q1 really caught my eye. The ability to display and list tokenized alternative products alongside traditional and/or digital asset products to the broader financial advisor, RIA, and money manager networks is key here. Put it right in front of billions of dollars worth of potential buyers; the “build it and they will come” mentality simply won’t cut it, even if wealth managers are being asked about alternative investment opportunities by their immediate clients.

Onramp Invest’s recent advertisement depicts tokenization as the “Uber to private equity”... and I kind of love that. The phrase itself isn’t saying tokenization is an absolute necessity to find PE and alternative investment opportunities, much like Uber isn’t a necessity to find a ride to the airport. BUT it does infer that tokenization makes things more seamless, precise, and eventually preferred when it comes to investment style and access. Specifically, Onramp writes “Uber increased the number of ride providers available, brought opportunity and access to smaller cities across the country, made pricing more competitive and affordable, and made the entire process faster and safer by making it digital.”

Rather than working with old-school documents, holding periods, and third-parties, we know tokenization holds the promise of smaller buy-in requirements, possible collateralization, and more accessible liquidity solutions. Just like Uber is nice and flexible to adjust the pick-up location, add stops along the way, modify the end drop-off, and even adjust the car type and timing based on fees and desirability. Simply not going to get that by calling the cab service landline and asking them to send a car to XYZ address before hanging up and waiting.

There really is no shortage of issuers at the moment. Most of the quality ones are sitting on the sidelines waiting to see some validation on the demand side (buyers). Platforms and brokers should certainly take heed and determine where their comparable advantages lie on the product distribution side. And if there are none? That’s a self-answering question. I’ll be keeping my eyes on Onramp Invest and future tokenized products, product suites, and RIA & financial advisor partnerships to come as we locate and fortify the necessary buy-side roads.

Peter Gaffney, Head of Research at Security Token Advisors

Upcoming Success Network Events

  • Office Hours with Herwig Konings - Monday July 17th at 3pm EST

  • Weekly Industry Updates Breakdown - Tuesday July 18th at 3:30pm EST

  • The Liquidity Problem - Wednesday July 19th at 9am EST

  • Office Hours with Peter Gaffney - Thursday July 20th at 11am EST

  • New Member Introductions & Networking - Thursday July 20th at 4pm EST

  • Securrency Spotlight - Wednesday July 26th at 1pm EST

  • Compliance in Security Tokens - Thursday July 27th at 12pm EST

  • Issuer Spotlight: Freeport - Thursday August 3rd at 12pm EST

  • Wealth Management and Security Tokens - Wednesday August 9th at 1pm EST

Recent Recordings

  • Powers’ Hour - Legal Review with Marc Powers - Coinbase Commentary - Recording 

  • Protocol Series: Provenance Blockchain - Recording

Webinars + Events

State of Security Tokens 2023 - Q2 Publication

As our team finalizes the State of Security Tokens 2023 - Q2 report this week, we are finalizing sponsors for any groups interested in associating their brands with Security Token Advisors, our research, and the general tokenization and real-world asset (RWA) market. The publication gets distributed to many of the industry’s service providers, blockchain foundations, investment banks, crypto native firms, infrastructure solutions, and buy-side organizations including asset managers, wealth managers, and family offices. It’s also been syndicated by groups like Forbes and Securities.io as shown in the sample below. Please message Peter Gaffney here in the Success Network or email him at [email protected] to discuss.

Member Updates

Coinbase launches its wallet-as-a-service, which can truly be a pivotal point for platforms and service providers looking to streamline that end for its clients and partners.

Broadridge expands its growing DLR (Distributed Ledger Repo) network with new transactions and partners including DRW and Societe Generale. The firm also partnered with DLT-based securities lending platform Equilend to streamline securities finance transactions.

DigiShares completes its integration with Texture Capital for seamless alternative trading system listing capabilities of DigiShares assets.

Ripple has joined the tokenization world through initial real estate projects with the Hong Kong Monetary Authority. The organization is also preparing for the custody side with its acquisition of Metaco.

Freeport, a Security Token Advisors client focusing on fractional museum-quality art investing to retail and accredited investors, went live with its initial Reg A+ offering to Andy Warhol paintings last week. The collection includes Marilyn, Double Mickey, Mick Jagger, and Rebel Without a Cause.

Avalanche launches the Spruce subnet to cater to institutional players and usher them into the tokenization worlds at a lower barrier to entry. Initial joiners include WisdomTree, Cumberland, Wellington Management, and T. Rowe Price. Fireblocks signed on as a custodian.

Franklin Templeton announces its original blockchain-based mutual fund, the Franklin OnChain US Government Money Fund (FOBXX), surpassed $270 million in assets on the Stellar blockchain. Franklin Templeton soon after rolled the product out on the Polygon blockchain (under the token ticker $BENJI) in an effort to find wider distribution channels for the proven out product and concept.

Castle Placement goes live with its alternative trading system CPGO that supports private placements in analog and tokenized form.

Republic closes its Algorand-based Republic Note Regulation Crowdfund (Reg CF) offering, reaching its capital raise target of $2 million.

Accumulate blockchain development group IDD Labs partners with NEXT IT & Systems in the UAE.

Bank of America detailing tokenization’s projection as a new infrastructure overlay to the capital markets over the coming 5-15 years.

WorldVest launches its TroyMoney, its Gold-backed asset as part of the greater Precious Metals Backed Digital Investment Currencies initiative.

Ledgible launches its NFT suite for portfolio management, tax, and accounting.

EisnerAmper adds Chris Broderson as Managing Director of Digital Assets & Strategy.

Goldman Sachs Digital Asset Platform (GS DAPTM ) gets named Euromoney’s Financial Innovation of the Year for progressing institutional tokenization.

Hello tokenizers,

Yet another momentous week in the tokenization space, as well as crypto. Both the XRP rulings as well as the WisdomTree Prime launch will put incredible pressure on financial institutions to evaluate and accelerate their blockchain timelines. BlackRock’s ETF filing gave a breath of fresh air to native cryptocurrencies and now with the latest legal update, we’ve got more clarity too. Pile on the fact that WisdomTree has completely removed its reliance on outside parties in order to build AUM, everyone must be reconsidering their previous position on blockchain technology within capital markets.

Despite judging the asset value of native cryptocurrencies, we’ve always said when that market does well, so does tokenization and vice versa in the bear markets. As many are pointing out, we may be thawing from winter and entering a spring renaissance across the board in crypto and tokenization. This will lead to more non-institutional adoption of tokenization as well. As mentioned earlier, Ripple just became a household name player in tokenization and the sector use cases of real estate, minerals, and private alternatives will also gain traction alongside Wall Street adoption, likely in more quantity of issuances but also, naturally, in smaller asset values. This is a good thing as adoption and education of tokenization will continue to spread widely across retail and professional investors.

What insights can I share? Other than the fact that I already know WisdomTree will not be the only one to make major announcements like this in the coming weeks and months, I do believe that we’re also going to see additional tokenization trials and partnerships from household names (bigger than WisdomTree!) come to light. What remains is the big question regarding how the technology is used. Ultimately, the recent news should make issuers more comfortable with public blockchains, which was not the case even a month ago. To me, this all means things are just getting started as we are finally heating up.

Happy tokenizing,

Herwig Konings, CEO at Security Token Advisors

Helpful Resources

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