šŸ¤ STA Insights: 07/31/2023

Exclusive Intelligence for STA Success Network Members

Summary and Key Takeaways

1. New Developments in the EU and Canada

Securitize officially entered the European Union after roughly a year after joining the Spanish General Secretariat of the Treasury and International Financeā€™s digital sandbox under EU guidance. Last week, the prominent tokenization platform announced it will be tokenizing ā‚¬150 million of equity shares in Mancipi S.A. Real Estate Investment Trust (REIT), a group that focuses on commercial real estate in the healthcare sector. Securitize is expecting trading of these tokens as early as September 2023 in compliance with the European Unionā€™s Distributed Ledger Technology Pilot Regime. These tokens will be minted on the Avalanche blockchain, and may even be contenders for capital from Avalanche Vista, Avalanche Foundationā€™s recently launched $50 million commitment to purchase real-world assets within its ecosystem, deemed ā€˜OnFiā€™ (on-chain finance).

Something interesting that came onto the radar in Canada is a ā€˜token tax.ā€™ At least, thatā€™s a quick moniker we came up with. Canadaā€™s Office of the Superintendent of Financial Institutions (OSFI) came up with a set of risk weighting guidelines for digital assets, targeting banks and insurance groups specifically. Building off of Basel Committee's proposal for different risk weightings of digital assets categories (i.e. crypto, stablecoin, tokenized asset), Canada looks to levy an automatic 2.5% risk-weighted asset (RWA) mark to tokenized securities.

NOTE: RWA in this instance is not the RWA that the tokenization space typically uses, including the tidbit I mentioned earlier with Avalanche. Maybe itā€™s time to note and improve that. 

This weighting is drawn from the notion that much of the tokenization industry is siloed across different providers and blockchains. The lack of interoperability means that liquidity isnā€™t really an on-demand feature just yet, thus making these tokens just as illiquid as their underlying assets. Canadaā€™s rulemakers acknowledge that this could (and likely will) change over time, but for now, these are the proposed risk weightings. The legislation will be open until September 2023 and targets ealy 2025 to go effective. Very pertinent topic of education for banks, custodians, and other institutions that will act as token holders in the future.

2. CBDCs as the Trojan Horse

While the digital assets industry (and even incumbent capital markets players) are pretty anti-CBDC (Central Bank Digital Currency), thereā€™s so many digital initiatives that begin with CBDC pilots that will likely lead to tokenized asset adoption. For that, we need to keep tabs and respect initiatives that can usher in the tokenization reality. This past week alone showed a few such cases.

SDX resurfaced with the Swiss National Bankā€™s CBDC trials. Project Helvetia III, the initiative in which this CBDC trial and related projects fall under, allowed a real, live wholesale CBDC to be used in digital securities settlements on SDX for a limited period of time during Q2 2023. Thatā€™s correct - this wasnā€™t a closed-door transaction or a sandbox trial; this was happening on SDXā€™s live platform with true transactions. SDX is still working on tokenizing cash while limiting counterparty risk, which is why the CBDC trial is indeed interesting and perhaps necessary to drive results at this time. The LedgerInsights article notes, ā€œOutside of a CBDC, to use tokenized cash on SDX, a bank needs to deposit Swiss francs with SDX via the SIC payment network. SDX then uses its node on the SDX network to tokenize the cash and make it available for settlement.ā€ It seems the lack of uniformity across bank deposits is also a limiting factor in SDXā€™s roadmap towards working with tokenized dollars, although thatā€™s expected until its member banksā€™ hands are forced.

Over in Australia, Imperium Market executed an atomic securities swap facilitated and settled by the CBDC eAUD. The pilot swapped certificates of deposit (CDs) between Commonwealth Bank and Westpac, and proved that not only is instantaneous swap and settlement feasible, but also that the transaction will not go through if one side fails, thus eliminating counterparty risk. Pretty impressive case with R3 Corda as the underlying technology provider.

More generally, the Bank of Italy, the Republic of Palau, and Rippleā€™s CBDC program are all making baby steps dabbling in the technology as of this week. The Bank of Italy has some of the nationā€™s major institutions (like the $1 trillion bank Intesa Sanpaolo) involved in exploratory trials through the central bankā€™s innovation center, the Milano Hub. The Bank of Italy specifically is exploring ā€˜institutional DeFiā€™ through tokenization, and is working with Polygon blockchain and Fireblocks as the custodian for whatever is to come. The Republic of Palau is in very early stages in developing a stablecoin that will likely transition to an XRP-based CBDC instilling easier and more accessible currency distribution to its citizens. Speaking of Ripple, that same CBDC framework (not pigeonholed to the Republic of Palau, of course) is being applied to a real estate tokenization initiative. Fubon Bank in Hong Kong will be digitizing customer deposits as CBDCs (e-KHD) to facilitate tokenized real estate transactions and lending activities. XRP has increased its footprint in the CBDC and tokenization space notably throughout Q2, and shows no signs of slowing globally here.

Connecting broker-dealers with active buy-side groups has been one of the most formidable challenges thus far in the tokenization industry. There really isnā€™t a lack of security token issuers and prospective issuers - quality of the offering may vary, but the supply certainly exceeds buyer demand at the moment. Thatā€™s why we at STA are always looking to educate and onboard buy-side groups across wealth management, asset management, family offices, private banks, hedge funds, and alternative investors for the betterment of the surrounding industry. Whether thatā€™s sell-side groups and service providers or issuers themselves, the industry wonā€™t unlock until the demand side is reached.

Onramp Invest is pushing this exact agenda forward with its pre-existing digital assets integrations and connections with $35+ billion in RIA and wealth management capital, and the firm is now enabling investment into tokenized products through Securitize. Interested integration partners and platforms can find more details about Onramp Invest and its recent tokenization campaign here. Reach out to [email protected] for any introductions and additional information.

Notable Market Headlines

Institutional Activity

As mentioned in last weekā€™s midweek updates email, the STA team is very grateful for its feature and insights inclusion in FundFireā€™s recent piece on tokenization. This specifically was in regards to Hamilton Laneā€™s Private Assets Fund with Figureā€™s Digital Fund Services (DFS). Knock on wood that the offering eventually finds its way to ā€˜effectiveā€™ with the SEC, this would create brand new digitally-native share classes in the fund that exist on Provenance Blockchain right alongside the existing traditional share classes. A first for a private markets 1940 Act Fund.

While we work with asset managers on their tokenization strategies through the greater Security Token Advisors consulting offering, private funds are usually the low-hanging fruit. Feeder funds, to be specific, seem to be the lowest hanging fruit. I really respect how Hamilton Lane built that feeder fund model out across a handful of products (I believe 5 products, in fact - a perfect handful) while also getting the ball rolling on the digitally-native product, which is where the future and the real benefits of tokenization lie.

Weā€™re also very appreciative of Avalanche drawing details from our State of Security Tokens - Institutional Edition in their announcement of Vista, which has been mentioned a couple times now. Vista is replicating a key missing ingredient in most of the tokenization world: the buy-side. Holding $50 million for OnFi products in the Avalanche ecosystem (assets tokenized on AVAX) is of course a strong incentive for issuers, but also a strong signal to prospective buyers. Much like Avalanche rolled out Spruce as a sandbox mode for institutions, Vista will give Avalanche that first-hand perspective into the buying process. This will likely enable the foundation to better target pain points and iterate over any gaps that need to be filled for real buyers to deploy capital.

All around, a very nice and motivating week for the industry.

Peter Gaffney, Head of Research at Security Token Advisors

Upcoming Success Network Events

  • Office Hours with Herwig Konings - Monday July 31st at 3pm EST

  • Weekly Industry Updates Breakdown - Tuesday August 1st at 3:30pm EST

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

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

Recent Recordings

  • Powersā€™ Hour - Legal Review with Marc Powers - Ripple & XRP Ruling - Recording 

  • Protocol Series: Provenance Blockchain - Recording

  • The Liquidity Problem - Recording

  • Securrency Spotlight - Recording

  • Compliance in Security Tokens - Recording

Webinars + Events

Member Updates

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. The collection includes Marilyn, Double Mickey, Mick Jagger, and Rebel Without a Cause. Success Network webinar on August 3rd, 2023.

WorldVest launches its TroyMoney, its Gold-backed asset as part of the greater Precious Metals Backed Digital Investment Currencies initiative. Followed up with MineralCoin this past week.

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 Euromoneyā€™s Financial Innovation of the Year for progressing institutional tokenization.

Securitize entered the European Union (EU) markets with Spain-based Mancipi S.A. in its ā‚¬150 million REIT tokenization for secondary trading.

Avalanche added Domani Protocol, who currently services Deutsche Bankā€™s DAMA (Digital Asset Management Access) initiative, to its Spruce Subnet alongside Wellington Management, T. Rowe Price, WisdomTree, and Cumberland. More recently, Avalanche Foundation launched Vista, a $50 million commitment to purchase real-world assets tokenized on the AVAX blockchain.

Hello tokenizers,

Next week will be the Security Token Showā€™s 200th episode. For those of you who are unaware, thatā€™s 4 years of tokenization coverage, with a new topic each week, every Monday available on YouTube, on all podcast options, and on STM.co (our sister company). This goes to show you how long the industry has been building towards powering the next generation of finance.

At this point, I expect every major financial firm to already be paying attention to tokenization and to start to consider their build-or-buy strategies around the technology. This means that next year we should expect a lot of new product offering announcements and platform service roll-outs alike, maybe some mergers or big investments into existing players. The remainder of this year should see a similar pace of adoption as weā€™ve been experiencing, a few announcements per week.

Securitizeā€™s entrance into Europe shows the global opportunity of tokenization. What a beautiful future weā€™re building to where investors around the world all have equal access to the same investment products, jurisdictional rules permitting and technology platform permitting. Still, in a decade itā€™s hard not to imagine that hundreds of brokers and platforms will be interconnected through blockchain, connecting hundreds of millions of investors with products and issuers around the world.

Itā€™s still early innings but weā€™re past the point of no return. Even crypto markets are looking towards RWAs as a legitimate opportunity too, perhaps a way to bring fresh life into the market for the underlying blockchains that power them. That only means one thing, exciting times ahead for both crypto and tokenization!

Happy tokenizing,

Herwig Konings, CEO at Security Token Advisors

Helpful Resources

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