How This Cryptocurrency Innovation Will Transform Traditional Investment Offerings
Following the ICO wave of 2017, the cryptocurrency markets came crashing down amid concerns of regulatory backlash, and since then, the space has felt relatively muted. But make no mistake, the community has been quietly gearing up and building infrastructure to support the next big wave of crypto innovation -- tokenized securities.
What's happening behind the scenes?
On March 26, Coinbase published a blog post announcing its intention to support the Ethereum ERC20 technical standard on its platform. Following the announcement, on April 6, the Wall Street Journal published an article detailing conversations between Coinbase and the SEC about possible paths towards registering as a licensed brokerage firm and electronic trading venue. Combining ERC20 compatibility with the SEC’s blessing to act as a legal brokerage, Coinbase would be in a position to offer tokenized securities to more than 10 million users on their platform.
Coinbase isn’t the only one hoping to offer their services for tokenized securities. On April 10, Overstock.com subsidiary tZERO unveiled a prototype of their technology that will “support the eventual trading of security tokens.” Meanwhile, companies such as Templum, OpenFinance Network, Sharespost and the Gibraltar Stock Exchange have been working diligently to build bulletproof platforms for the issuance and secondary trading of security tokens. Even Nasdaq recently stated that they wouldn’t be opposed to becoming a crypto exchange.
In early March, the SEC issued a Statement on Potentially Unlawful Online Platforms for Trading Digital Assets outlining precautionary measures for investors to consider before buying or selling tokens online. While the increasing presence of the SEC in the world of crypto has been alarming for some, it’s actually beneficial to the community as a whole. Not only are they helping to weed out the bad actors, but they are also helping lay the foundation for institutional money to enter the space.
What most people don’t realize is that regulation, or lack thereof, has been a major roadblock for professional investors to enter the market. With big names like Soros and Rockefeller announcing cryptocurrency/blockchain funds, and entrepreneurs like Mark Cuban accepting cryptocurrency payments for Mavericks tickets, there is clearly tangible interest from notable investors. However, other institutional investors are still waiting on the sidelines for legal clarity before they can comfortably invest in this newly emerging asset class.
So, what will digital assets will look like under the purview of the SEC?
Securitized token offerings
Investopedia defines a security as a “fungible, negotiable financial instrument that holds some type of monetary value,” and a cryptocurrency as a “digital virtual currency that uses cryptography for security.” Tokenized securities effectively combine these two ideas by representing the ownership of the security via tokens on a blockchain.
Private equity joins the party.
One company seeking to take advantage of this new form of securitization is Muirfield Investment Partners, a private equity real estate investment firm headquartered in Boston. By tokenizing its private equity fund, it will be among the first institutionally managed crypto offerings to hit the market in 2018.
In short, Muirfield is issuing tokens through a Tokenized Asset Offering that will raise capital to invest in U.S. real estate. Each token represents a fractional ownership interest in the investment vehicle which owns the real estate. Therefore the value of the tokens is highly correlated with the net asset value of the underlying real estate portfolio managed by the Muirfield team.
The new tokenization approach to private equity offers a number of benefits over the traditional model. Not only does it open up this once very exclusive opportunity to an entirely new set of potential investors, but it also creates a more liquid and structurally sound investment vehicle. Rather than having capital locked up in a fund for a predefined period of time, investors can now trade in and out of their position by exchanging tokens on secondary markets. This allows portfolio managers to focus entirely on optimizing performance without the need to adhere to strict timelines. All in all, tokenization grants greater liberties to both investors and managers in the private equity space.
Tokens offered and regulated as securities will have a profound effect on the overall crypto space in 2018. As we move past the misinformation, speculation and scams of 2017, it’s refreshing to see new applications of cryptocurrency and blockchain technology led by seasoned professionals committed to doing things the right way. Soon, crypto investors will have the opportunity to diversify their holdings into assets with tangible underlying value while keeping their wealth secure via digital tokens on the blockchain.