Cryptocurrencies Are Pivoting to Become Security Tokens
The other shoe is slowly dropping for ICOs. As the 2017 Cryptomania has finally calmed down, many who took advantage of the cryptocurrency craze are starting to face the music. Once a symbol of libertarianism, cryptocurrencies are now coming under intense scrutiny from government regulators following a series of cryptocurrency scams.
In mid September, a Brooklyn judge refused to dismiss a case where the defendant argued the cryptocurrencies he created from two separate ICO’s are outside of securities law. According to the judge, Bitcoin and Ether are the only two digital assets the Securities and Exchange Commission (SEC) deems outside the purview of securities law.
Blockchain experts now look to the SEC and other financial regulators to bless the token industry. The utility tokens of ICOs past are taking the logical step of pivoting to a more sensible, legally compliant financial instrument called security tokens.
Security Tokens – What are they and why are they important?
A security token is a digitized representation of financial interest in any number of assets. These assets can be equity in a company, shares of a fund, ownership interests of a trust, or creditors in a debt instrument.
Financial transactions that were normally documented, executed and settled on paper are now being digitized through security tokens to facilitate issuance and tradability. The impact of tokenizing private investments is profound because it enhances traditional financial markets by expanding capital flow and broadens access for market participants.
At Cadence, we chose to tokenize private debt to take advantage of blockchain technology to open the private market to the masses.
Below are some of the most significant improvements security tokenization can facilitate in traditional financial markets:
Streamline operational processes
Today, fractionalizing asset ownership requires significant manual effort from both the buyers and the sellers. Financing originators spend upwards of 25-30 hours per investment offering on operational tasks. Such tasks as Know Your Customer (KYC)/Anti Money Laundering (AML), Investor Relations, subscription documents, Private Placement Memorandum (PPM), investor onboarding, take up significant resources and time.
Additionally, investor and regulatory reporting can take up to 20-30 hours per quarter. By using tokenization, these processes can be automated. The resulting efficiencies enable companies to focus on growing their business rather than operations and reporting, creating significant savings for companies in both money and time.
Capture a wider investor base
With the appropriate exemptions filed, an issuer of security tokens can open their investment to a wide variety of investors both domestic and international in a legally compliant manner.
By digitizing conventional assets, originators can now lower barriers to entry and raise funds from investors who previously could not meet the high investment minimums. Originators can now also raise funds from institutions under more favorable terms due to the increase in supply of investors.
Domestic investors on both the retail and institutional side will have access to and will be able to deploy capital at a scale they’ve never been able to before.
International investors who are looking for US opportunities now have the ability to easily increase or decrease their exposure as well. Due to their ability to expand both the supply and demand of deals, security tokens as an instrument will help implement a more democratized and inclusive private capital market.
Reduce transaction fees
Automation through smart contracts will reduce the number of intermediaries required to complete any transaction. Whether it’s an issuance or a trade, the contract will be carried out automatically based on preset triggers. Subsequently, each action will represent a legally enforceable event. This will effectively reduce the fees paid for lawyers, compliance, and operations, ultimately passing on higher yields to investors.
Enable liquidity for illiquid assets
By tokenizing an asset, the instrument is structured into a tradable product.
Traditionally, managing holding periods on an investor-by-investor basis required significant manual effort. The cost and effort required to make a trade often times outweighed the yield, making the assets illiquid.
Smart contracts built into security tokens, however, are able to identify the investor, the security that is bought/sold, the timing of the order, and whether the investor is eligible for the transaction.
The smart contracts enable asset backed security tokens to be easily tradable across exchanges. This processes transform a previously illiquid asset into a more liquid one.
We believe that through tokenizing private debt, we will be able to open private capital markets to global retail investors.
Our Decision to Offer Security Tokens
Security tokens have made tremendous progress in the past few years, yet there is a long road ahead before widespread adoption. The ecosystem needs to mature, from issuance, to infrastructure, to exchanges. The coming years will see the impact of security tokens across all private capital markets, fundamentally reshaping how capital is deployed for the better.
At Cadence, we want to be at the forefront of digitizing securities to democratize access to private investments. We built our processes on chain to enable efficiency and transparency to all parties. Most of all, we want to offer liquidity and tradability so alternative assets no longer have to be long term assets with impossibly large investment minimums.