Digital securities and tokenized capital markets are growing rapidly. Tokenization allows companies to raise capital from a wider pool of investors through security tokens, reducing costs compared to traditional securities. Major banks and exchanges are exploring using distributed ledger technology to settle securities transactions. Regulators are taking notice - the SEC has charged some blockchain projects with failing to comply with securities laws, while also showing a willingness to work with compliant exchanges. Institutional interest is growing, with financial institutions backing security token infrastructure projects in Europe and Asia. Japan in particular has seen increased activity, including the formation of a security token offering association by major brokers.
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...
Stobox digest, October 2019
1. Digital Securities
Essentials for Business.
OCTOBER 2019
Your guide to digital securities and
tokenized capital markets
Are security tokens the securities of
tomorrow? The answer is yes!
2. Tokenized securities are an innovative form of financial instruments,
enabled by the Distributed Ledger Technology. This new fundraising
method is able to reduce overheads associated with traditional
securities and allow businesses to attract capital from a much wider
pool of investors.
Due to these features, tokenization is starting to get increased
attention from SMEs, investment funds and traditional financial
institutions.
During the last two years, over 25 companies collectively raised over
USD $500 million (PwC). Major banks and exchanges are exploring the
DLT for settling securities transactions, and the first tokenized security
is already traded on the National Stock Exchange.
Stobox is your guide to this rapidly evolving industry.
Twice a month we deliver to your inbox the latest news about the
digital securities industry to provide a vision of where the market is
heading. In every edition, our CEO Gene Deyev conducts an interview
with a prominent expert to give you exclusive insights into how you
can extract the most value from tokenized securities. We do our best
to let you know today where the world of securities will be tomorrow.
Best regards,
3. Digest highlights
Recognition of tokenization tech is going big in Japan:
biggest brokerage firms form STO Association,
developers are looking to tokenize real estate
properties in the run-up to 2020 winter Olympics in
Tokyo.
United States Securities and Exchanges Commission is
after large blockchain projects, including Telegram and
Block.one for failing to comply with securities laws.
Institutions around the world are openly supporting big
digital securities offerings: global consortium of
financial institutions is formed to back the offering of
Swiss Digital Exchange (SDX), SIX subsidiary.
Interview with Oscar Jofre, CEO and President of
KoreConX, whose advisory board includes the father of
JOBS Act and former vice-president of NASDAQ David
Weild.
Outtake from the book “How to Attract Investments
with STO: practical guide”.
1
4. Tokenization is taking over Japan
October marked the establishment of Japan
Security Token Offering (STO) Association with six
major Japanese brokerage companies among its
members. The goal of the association is to boost
STO as a fundraising model in the country.
Why this is important: The association is formed by Japan’s biggest
brokers: Nomura Securities, Rakuten Securities, SBI Securities, Monex,
Daiwa Securities and Kabu.com Securities. Consolidation of expertise
on institutional level can facilitate adoption of blockchain in the
country’s financial system, ensure regulatory compliance and protect
investors.
The formation of this association by local financial giants is interesting
in the context of Japan’s previous actions towards digital assets: last
year, Japan gave the cryptocurrency industry legal self-regulatory
status, enabling Japan Virtual Currency Exchange Association to police
and sanction exchanges for any violations. According to FSA official,
“it’s a very fast moving industry, and it’s better for experts to make rules
in a timely manner than bureaucrats do”.
!
2
TOKENIZED ASSETS NEWS
5. Tokenization is taking over Japan
With this, Japan has taken an approach different from many others.
Countries with continental law system need to introduce separate
legislation to enable token-based activity (e.g. Liechtenstein); countries
that practice common law system (e.g. USA) have greater flexibility and
tend to define digital assets as falling under existing securities laws (e.g.
USA). Japan is an example of a third model: so far, instead of
introducing centralized rules Japan has been encouraging self-
regulatory organizations in a belief that market participants possess
the most relevant knowledge and expertise to establish rules. This
increases flexibility, as such organizations can make changes more
rapidly than governments.
If this approach will be applied to the tokenized securities industry as
well, we might see the newly created Japan Security Token Offering
Association becoming an important entity that will regulate and speed
up the adoption STO as a fundraising method in the region.
On a further perspective, all these countries and organizations that
pursue different approaches to tokenization and digital assets
worldwide might propose different models and classifications:
classical division payment/utility/security, Maltese model, token
container model. Will Japan propose something new?
3
TOKENIZED ASSETS NEWS
6. Tokenization is taking over Japan
Japanese real estate development company
Lead-Real Estate Co. LTD partnered up with
Securitize to fund the development of
condominiums and hotels ahead of the Japan
Olympics 2020 via security token offering.
Why this is important: The benefits of tokenization are being
recognized on the booming real estate market in Japan that sees the
inflow of foreign capital and rising rents with summer Olympics in
2020.
For real estate developers, who traditionally have to address banks and
other financial institutions for funding, tokenization offers a new way
of raising capital for projects. At the same time, smaller investors who
previously had limited access to fractional real estate investments, will
be given an opportunity to participate in attractive offerings prior to
the biggest event of the year.
Apart from that, the Olympics are an event with enormous media
coverage. This creates an opportunity for a very significant rise in
awareness about tokenization as a fundraising method for real estate.
Especially considering that the hype around the Olympics can be
leveraged by Lead-Real Estate Co. LTD to attract large volumes of
investing with the marketing campaign targeted at the general public.
!
4
TOKENIZED ASSETS NEWS
7. SEC is after crypto violators (but is
willing to work with exchanges)
On September 30th the U.S. Securities and
Exchanges Commission announced that
Block.one, a blockchain company previously
charged for conducting a multi-billion
unregistered ICO in 2017 and 2018, agreed to
settle charges by paying a $24 million civil
penalty.
Why this is important: According to SEC statement, there were U.S.
citizens among Block.one investors, while the company neither
registered its securities offering, nor qualified for an exemption.
Moreover, it did not provide investors with information that the tokens
sold were securities.
This is not the first massive charge against a blockchain company, and
certainly not the last, with more expected to come in the following
months. According to a popular opinion, in relation to digital assets the
SEC has taken the approach “do what you do, and if you do it wrong –
we will come after you”. In any jurisdiction, however, compliance with
existing regulation should be the priority 1 in any security token
offering conducted.
⚖
5
TOKENIZED ASSETS NEWS
8. SEC is after crypto violators (but is
willing to work with exchanges)
The most widely-discussed case: SEC obtained a
temporary restraining order in an emergency
action against Telegram that allegedly violated
the U.S. securities laws by failing to register its
$1.7 billion digital token offering.
Why this is important: Telegram’s token offering is one of the largest
on the market by far, and the fact that it SEC filed a legal complaint
against it is a serious warning for all market participants. The biggest
SEC concern seems to be the secondary sale of these tokens to retail
investors rather than the initial offering itself, as the injunction came
right before the scheduled deadline for token issuance and platform
launch. This is a general problem for early security token issuers
expecting immense liquidity that went using exemptions - secondary
sale and being admitted to trading on a regulated market requires IPO-
type disclosure. In this regard, private placement followed by listing on
a marketplace is rather similar to Slack's direct listing.
Basically, Telegram was supposed to return the raised funds to
investors if it failed to deliver the product by the scheduled date;
however, the majority of investors voted to postpone the deadline for
April 2020, which will give Telegram the opportunity to finish
development of its product (which is rumored to be not ready yet) and
try to solve all the regulatory issues.
!
6
TOKENIZED ASSETS NEWS
9. However, it doesn’t mean that it is
impossible for blockchain and
tokenization companies to reach an
agreement with SEC
SEC published a rulebook for security token
trading brought forward by Boston Security
Token Exchange (BSTX), a platform backed by
tZero.
Why this is important: The publication of the set of rules suggested by
BSTX supports the aspiration of the startup to become the world's first
regulated exchange for tokenized securities, as it is pending regulatory
approval by SEC.
!
7
TOKENIZED ASSETS NEWS
10. However, it doesn’t mean that it is
impossible for blockchain and
tokenization companies to reach an
agreement with SEC
SEC calls for innovative proposals from
exchanges and other participants of the capital
markets aimed at improving the structure of
secondary market for so called “thinly traded
securities” — equity securities that trade in lower
volumes on exchanges.
Why this is important: Low liquidity of thinly traded securities creates
a significant bid-ask spread and high volatility, as it is very easy to
impact the price with a single trade. This keeps many investors away
and makes the cost of capital high for issuers as such risky stocks are
less attractive for investors. One of the reasons for low liquidity is high
transaction cost that makes small trades non-feasible, while large
trades can significantly move the price due to the lack of liquidity.
Reducing it will create more incentives for traders to participate,
particularly with low trading volumes, which can not only increase
liquidity by itself but also attract market makers that can further add to
enhancing liquidity and, thus, reducing the risk of these stocks.
!
8
TOKENIZED ASSETS NEWS
11. However, it doesn’t mean that it is
impossible for blockchain and
tokenization companies to reach an
agreement with SEC
9
TOKENIZED ASSETS NEWS
Adoption of the blockchain for a post-trade settlement can
significantly simplify the clearance and settlement processes, thus,
reducing transaction costs. Usually, the US government authorities
express scepticism towards the blockchain adoption. The seek for a
more efficient market infrastructure by the SEC may be the first case of
the US government using blockchain as a solution on a federal scale,
which can give an enormous boost to both the adoption by boosting
credibility of the blockchain as a solution for capital markets,
promoting competition from other countries and developing
implementation template.
12. Institutional Investments in STOs
10
TOKENIZED ASSETS NEWS
A global consortium of financial institutions is
ready to back the initial digital offering of Swiss
Digital Exchange (SDX), scheduled for next year
Why this is important: SDX is a subsidiary of SIX, one of the largest
European stock exchanges. The shares of the company will be offered
to institutional investors in the form of security tokens on SDX’s own
platform. Thus the exchange is testing the service it is planning to offer
on itself, while bringing large institutional investors (who are not yet
announced) in to the game to get them involved in the process
beforehand.
The good thing is that institutional investors will be able to experience
owning and managing digital securities. If they find this experience
easier and cheaper, which is probably going to be the case, they may
be interested in investing further in DLT-based securities.
!
13. Institutional Investments in STOs
11
TOKENIZED ASSETS NEWS
iSTOX, a Singapore-based tokenization platform
raised Series A funding from Kiatnakin Phatra
Financial Group, one of the largest investment
banks in Thailand.
Why this is important: Singapore has traditionally been one of the
most innovative jurisdictions in Asia in terms of blockchain and
tokenized securities, and now other countries in the region follow in
its footsteps. A large Thai investment bank backing iSTOX that has
Singapore Exchange among its stakeholders, confirms the expansion
of STO trend throughout Asia.
!
14. Institutional Investments in STOs
12
TOKENIZED ASSETS NEWS
One of Germany’s largest real estate developers
Bauwens made a strategic investment in
Fundament Group, a Berlin-based startup that
received approval from BaFin for the first $280
million real estate-backed bond on blockchain.
Why this is important: Fundament’s offering is the second public STO
approved by the German financial regulator this year, and the first one
related to real estate in the country. Soon afterwards Fundament
announced that Bauwens Group with €6.7 billion development
portfolio under management acquired 15% stake in the company.
Both the BaFin approval and the strategic investment from German
real estate giant mark regulatory and institutional support of
tokenization as a fundraising method.
Such investments are a common strategy by companies that want to
enter a new market but lack expertise and technology. Bauwens's
portfolio has more value than everything that has been tokenized so
far. If they decide to tokenize their portfolio this will be an enormous
leap forward for the STO market.
!
15. “How to Attract Investments with STO:
practical guide”: outtake from the book
After the offering document — prospectus or white paper — is
prepared based on the business analysis, it has to be registered at a
competent authority. The concern of the regulatory bodies is two-
fold.
Firstly, the offering document has to provide investors with exact and
complete information so that they can make an informed decision.
Due to this reason, it is essential to back all statements in the offering
document with data to provide a realistic evaluation of returns. It is
also important to explicitly state all the risks of the investment.
Secondly, the offering has to correspond to legal requirements. For
example, when structuring an offering of investment fund units to
retail investors, the risk-spreading principle has to be abided. Members
of the management body have to be fit and proper persons for
conducting the business with due skill and diligence.
7.5 Registering the Security Token offering to a
Competent Authority
Download the full version
13
16. The process of preparing and registering the offering is the most
prolonged and most complicated part of conducting a securities
offering. Often, after the document is submitted to the competent
authorities, it is rejected with a list of suggestions to clarify the material
or change the terms of the sale, and concerns to address such as the
risks for investors or the background of team members. Then the
offering document has to be updated and re-submitted alongside
additional documents the competent authority may require.
In the US, the competent authority to register an offering is the US
Securities and Exchange Commission (SEC); in Malta, it is the Malta
Financial Services Authority (MFSA); in Switzerland, it is the Financial
Markets Supervisory Authority (FINMA).
The offering has to be registered separately in every country where
the issuer is willing to sell securities. However, a prospectus registered
in one EU Member State is recognised by competent authorities in
other Member States.
14
17. Oscar Jofre
CEO of KoreConX
Questions are asked by Stobox CEO
Gene Deyev.
Gene Deyev: Do you think that after the SEC charges were
announced lately, the entire blockchain and security token industry
will prefer to keep quiet for a while? What does the SEC’s latest
activity (Telegram, BlockOne) mean for the market in general?
Oscar Jofre: The entire sector needs to understand that these are
regulated activities and there are ways to do and say things in a
compliant manner. So, I believe that until Q1 2020, many deals will
not be surfacing until they are complete and have been properly filed
with the SEC and have been given the okay by their lawyers to
announce. This is not to suggest that companies are doing anything
illegal in their offering, but given the negative climate that certain
companies have brought to the industry, even investors are starting to
get concern this could bring risk to their investment.
15
INTERVIEW WITH AN EXPERT
18. 16
INTERVIEW WITH AN EXPERT
GD: Large institutions are willing to back security token
infrastructure projects – conglomerate of financial institutions to
invest in SIX, large Thai investment bank backing iSTOX, Bauwens
funding Fundament Group. Can it already be called a trend? How it
will evolve in 2020?
OJ: Infrastructure is a big word. There are 450M companies
worldwide. To date, many who say they have built infrastructure have
very little understanding of the entire global marketplace.
To start a true trend, we need the equivalent of what the public
markets have — an infrastructure that everyone is part of and that is
fully compliant. Until recently, that did not exist, but now it's here. It
will take roughly 2-3 years to bring all the participants together from
around the world. No regulated participant should be left out.
19. 17
INTERVIEW WITH AN EXPERT
GD: Japan has been active in the field of tokenized securities
recently, with large brokers forming an STO association, big real
estate company to fund property development ahead of Tokyo
Olympic 2020 via tokenization. What are the tendencies have you
noticed on the Asian market, and how do they correlate with the
situation in the US?
OJ: No matter where an issuer (company) comes from, as long as you
follow the regulations in each country, you can provide a tokenized
asset to investors. The problem with Asia-based companies is that
they may not be aware of all the rules. It's not just about ID and AML.
There is a lot more than that. Each country has its own regulations on
what you need to do to sell securities to investors, such as reporting
requirements, transfer agent services, share registry requirements, or
the types of verification needed.
Those that do it correctly will enjoy success in their capital raise.
20. 18
INTERVIEW WITH AN EXPERT
GD: What is the most exciting STO of this year, in your opinion?
OJ: I firmly believe 2019 will be the end of the term STO, because the
same way ICO became tainted by a few bad apples, it has happened
again.
We are already seeing this in the market — law firms are now talking in
terms of Digital Assets and Digital Securities.
STO is not what it promised to be. For many who continue down the
STO path, all that they achieve is that they've made themselves a target
for the regulators.
2019 is the year of re-boot. The ecosystem is rebooting itself with a
new OS (operating system). Many of the secondary market participants
are rewriting their solutions. Others are rethinking their strategy and
approach, while others are getting licensed. This is a wonderful thing
for the “Private Capital Markets” to help companies in their “Digital
Securities Offering”.
21. For any questions regarding this digest and tokenization in general,
feel free to reach out to us at info@stoboxplatform.com
stoboxplatform.com
About Stobox
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securities and financial markets regulations.
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