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On Tokenization and Liquidity

Transcript


 

Leeor Shimron:

I think it’s important to understand that liquidity is a spectrum. It’s not binary. Now you have obviously many different asset classes that kind of cover that spectrum that are more liquid or less liquid. Something like equities, security tokens and tokenization may not be the best fit for because equities already have a ton of liquidity. Something like real estate, traditionally it’s very difficult to get liquidity on investment.

If you want to get out of a position, you have to take a 30% to 40% hit. So liquidity tokenization essentially can help access greater liquidity, but it’s more so an option to gain liquidity.

Adam Chapnick:

As community how are we going to build that demand? Where’s the liquidity going to come from?

Graham Rodford:

I think it’s going to come from different places. I think I’ll run through the all and then collectively, hopefully it paints a picture.

Adam Chapnick:

Lay it on us.

Graham Rodford:

The tokens themselves when people are out there issuing the tokens, in the ICO world a lot of people were participating in those tokens because they wanted the multiple when they eventually list. You won’t get that sort of demand in this space. But I do expect to see security token offerings going a bit of a discount. Hopefully the value of the company or what they considered to be the inherent value of the company over time.

Naturally within every token, you’ll get a kind of a community that will support that token at the start. When it lists on an exchange, you’ll already have some activity. Then beyond that if you look at the market makers in the space, at the moment they’re not interested in making markets on a single property in London or what it may be. But when it starts to grow, it becomes more interesting. When you’ve got let’s say, a 100 properties in London, suddenly it can be a good proxy for an area and it might be something they can use to hedge their portfolio.

Adam Chapnick:

That’s interesting.

Graham Rodford:

When you see exchanges, we’re already starting talking to Brockway, you can see Zero and these other guys that are operating in the space. The reason being is that they are competitors in a sense, but we all need to work together to help develop this area. When you start having tokens listed on multiple venues, that too creates opportunities for market makers coming to the area and play arbitrage between the exchanges, which helps develop liquidity in the space. So that kind of gives an underpinning of liquidity.

But the truth is for a lot of these illiquid assets like properties, hedge funds, private equity funds, they’re just not going to trade at the volumes that blue chip companies trade at. They’re small companies that what we’re trying to achieve here is better liquidity than exists currently. If you’ve got a seven year private equity vehicle, it trades once a quarter-

Adam Chapnick:

Zero liquidity.

Graham Rodford:

It’s much better if it trades at some point.

David Benizri:

Because we believe that tokenization is disruptive, but it’s not its own service. By combining it with our fully functioning fund management software, we’re able to disrupt an existing industry and really add value to our clients.

Adam Chapnick:

Wow. Ok so, of all the things you could have tackled, what was it about this particular fund management problem that attracted you? Why did you say this is the place you’re going to apply yourself?

David Benizri:

We looked at several verticals. We looked at real estate, we look at the more alternative ones like art and diamonds and etc. As appealing as those new verticals sound, we wanted to go to a market that was already established and strong supply and demand. That’s automatically we thought of secondaries for fund interest. The reason being is that companies, especially venture back companies are staying private for a lot longer than we saw in the last decade or two.

What happens then is that there’s a highly increased illiquidity, which is found on the LP level. Previously it would be seven, eight years and then IPO and now that could be extensions up to 12, 14 years, which is-

Adam Chapnick:

Painful.

David Benizri:

Yeah, absolutely. So LPs need a viable way to see returns before the fund is worn out and by being able to streamline the whole settlement process of secondary transactions, our goal is not to create the market and to create supply and demand, but just to become catalysts to already established $61 billion market.

Tobin McComas:

As we think about facilitating liquidity, it’s really a two sided equation, you need the product or the securities, but you also need the investors. We’re starting to see really good signs of demand for tokenized securities. We’ve seen that since we launched in November. With each new issuance that comes on board, we see a new group of investors who want to participate in that space. It really comes down to diversification and the ability to own the types of assets and securities that people have never been able to own before. That’s what’s really exciting.

That’s one component of it. The other component is again, on the buy side, so as we prove out the concept that this works and we can maintain books and records compliantly on chain, we think there’ll be more adoption from both institutional sponsors and issuers, but also institutional buyers. Whether it be hedge funds or broker dealer networks, etc.

Adam Chapnick:

Not only that, but I wonder if there’s also maybe the promise of a liquidity premium that makes people a little less tight lipped because they’ll get a boost in the value.

Tobin McComas:

Yeah, no doubt. The issuers certainly have a vested interest in their shares trading closer to the NAV on a secondary market. We see that 30 to 50% spread and historically I’ve seen that across all illiquid assets. That’s a real key component to the conversations we’re having with issuers about tokenization in general and what that can do from evaluation standpoint.

Adam Chapnick:

What do you think is going to be the impact of having companies or other assets, I guess available in securitized tokenization? How is that going to impact either issuers or maybe international investors?

Antonio Brasse:

It’s going to add massive liquidity to a lot of the private markets. Just coming from financial services, I talked to a lot of my old colleagues. They’re excited. Some of these OTC companies or other private companies they can tokenize and get a lot of traders and investors in that way debt offering instruments. There’s a lot of private debt out there. They can tokenize as well. Stable coins whether it’s gold, silver, silverback coins, it’s a great way to just add a lot of liquidity to asset classes that are naturally liquid.

Adam Chapnick:

Where do you think that’s going to have the biggest impact in the investor side? The liquidity is obviously sort of the holy grail, but it doesn’t really exist yet. Do you think that’s going to come from lots of regular people getting involved or is it going to come from just institutions piling in and boom, there it is?

Antonio Brasse:

I think definitely institutions first because they’re looking for this. But at some point you’ll see the retail crowd get involved too. I think about real estate, like the little person can’t really get in on a real estate deal in Manhattan. We were actually talking to a blockchain project that’s tokenizing real estate in Manhattan a couple months ago. They’re doing obviously institutional money, but they want to give the normal person a chance to buy into some of these properties and get involved.

Adam Chapnick:

That’s exciting.

Dave Hendricks:

Liquidity is obviously a really, really big topic.

Adam Chapnick:

It’s a holy grail in some ways.

Dave Hendricks:

It’s the holy grail. Liquidity is a whole reason for security tokens.

Adam Chapnick:

Well, a major, yes.

Dave Hendricks:

It’s the whole reason to me. The reason for security tokens is taking private assets and making them more salable. Not absolutely liquid, but just more liquid than they were before. The way that they do that is by having your ownership of the private asset on chain, it’s easier to connect them to sources of secondary liquidity. Sources of secondary liquidity are exchanges and broker dealers or ATSs. Now you’ve got Andreessen Horowitz that has made their team into basically a broker dealer registered investment advisor.

They have now connection to Carta, which has all of these private companies its private assets. Now maybe do you think that they’re going to try to take some of those private assets and make them more liquid?

Adam Chapnick:

Liquify, yes. People talk about liquidity premium on things that get tokenized and unleashed for up the opportunities in the market. Are you expecting to see that in some of these funds too?

David Benizri:

Yes, absolutely. I think by being able to digitize their offerings, fund managers can really add value to their offerings and to their LPs when fundraising. The reason why we like to target those smaller funds for now is because they’re able to stand out when approaching their LPs. I think definitely helps them in their fundraising efforts.

Adam Chapnick:

The question that came up on almost every panel is how are we going to get to liquidity? How are we going to get to liquidity? This is really interesting as an indicator for how we’re going to get the liquidity.

Dave Hendricks:

The way you get to liquidity is you’ve got to be able to connect the Cap Table, the ledger of ownership to a source of secondary liquidity. You need to make it so that someone who owns something doesn’t have to go through a really, really painful process that could take months to sell what they own. They also need to know what they own.

Adam Chapnick:

That’s important.

Dave Hendricks:

People say when liquidity, and yesterday I gave a talk, a keynote at a conference and I wanted to focus on the concept of whales.

Adam Chapnick:

Okay, great. Yes, let’s hear it.

Dave Hendricks:

I mean, Andreessen Horowitz is a whale. Let’s talk about the sperm whale. The sperm whale has a 15 month gestation process. It takes a long time to make a whale and then a whale lives for a really, really long time. Basically what we’re doing here is it takes 15 months, maybe 18 months from the beginning when you think about doing a security token offering to when it trades. You’ve got to do all the work with the bankers and the lawyers. Then you got to raise the money. Then it sits there for a while until you can sell it. It takes a long time to make a sperm whale and so that’s the same thing with security token liquidity.

Adam Chapnick:

My mother always said that to me.

Dave Hendricks:

When the whale is born, it becomes the king of the sea and it lives forever. That’s what we’re building. We’re building assets for the long term. You’ve got to be patient, but the mechanisms, the purveyors, the techniques, they’re all coming together now and look at Andreesen Horowitz for signals of imminent adoption.

Adam Chapnick:

There’s something interesting you had shared with me earlier about these vanilla opportunities and sort of what the strategy is behind them. Can you talk a little bit about what you learned?

Henry James:

Yeah. I know why you’re asking me for them. When we probed a little bit deeper and we just asked these groups, “Why do you want these vanilla products which you can buy in by the way, much more liquid markets through traditional markets today? Why do you want to buy them in a form of security token?” Their view is they’re taking a medium to long term view and saying, “Once liquidity does come to this market, we will have the ability to trade asset for asset via the security token market.” That’s huge. I think that’s an investment movement that’s going to resonate also with millennial investors as the whole market grows and matures over the coming years.

Adam Chapnick:

I think that’s very exciting because I hadn’t heard that yet. The idea that it’s what sounds like an innovative thing to do, but from the most conservative investors, that’s kind of mind blowing and exciting because it means people are deeply understanding the space. That to me is an indicator that it’s going somewhere.

Henry Hames:

Yeah, absolutely. Like we said, these are kind of investment mandates. We’ve completely different needs and objectives. These guys are here to try to reduce their exposure to cash where their reliance on cash and sovereign currencies. They want to protect themselves in case of recessions, regional recessions in different parts of the world that may affect themselves. They see the security token market as being a market where they can actually start hedging some of their positions and diversifying their portfolio in a more efficient and cost effective way.