It’s that time of the year again.
Your New Year trial month is coming to an end. Global leaders gather at a silken snow village in Davos to shape the global economy.
This year’s theme of the World Economic Forum is “Stakeholders for a Cohesive and Sustainable World.”
At Novum Insights we will discuss how blockchain technology fits into this agenda.
The digitization of securities is a major theme in both financial and blockchain industries, becoming a valued alternative to share capital that offers liquidity, cost-saving, transparency and interoperability. The Security Token ecosystem is still in its nascent stages, but there are multiple factors which excite proponents versus traditional share capital and tokens without security status.
Security Tokens offer new investment opportunities that have not yet sought security status and give individuals access to unique investment opportunities that had previously been given exclusively to institutions or high net worth individuals. Security Tokens are also becoming a medium of tokenizing a portfolio of assets providing access to small investors without discrimiation. This increase in market participants will drive up liquidity.
UNRAVELING THE SECURITY TOKEN ECOSYSTEM
The Security Token Ecosystem is a multi-layered ecosystem similar to traditional financial security system. We will look at Issuance Platforms, Exchanges and Issued Security Tokens in particular.
The primary goal of these platforms is to make the cumbersome process of launching security tokens easy & accessible to companies. These platforms can integrate the required KYC(know-your-customer) and AML (anti-money laundering) processes. In addition, some offer investor management, and legal compliance for these securities to automate primary issuance and secondary market transferability of tokenized assets across borders.
Exchanges enable better access to capital, enhanced secondary liquidity, and democratized investor access to securities. This is not without some risk on these new and mostly unregulated exchanges.
Blockchain Capital was arguably the first to introduce a public offering of securitized token. It is a digital liquid venture fund that gives an opportunity for token holders to become part of a fund investing in companies operating within the blockchain technology sector.
Neufund is an equity crowdfunding platform aiming to eliminate barriers to markets and open it up to a larger pool of potential investors and everyday working people. Since 2016, Neufund has been developing open-source standards for ownership, allowing for the first generation of security tokens to emerge on the market. Neufund has established a legally-enforceable link between an on-chain token and real-world equity, making the offer compliant under German jurisdiction. The company’s technology enables virtually any incorporated entity worldwide to conduct a public offering on blockchain.
Nexo is a crypto-collateralized fiat lending platform. Users receive a discount if they pay off their loans using the token. Token holders who have stored their tokens on the platform wallet share in 30% of the company’s profits, paid monthly. Nexo self-declares as a ‘Licensed and Regulated Financial Institution’ although it is not clear under which authority this regulation is effected.
THE SECURITY TOKEN ECOSYSTEM IN EUROPE AND US
We have learned the hard way that the rise of new technologies must coincide with protection for the users of the technologies. Fraudulent ICOs held in 2017 caused significant damage and policymakers started to intervene. We look at some of the positive legal developments and notable companies in each jurisdiction.
The United States had a busy year in the blockchain space. Securitize having been approved as a transfer agent by the SEC marks a huge leap forward in legal progress.
Bitcoin ETF proposals are fighting an ongoing battle with the SEC, its decision being delayed multiple times and no licenses having been granted at the date of this document. A number of ICO projects faced enforcement actions from the SEC for violation of various security-related laws. In the STO sphere however, the US has been leading thanks to the ease of opening new businesses. Here are some examples;
Codefi is a blockchain operating system for commerce and finance, built to optimise business processes and digitize assets and financial instruments. This new product suite for commercial applications of decentralised finance was initiated by ConsenSys.
SeriesOne is a Miami-based SEC-regulated broker-dealer and crowdfunding platform which specialises in digital securities offerings (DSOs). They also partnered with South Korean crypto exchange Bithumb to offer compliant exchange services to US residents and citizens.
Switzerland has been the most crypto-friendly country in the world along with the US. The clarification by FINMA distinguishing between asset tokens, utility tokens and payment tokens has led companies in Switzerland to explore the security token space.
Lykke, the Swiss blockchain pioneer, has launched Short LyCI, a new token designed to track the performance of the top 25 crypto projects and bet on their value falling in the future. The Lykke Crypto Index - LyCI (pronounced like the name ‘Lucy’) consolidates the most popular cryptos into one single place, allowing you to access in a single click a snapshot of the overall crypto market. Recently they partnered with Fineqia a Canadian listed corporation who will be providing the software to Nivaura an FCA-regulated UK company to assist with the tokenized bond issuance.
SIX, the Swiss stock exchange has announced its plans to have its own security token offering alongside the launch of its SIX Digital Exchange (SDX) platform for trading digital assets. In November, SIX listed a pioneering crypto-based multi-currency exchange-traded product (ETP), which includes among others ‘AMUN Crypto Basket Index’ with the token ‘HODL’ which tracks four major cryptocurrencies. The exchange also mentions that the goal of the platform is not for trading cryptocurrencies but rather a marketplace where traditional investors can digitise their existing assets using the innovative technology.
The London Stock Exchange has publicly claimed that it will offer security tokens in the future. However, the Financial Conduct Authority (FCA), the UK’s financial watchdog, has yet to release any official guidance on the use of blockchain-based assets. In November 2019, Her Majesty’s Revenue and Customs (HMRC), the United Kingdom’s tax authority updated the cryptocurrency taxation guidelines.
Businesses engaged in buying and selling exchange tokens, exchanging tokens for other assets, mining and providing services in return for cryptocurrencies are liable for taxes. HMRC also provides limited guidance on the type of tax - capital gains tax, corporate tax, income tax, stamp taxes, national insurance contributions - businesses have to pay.
Globacap is an automated capital market which specialises in digital securities. In 2018, Globacap tokenized its own shares. In 2019, the platform tokenized two UK-based companies with Globacap serving as the custodian and responsible for capital crowdfunding. The purpose of the platform is to provide built-in compliance to properly transfer ownership from traditional assets to digital tokens. The platform is now authorized and regulated by the Financial Conduct Authority (FCA).
London Derivatives Exchange is an FCA-regulated exchange located in London. The goal of the company is to create hybrid products which help bridge the gap between listed and OTC contracts. LDX has also embarked on several partnerships with broker-dealers, a custodian and a trust company, to act as the settlement and clearing platform, and a set of funds to provide funding for the capital raising tokens. Contracts are traded on the Eurex platform and cleared through Eurex Clearing.
In December 2018, Germany’s second largest stock exchange announced plans to launch a crypto token exchange. The country’s securities regulator BaFin approved a number of STOs.
Bitbond is an online lending platform that helps small businesses raise funds from institutional and retail investors. Bitbond loans can be funded in bitcoins, US dollars, euros or Kenyan shillings. Bitbond is the first company to raise through an STO in Germany. In December 2019, Bitbond announced its partnership with KlickOwn, a property investment platform, to offer real-estate backed bonds tokenized on the Stellar blockchain.
Fundament offers a blockchain-based real estate investment firm. The company received regulatory approval by BaFin to launch a real estate token with an issued volume of €250 million. Fundament’s German Real Estate Token will bring liquidity and can be traded on licensed echanges and peer-to-peer.