I had the pleasure of presenting on the topic of “Investing in the Security Token Ecosystem” in January 2019 at the Security Token Realized conference in London. Below is a summary of some key ideas from the presentation. If you are interested in learning more about our insights and perspectives on investing in the space, check out the full video presentation here.

I) Key Benefits of Security Tokens:

Transparency & Programmability: Establishing trust between different parties is of vital importance locally, nationally, and globally. Blockchain is the ultimate cap table of “who owns what” and a record of all the previous transactions. Additionally with smart contracts, we can program compliance so that trades can automatically go through if the investors are compliant, else there would be an error blocking the transactions. This can make transactions a lot faster and cost-efficient.

Liquidity: Right now buyers and sellers can’t find each other, and need to go through their fund managers to make their transactions happen because of all the contractual rules enforcing “who is trading / what assets / where are the trades taking place”. This can take months or years to get out of established positions, creating a lot of risks for the investors.

24/7 Market & Portability: Blockchain allows for digital assets to be portable for different platforms and exchanges because they are sharing the same technology layer. This is something that wasn’t possible since currently, each technology company is a closed system. By utilizing a common layer that we can all trust, we can allow for a truly global market.

Cost Reduction: Before emails came out, people were using Snail-Mail to send a message, in which you had to print out the message, put it in an envelope, pay $0.50 and wait 3 days for the mail to be delivered. Later came emails, and with one click, you could send over your message instantaneously, with an order of magnitude faster, cheaper and with much more simplicity. In a similar way, with tokenization you can allow securities to have an electronic format, drastically lowering the cost, easily tradable and interoperable on different exchanges.

The fact that issuing tokens is much cheaper, and simpler than the traditional way, we can essentially enable use-cases and business models that weren’t practical before. For example, prior to email, you wouldn’t mail a letter to someone to schedule for lunch, but now you can do it through email. And this is something that we think a lot about, especially with the potential for new industries and business models to emerge from new technology.

This doesn’t exist in the market yet, but for example, tokenizing a sports team, let’s say the Celtics. Right now you could sell the ownership of the team to a major investor, but if the cost is low enough, you can tokenize 10% of the team and sell it to 2000 people, which is the maximum holders you can have for a single class of equity, the token can allow for dividends, capital appreciation, and have other interesting features, such as first dibs on box seats, meet players after the games etc. If you were to do it right now, it would be a pretty complicated and expensive process of managing everybody’s assets. This fits well with some of the consumer trends we see with Netflix and Spotify, in which consumers prefer having experiences over ownership of products. With security tokens, you could allow for fans or mainstream investors to have ownership into their favorite team and potential access to new experiences.

Conclusion:

Overall, 8 Decimal Capital is looking for an evolution rather than a revolution: we are expecting a hybrid digital world instead of a purely digital world, because we would still need central authorities to provide us the ultimate protection. This hybrid world combines the traditional business world with new technology, without completely replacing current business structures.

We think tokenized securities will not replace all financial services. Tokenized securities will simply provide better tools. For example, Salesforce didn’t replace salespeople, but simply provided better tools for salesmen. In the same way, tokenized securities can help companies, brokers, and investment banks raise money more efficiently, but they will still exist. So security tokens will not remove all the middlemen, but make the processes work more efficiently.