The high growth rate of the “future economy” leads to the popularity of “private shares” among investors. The typical tech start-ups, which often make the headline of BloombergTech rarely into IPO. According to TechCrunch, the average time businesses take from initial capital raising to entering the open market increased from 2–5 years in the last century to 6–10 years today. Startups prefer getting funded from venture capitalists and angel investors. As VentureBeat writes: “The abundance of capital available from private investors has stable start-ups that otherwise would need an IPO to attract cash.”

Due to the popularity of the “private investment market”, fewer shares of the so-called “new economy” companies can be sold or bought on the open market.

But we have a solution to this problem: it lies in the “newest” economy of tokens and cryptocurrencies.

Two problems of private shares trading

Private share trading can only be made through direct contact between the two parties. Various costs are included in the process: the transaction takes a long period of time, intensive legal support is needed and the probability of the deal being aborted is high since every act related to the share sales must get the permission from the management of the startup. The rules were especially tightened after the problems with Facebook shares in 2012. Today it is difficult even to just buy the stock itself, if you are not an institutional investor specified in the “privileged sheet” of the company.

There is a second problem for private stocks — a potential buyer does not know all the information about the company and it is very difficult for the regulator to provide protection to the investor. As early as 2015, the Financial Times wrote: “The US Securities and Exchange Commission prohibits trading based on inside information, but applies the rules to private transactions. Employees are governed by non-disclosure agreements and investors”.

Tokenization as a solution

We believe that both of these problems can be solved: the private market can be as efficient as the public market. The solution is the technology of tokenization.

Let’s imagine a typical situation: a venture fund wants to sell some private shares of a new tech start-up. A buyer, who is a venture capitalist has already been found. However, the lack of transparency and clear rules on the market create to an extend that it is simply not profitable for funds to make a deal. Obstacles can be conquered by releasing tokens on the security of private shares.

The process is similar to securitization, only the technology of blockchain makes the process more efficient. Comparison of securitization and tokenization shows that the blockchain reduces expenses on the following parameters:

1. Creating a single and standardized source of information instead of multiple data silos across different entities. This makes information sharing easier and streamlines the process at different stages, reducing costs and time consumption.

2. It improves price discovery and liquidity by making security prices more accurately reflect true value.

3. An immutable trail of changes enables instant audit during all stages of the process, starting from loan origination to changes of ownership in the secondary market for securities. Immutability significantly cuts due diligence costs.

4. Disintermediation and simultaneous recording of data into blockchain boosts the speed and reduces costs as well.

The BANKEX protocol is used to represent shares or any other asset with tokens

Cash flows are allocated, the asset (in our case, the share) is monitored using the sensors of the Internet-things, which allow you to keep track of the location and condition of the asset, then the asset is transferred to a third party for example, escrow or asset manager. After that, tokens will be listed and traded in the secondary market, while the asset itself does not change its owner. When the asset has high liquidity , for example, with an IPO or takeover of a startup, all tokens will be automatically exchanged for shares of the company.

To sum up, blockchain and the economy of tokens solve two problems at once: they eliminate the problem of information asymmetry, and make the deals free from the long and complex legal and bureaucratic procedures associated with the sale of private shares.

The first problem is solved with the help of Internet-things and smart contracts that will return the funds to the buyer if even the slightest violation of the contract happens. while the solution of the second problem lies in the technology of blockchain, which provides the highest security while reducing financial and time costs.

The Proof-of-Asset Protocol that is used to realize tokenization is as clear and understandable. To learn how the protocol works takes no more than ten minutes and does not require expert knowledge in token economy.