Word On The Street

Quick note: we are doing a fair amount of blocking and tackling this week. In light of that, the newsletters will consist of a long-form brief and additional articles to dig into.

Tokenize It All

It’s July 2nd, and LeBron James is no longer a free agent. But covering the newest Laker’s immutable job security doesn’t boost our open rates — talking about security tokens does.

So, let’s get on with it — the media is keeping stuff from you. Not that the content they’re delivering is fake news, mind you. It’s just that squabbling about prices creates greater buzz than chatting about the third wave of the blockchain boom: security tokens.

At least that’s Jeff Brown’s take

His background? Editor of the Exponential Tech Investor and 2.5 decades in high tech. The take? More coverage should be on the capital that will be unlocked through STOs, or security token offerings.

Brown’s source: David Weild, former Vice Chairman of the Nasdaq, who stated last month that “we have left GDP growth and undermined U.S. competitiveness because our capital markets are not designed to support small issuances.”

He’s not wrong. Smaller companies can’t front the bills for an IPO issuance, which were estimated to be north of $1 million by 83% of CFOs in a survey by PwC. When considering the IPO’s multi-year route to market and legal nuances that can trigger migraines by the mere sight of a lawyer (s/o Pavlov), it shouldn’t be surprising to find larger companies saying ‘that’s gonna be a no for me, dawg.’

That all changes with STOs. With STOs, smaller business gain access to capital, both institutional and retail investors gain exposure to a previously illiquid class of micro cap stocks, and the markets remain open 24/7 like most 7-Eleven franchisees.

Then there’s fractionalized ownership, instantaneous settlement, and a globally accessible market. Talk about eating your cake and having it too.

Brown’s final thoughts concern the means of exchange. Will folks purchase security tokens with fiat “and deal with layers of exchange rates and delayed settlement times” or crypto assets “that can settle almost instantaneously and in a peer-to-peer fashion?”

Jeff, we have a problem…

On the road trip to thousands of processed transactions per second, neither Bitcoin nor Ethereum are there yet. For instance, Ethereum’s blockchain continues to get bogged down when faced with significant activity — look no further than the latest failure with FCoin.

The report card: FCoin is a Chinese exchange that rose to notoriety last week after implementing a problematic business model akin to wash trading. By forcing companies to use huge gas fees (see: tx fees) in a fight to get listed, its infamy lives on. Upgrading Ethereum’s plumping should render most blockchain clogs obsolete, but again — they’re not there yet.

But as Kyle Samani notes, give it time

In other words, trust the process. The MultiCoin Capital partner is most bullish on Ethereum on a 10-year horizon and remains uncertain of any securities that haven’t been given the go-ahead by the SEC.

The reason? Tokens pegged as a security will unceremoniously have their “rugs” yanked out from under them as exchanges without the necessary SEC approval pull their support, effectively drying up the buy side demand and leaving holders scrambling for the door.

That’s why XRP, which currently holds a $17.8 billion valuation, could make some noise (in a bad way) if it’s labeled a security. Quoting Samani, “if that happens, liquidity is going to dry up on XRP and the price will plummet.” In other words, elevator down.

Hundreds of other coins could go the same route. Research from crypto asset tracking websites Coinopsy and Dead Coins suggests that there are roughly 1,000 projects with no activity ready in their pipelines.

That alone isn’t grounds for a security label, but it smells of bait-and-switch tactics as projects can no longer rely upon speculative fervor to turn half-baked ideas into pastries. As we mentioned, security tokens trading on exchanges without SEC approval will get the boot.

So, where’s the safe house?

Until a trading platform receives SEC approval, there isn’t one. However, institutions and incumbents alike are rushing to be the first accredited platform due to the network effects that will likely follow the first firm out of the gate.

There’s a reason why Bitcoin (and Ethereum) have yet to be supplanted as the Top Two of crypto. There’s also a reason why Ricky Bobby believes that “if you’re not first, you’re last” — network effects drag on after the finish line.

One contender? Overstock’s crypto exchange, tZero. Hong Kong venture capital firm GSR Capital just purchased $160 million of tZero’s tokenized shares, putting the company’s total funding at $328 million — well above their initial $250 million target.

And Ralph Daiuto, the company’s General Counsel and Chief Operating Officer, expects 100% of stocks and bonds to be tokenized when all systems are a go in what could be as little as 24 months.