Welcome to the second edition of Token Up, where we analyze the emerging security token ecosystem, without the bullshit.

As you may recall, we spoke last time about the big picture: what security tokens are, the benefits they offer today’s outdated system, why you should care, and what the market opportunity looks like. Today, we’ll talk about a topic that’s been getting a lot of attention lately: security token exchanges. It seems with every week that passes, a new security token exchange is born. As liquidity remains one of the biggest roadblocks to widespread adoption of security tokens, this is both a welcome and important development for our emerging industry.

So what do we mean when we talk about liquidity, you might ask? Well in this case, liquidity refers to the relative ease and stability with which an asset (or token) can be bought and sold on the market. Today, the security token market is characterized by an almost complete lack of liquidity, because there are very few regulated security token exchanges currently in operation. Just because a company decides to tokenize its shares doesn’t mean that anyone can trade those shares just yet. Don’t get me wrong ﹣ issuance is a critical piece of the puzzle, but in order for our burgeoning ecosystem to flourish the exchanges are a must. This is really important to understand, because liquidity is often stated as one of the biggest benefits that security tokens will offer vs. traditional securities. The key here is the future tense. While there are a lot of important advantages that security tokens offer on their own (many of which I discuss in my last post), liquidity is one that will only materialize when the forces within the ecosystem are working together﹣ startups, corporates, traditional stock exchanges and yes, regulators.

The good news is that these forces are already hard at work. And there have been quite a number of developments this year that are worth mentioning. Perhaps what has struck me the most is the diversity of actors within the space. Not only are we seeing hopeful new entrants emerge or mammoth stock exchanges begin to adapt; we’re also seeing large corporates who most wouldn’t associate with either securities or tokens get in on the action, as well as established crypto exchanges seeking to incorporate new revenue opportunities as they target additional growth.

Best of all, there isn’t just one jurisdiction that’s leading the way ﹣in fact, while there have undoubtedly been a number of developments in the United States, I would argue that some of the most exciting progress is coming from Europe. This is thanks to a more stable regulatory climate, and perhaps a sense that tokenized assets represent a major opportunity for Europe to even the capital markets playing field once and for all.

The ensuing guide covers the following exchanges: Gibraltar Stock Exchange, OpenFinance Network, tZERO, Templum, SharesPost, Coinbase, Australian Securities Exchange (ASX), SIX Swiss Exchange, London Stock Exchange, and the Malta Stock Exchange.

So let’s take a look at what’s going on.

Gibraltar made headlines in October 2017 when GSX Group Limited, owner of the Gibraltar Stock Exchange, announced at the Hong Kong FinTech Summit the creation of a new subsidiary, the Gibraltar Blockchain Exchange (GBX). The GBX would aim to “create a new standard of excellence” by allowing only vetted, high-quality listings to be offered through its planned global, regulated marketplace for utility token sales. This feels like ages ago in crypto time: ICOs reigned supreme, and almost nobody was talking about security tokens or STOs, let alone setting up exchanges to trade them.

Around the same time as the GBX announcement, the GSX Group confirmed that it was also planning to revamp the Gibraltar Stock Exchange (GSX), which it owns, to become the world’s first regulated exchange for listing and trading security tokens. Though the news flew under the radar when it was announced, this was and is a very big deal. According to their white paper, GSX aimed to list tokenized securities by Q3 of this year, with trading of such security tokens to be enabled by Q4. It now appears, however, that this was wishful thinking: we learned recently that GSX will officially seek regulatory approval from the Gibraltar Financial Services Commission (GFSC) to list and trade security tokens, kicking off the process in Q1 of next year. While it seems that GSX will not make their original timeline, the overall point remains. The recognition of security tokens by an EU-licensed exchange is a major milestone for the entire blockchain community and one that we continue to watch closely.

A number of interesting security token projects have begun to take shape in the United States despite the uncertain regulatory climate. One early-stage project that we’ve been following closely is OpenFinance Network (OFN), which claims to be the first US based regulated security token trading platform. Here’s what you need to know: OFN is a trading, clearing and settlement platform for alternative assets which combines a centralized matching system with a decentralized p2p settlement process. The platform went ‘live’ at the end of June after undergoing a few months of beta testing from early investors and partners. Well, sort of. On their Telegram channel the administrators clarified a major caveat: trading itself isn’t yet live. So, for now, all you can really do is register and complete KYC. You’d think they could just say that instead of making me sift through hundreds of messages on Telegram…

Even when trading functionality is live, the only token that users will be able to trade, at least initially, is SpiCE VC (a tokenized VC fund). Beyond that, the team has said that they expect Blockchain Capital (aka BCAP; another tokenized fund) to eventually trade on the platform, but haven’t given any concrete timelines. To be sure, the team is hard at work and has inked some notable partnerships (Polymath, Republic). They’ve also announced a listing pipeline of at least 130 security tokens with a combined market cap of more than $6B, but again there has been no indication when all of those tokens will actually be tradeable.

A few more important points: While non-accredited investors can create an account on OFN, they won’t actually be able to trade anything until Reg A or Reg CF tokens are issued. As a quick refresher, Reg A and Reg CF are regulations related to private capital raising that were introduced by the JOBS Act in 2015 (more detailed explanation here). At this time, OFN has neither issued nor announced any Reg A or Reg CF tokens. The platform also requires the use of MetaMask, a popular browser wallet and interface, but which does not offer the level of security that many users demand.

Another interesting project coming out of the U.S., which has garnered far more attention than OFN due to the size of its parent (Overstock), is tZERO. To be sure, not all the headlines have been good: tZERO’s STO got off to the worst kind of start when it was announced first that the SEC was conducting an investigation of the company, followed by the filing of a class action lawsuit the next month. Legal issues aside, tZERO’s platform has the potential to be a major player in security token trading due to its current operational capacity, access to fresh capital and ambitious plans. Here’s what you need to know:

tZERO owns two SEC registered and FINRA Member broker-dealers: SpeedRoute LLC, a routing and execution firm, and PRO Securities LLC, an Alternative Trading System (ATS). The platform (demo here) consists of brokerage services, stock inventory management systems, smart order routing and 24-hour trading. Today, you can only trade traditional equities but development of a security token trading system is underway. Their infrastructure is impressive: the platform currently processes 15–18 million in traditional equity orders per day, and the company claims it is equipped to handle over 100 million orders per day.

In May, tZERO announced their intent to form a joint venture with BOX Holdings in which both companies committed to form an exchange for companies to list and investors to publicly trade security tokens. tZERO will put up the cash and the tech, while BOX will offer people and regulatory expertise. In June, both parties announced they had finalized the deal. The deal is of course subject to regulatory approval from the SEC, which is no guarantee. Assuming they get the green light, the venture will operate as part of BOX Options Exchange, which is an existing registered securities exchange in the U.S.

A few days later, tZERO announced that GSR Capital, a Hong Kong private equity firm, would purchase $160 million in tZERO Security Tokens pursuant to the Simple Agreement for Future Equity (SAFE). In total, tZERO has raised $168 million in the form of SAFEs. Proceeds from the STO (which is still ongoing) will be used, among other things, to finance the partnership with BOX.

As we continue our America tour, I want to discuss Templum next. Templum, through its subsidiary Templum Markets LLC, is a platform for primary issuance and secondary trading of tokenized assets. Templum has decided the world needs one more three letter acronym (TLA), so instead of sticking with the term STO, they use Tokenized Asset Offering instead (TAO for short)﹣cool.

In February, Templum acquired Liquid M Capital, giving them access to an ATS and thus enabling a secondary market. With the ATS, Templum can offer liquidity for securities they tokenize and remain compliant with US security regulations. Having flown under the radar for quite some time, Templum attracted headlines in April when it raised $10 million from Japan’s SBI Group to finance the development of their trading platform and a planned expansion across Asia.

The platform appears to be live, but in terms of listings it looks pretty sparse. From their website, BanQu looks like the only company to conduct a TAO so far and BCAP appears to be the only secondary trade to have been completed. Like all U.S. companies trying to get in on the security token action, however, trading availability will be limited to accredited investors only assuming the TAOs are structured to comply with Reg-D (like the BanQu TAO).

One last thing: Templum recently partnered with CUSIP Global Services to bring standardized identification numbers to security tokens. For now, only tokens listed on Templum Markets will get the honor, but I can see this becoming standard practice across the industry. I love it when companies focus on the bigger picture, helping to advance the ecosystem at large. We are all in this together, after all.

I like to think of SharesPost as the hip grandpa. Founded in 2009, SharesPost essentially launched the industry for online private equity secondaries. The company now boasts a user base of over 50,000 accredited investors and has facilitated more than $4 billion of transactions in the shares of more than 200 technology companies.

Recognizing the massive opportunity that security tokens pose, SharesPost announced in May that it was revamping its existing ATS to facilitate secondary trading of security tokens﹣turns out you can teach an old dog new tricks. Then, in late June the company announced it has closed a $15 million Series C round led by LUN Partners and Kenetic Capital in order to further build out their ATS and expand into Asia. According to SharesPost’s CEO, the strategy is to create a unified, global marketplace for both traditional and tokenized securities of private companies.

If all goes as planned, SharesPost will launch the new trading platform sometime during 2H 2018.

Before moving away from the U.S., this chapter would be incomplete without mentioning the big news from Coinbase. As a household name in cryptoland, the company’s announcement in early June that it was “on track” to operate as a regulated broker-dealer and thus enable secondary trading of security tokens was a major piece of news. This news grew even louder when the company confirmed a few days ago that FINRA had signed off on their plans. So, how did this all happen? As is so often the answer, money! In one fell swoop, Coinbase acquired three companies: Keystone Capital Corp., Venovate Marketplace, Inc., and Digital Wealth LLC. The triumvirate of acquisitions gave them the three licenses they needed to make their aspirations a regulatory possibility: a broker-dealer license, an ATS license, and a registered investment advisor (RIA) license. The last piece of the puzzle was the regulators signing off on the deal, which happened surprisingly quickly.

My two key takeaways from these developments:

It is a sad fact that the state of affairs in the United States is such that you actually have to buy companies in order to get around the country’s complex regulatory headaches. God only knows how long it would have taken Coinbase to organically apply for and receive these licenses. This is not how business should be done. Coinbase has a s***t ton of users. Users = trading volume. Trading volume = liquidity.

Moving outside of the U.S., we can see that even major traditional exchanges have finally started to wake up and smell the coffee. With an average daily turnover of A$4.685 billion and a market capitalisation of around A$1.9 trillion, the Australian Securities Exchange (ASX) is one of the world’s top 15 listed exchange groups. It also deserves credit for being one of the first exchanges to spot the benefits of Distributed Ledger Technology (DLT) and tokenized shares.

Having begun exploring different applications of DLT in 2015, ASX announced last December that it would replace its registry, settlement and clearing system with a DLT-based system developed in partnership with Digital Asset (DA), a blockchain infrastructure provider to large financial institutions. In doing so, the exchange became the most notable blockchain convert among mainstream financial institutions to date. In April, ASX released additional details about the project in a consultation paper. In it, the exchange noted they were targeting to rollout the system between Q4 2020 and Q1 2021. Tick tock…

Here’s the catch: the new system will operate on a private, ‘permissioned’ blockchain where known participants must obtain clearance to use it and the ASX will be the sole party able to commit transactions to the ledger. In other words, it will be a centralized network. But, as others have pointed out, this might not be a wise move long-term. As the trend towards asset tokenization continues to take root, decentralized public networks offer the greatest promise in that only they have the power to create a unified, open and interoperable global financial system. Those who put up walls around their networks will be left out.

Based in Zurich, SIX Swiss Exchange (formerly SWX Swiss Exchange) is Switzerland’s main stock exchange. It is also one of Europe’s largest with a market cap of approximately $1.7 billion as of 2017 year-end. In July, SIX joined the security token party when the exchange announced that it has begun building a fully integrated trading, settlement and custody infrastructure for tokenized securities. The new project, called SIX Digital Exchange (SDX), claims it will be the first in the world to offer an end-to-end solution for tokenized asset markets. Services will include both issuance and trading, and will tokenize existing securities and non-bankable assets to create liquidity for previously illiquid assets. Moreover, SDX will bear a big, fat “R” in what today has become the golden seal of approval: it will be regulated by Swiss financial regulator FINMA and backed by the Swiss National Bank, just like the traditional SIX exchange.

SIX said the project would roll out in phases, with the first services coming online in mid-2019. Clearly, the Swiss are far more efficient than the Aussies.

I normally take management quotes with a grain of salt, but I think the quote from Jos Dijsselhof, CEO of SIX, perfectly sums up the bigger picture: “This is the beginning of a new era for capital markets infrastructures. For us it is abundantly clear that much of what is going on in the digital space is here to stay and will define the future of our industry. The financial industry now needs to bridge the gap between traditional financial services and digital communities.”

As one of the world’s oldest and largest stock exchanges, the recent news from London Stock Exchange is a huge boon for the entire blockchain community.

A few days ago, Coindesk reported that the London Stock Exchange Group (LSEG) and the Financial Conduct Authority (FCA), the U.K.’s main financial regulator, has teamed up with U.K.-based startups Nivaura and 20|30 to issue tokenized equity in a U.K. company in a fully compliant manner. Targeting both institutional and accredited investors, the partnership will leverage LSEG’s Turquoise platform, a hybrid exchange platform for European equities. The equity tokens themselves will be Ethereum-based, so one can reasonably assume they will leverage the ERC20 standard.

In September, 20|30 will act as the ‘guinea pig’ as the first company to test out the process. Following a lock-up period of one year and assuming all goes as planned, they will launch the service to the public, allowing startups and small- to mid-size corporates to tokenize their own shares. Unsurprisingly, there’s already a sizeable pipeline of companies waiting to test it out.

Though perhaps slightly less ambitious than the development coming out of Zurich, this is nevertheless a major step forward for the soon-to-be non-European island nation and one of the more exciting projects happening across the landscape. Here’s to wishing the teams the utmost success and look forward to this system rolling out more broadly next year.

Last but certainly not least, I am excited to share my own company’s contribution to this space.

A few days ago, Neufund announced a collaboration with MSX, an innovation vehicle of the Malta Stock Exchange (MSE), as well as a partnership with Binance. The aim of both ventures is to create a global, decentralized and EU-regulated stock exchange for listing and trading tokenized securities. Both of these partnerships are designed to provide investors significant liquidity when trading Equity Tokens issued from Neufund’s platform, a goal we have been striving towards for many months. The three parties aim to conduct a pilot project later this year, which will include the public offering of tokenized equity on Neufund’s primary market that may later be tradable on Binance and other crypto exchanges pending regulatory and listing approvals.

Here’s why this matters: the deal represents perhaps the first complete, regulated ecosystem for tokenized equity, from issuance through trading. Malta has established itself as a haven for the blockchain community with major players like Binance and OKEx relocating to the #BlockchainIsland. Recent regulatory reforms demonstrate the country’s progressive and forward-thinking mindset and have removed the legal uncertainty around this promising technology that hampers so many other jurisdictions, namely the United States.

If you have managed to make it through this mammoth post, I congratulate you. More importantly, I thank you for listening. As always, let me know if you have any comments, feedback or suggestions. My plan is to update this post regularly as new projects are announced, so please let me know if you come across any.