Welcome to Token Up, a new publication powered by Neufund that is focused on analyzing the emerging security token ecosystem and competitive landscape. Here, I will discuss my views on the overall industry and its opportunities for future growth, as well as highlight some key players in the space. Each post will feature an honest take from my perspective － the good, the bad and the ugly, so to speak. Occasionally, I’ll also weigh in on the global regulatory landscape when any pertinent and/or noteworthy developments arise. Lastly, we’ll be launching a podcast to accompany this publication, hosted by Marlene Ronstedt and me.

Across the security token market, a variety of companies have sprouted up over the last year or two, many of whom are focused on different solutions. Today’s burgeoning ecosystem comprises issuers, platforms for both issuers and investors, secondary exchanges, existing tokenized securities or funds, liquidity providers and more. Some are focused on tokenizing alternative assets (e.g., art, real estate), while others are concerned with more traditional use-cases (e.g., equity, debt). Naturally, many have set their sights on the US market. But while the US brings promise in the form of access to capital, it also brings with it regulatory headache and uncertainty. Others, like Neufund, recognize the potential that markets such as the EU hold, replete with more attuned regulators and a desire to change the status quo of capital markets.

I think it’s a bit silly to try to sum up the landscape in one post － after all, new companies are coming online in this space faster than you can blink. So to kick off the inaugural post, I’m going to discuss the ‘what’ and the ‘so what’ of security tokens; I’ll tell you what they are, what the benefits are for the world of finance, why you should care, and what the overall opportunity size looks like. In the posts that follow, I’ll shine the spotlight on select industry leaders and emerging companies across the ecosystem － some you may have heard of, others you probably haven’t. My hope is that I’ll be able to shed some much-needed light on a market that is growing more crowded each and every day.

So without further ado, let’s dive in…

What are security tokens and what does the market look like?

The days of scammy Initial Coin Offerings (ICOs) and useless utility tokens that actually provide no utility are coming to a close, with the dawn of a new era that promises to transform the world of finance as we know it: transparent, inclusive and trustless. You know, the whole point of blockchain in the first place.

Unless you’ve been living under a rock for the past few months, you might be wondering why all of a sudden everybody and their mother are talking about security tokens in cryptoland. Well, there are many reasons. For starters, it’s a big f***ing deal. Security tokens, or tokenized securities, are investments just like the ones you are used to trading on Charles Schwab or Fidelity － except they’re better. Like traditional securities, they represent ownership in an underlying asset, like a stock certificate, a bond or even a building. So, why are they better you might ask? Because they are designed for today’s digitized and automated world. Imagine if those shares you held were a lot smarter, with your rights as a shareholder directly embedded into the token itself － time to receive dividends? The token knows. Have liquidation preference? The token knows. Need to vote on shareholder resolutions? The token knows. Even better, security tokens can also offer the same features as utility tokens ﹣ for instance, imagine a tokenized share of equity in Tesla that also offers special vehicle access (e.g., beta software) only for token holders.

What are the benefits of security tokens?

The benefits don’t stop there. Security tokens enable a new world of finance that doesn’t stop at 4pm when the closing bell rings on the floor of the NYSE. We no longer live in a world where it is acceptable to wait almost three days at the end of each week before you can trade your investments. Most industries already understand this quite well (just look at what Amazon Prime has done to e-commerce); perhaps it’s time Wall Street caught up. Beyond 24/7 trading and programmable shareholder governance, security tokens also promise to dramatically increase settlement times, liquidity and the amount of companies that can list themselves on an exchange, while reducing costs, market friction and quite frankly, the amount of back-office employees needed to power a bank. Sorry, but it’s true.

Ok, so maybe that’s a tad bit interesting. Or maybe that still sounds like boring finance jargon. In that case, let’s put it another way. If you’re familiar with the concept of venture capital, you probably already know that most people can’t access it. Over the past several decades, governments and regulators across the globe have done a really good job at making sure that only the richest people can access the most lucrative investments. Thanks in part to a certain concept called the “accredited investor” in the U.S., you have to already be a millionaire in order to invest in the most promising companies － you know, the ones that end up making their founders and investors, well, millionaires. Sounds a bit counterintuitive, no?

Enter fractional ownership. Today we can take a single asset －for instance, one share of Berkshire Hathaway －and divide it infinitely into tiny pieces that everyday folks can afford. So, if you don’t happen to have $287,000 lying around, you can still invest in the company and participate in the upsides (and downsides) of investing. While this concept isn’t entirely new, it is certainly made a lot easier through the advent of blockchain and tokenization. That’s because this concept is embedded in the digital token itself, instead of requiring additional costly tech development and manual workarounds.

The impact of security tokens on VC

Going back to venture capital for a second, let’s talk about why this all matters. Even without the unnecessary regulatory headaches, most VCs will tell you that the reason they don’t want to allow retail investors (a.k.a. normal people) to invest in their funds is because it creates a whole lot of extra work for them. Imagine a cap table with 30,000 investors each owning a fraction of a share in the fund; now imagine Marc Andreessen crying like a small child because he has to somehow manage all of those investors.

Security tokens can solve this dilemma by dramatically streamlining the operational and regulatory burdens that prevent a student with modest savings, or an 85-year old grandmother, from investing alongside Marc and the rest of the partners at a16z. Funnily enough, however, most companies within the security token ecosystem are not doing anything to solve this pressing problem. This post is not meant to single out any one company; that comes later, of course. That said, I do find it puzzling that for all the noise I’ve been hearing in the last months from the likes of Harbor or Securitize about the benefits of security tokens, they seem to shy away from mentioning that their platforms actually don’t extend financial services to the folks who are today excluded from it. Whether due to regulatory constraints or their business strategy, most companies still cater only to accredited investors. What a shame.

The future of security tokens

So, what’s the opportunity here? I’ll give you a hint: it starts with a T. If you believe Polymath, security tokens will represent a value of $10 trillion by 2020. Though I may disagree with the timeframe (Rome wasn’t built in a day, as they say), I find the number surprisingly accurate. Why, after all, the NASDAQ alone has a market cap of $10 trillion. While it may perhaps be too early to assign hard numbers, one thing is certain: the security token revolution has arrived, and I’m excited to be a part of it.

Until next time…

Alex Molé is the Investor Relations Manager at Neufund, where he is responsible for developing and maintaining the company’s shareholder and token holder relations. As part of his responsibilities, he spends time analyzing the security token industry and market participants. You can find him on LinkedIn, Twitter and Medium.

Neufund is a blockchain-based equity fundraising platform, an ecosystem of smart contracts operating on the Ethereum blockchain. The company’s key expertise lies in legal-tech and reg-tech. At its technological core, Neufund is a blockchain protocol for securities’ tokenization and issuance — it allows for any type of security or financial product to be issued as a token on a blockchain, and Equity Tokens are just one of many types.

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Further reading:

The Security Token Thesis (Stephen McKeon)

The Official Guide to Tokenized Securities (Anthony Pompliano)

Your Official Guide to the Security Token Ecosystem (Tatiana Koffman)

Security Tokens Set to Take Center Stage in 2019 (Rohit Kulkarni)