View profile

Digital Securities/STOs - some lessons to date (Guest series with Julian Kwan of InvestaCrowd)

Revue
 
Check out past issues of the newsletter along with more interesting crypto content as well as short (
 

Satoshi&Co Daily Crypto Newsletter

February 7 · Issue #121 · View online
ZPX | Satoshi&Co Newsletters

Check out past issues of the newsletter along with more interesting crypto content as well as short (but great) conversations with leading crypto industry participants at our newly-launched website www.satoshiand.co

Following up on some of our previous articles on Grin, we authored a column on Grin and privacy-focused cryptocurrencies for FactorDaily, a leading digital media outlet for the Indian startup ecosystem. You can subscribe to FactorDaily here. Essentially compares Grin and Bitcoin in the context of the seemingly perpetual struggle between individual and state, liberty and security….you get the drift, it is an easy, breezy read, mostly ; )
 
A few days ago, we had spoken about security tokens/digital securities. Admittedly, we were on the fence with how truly disruptive the whole STO/digital securitization industry is. Today we have a guest article in defense of STOs, authored by Julian Kwan, CEO @ Investacrowd 
******************************
Let’s start with 3 points to frame our ideas below:
1. Email is better than paper, digital shares are better than paper shares
2. The value of any share, digital or paper, is derived from the quality of the underlying asset
3. Digitalize = the process of converting information into a digital form to change a business model and provide new value producing opportunities
DSO = Digital Security Offering or STO = Security Token Offering as they are also known, are traditional investments where the shares to investors are issued digitally versus on a traditional paper contract. We prefer the term DSO as it is more friendly to traditional investors and easier to understand.
Why do this?
The benefits begin at the administration level bringing greater transparency to the setup and issuance of a new company, including cap table management, distributions, disbursements, company information management etc. The DSO also offers new ways to form capital for sponsors/issuers and as the contracts are now “programmable”, we will start to see the creation of new and improved offerings apart from traditional debt or equity.
We believe that digital securities are the future of all securities issuance for private and public companies. And in the not too distant future, we think you will see this offering coming at the government level too, so the issuance of a new investment vehicle i.e a new LLC or Cayman Fund will be issued 100% digitally by the government, as it’s simply a better system and easier for them to manage too.
We have now gone past the theory stage and have real use cases where traditional investments like a venture capital funds have issued shares to investors digitally and these shares are now trading on a regulated and licensed exchange, meaning that instead of the typical 7–10 year lock up for investors, there are now liquidity options available after just 12 months. This is a critical change and a pivotal moment. Those claiming this is not a 0–1 episode and more of a 9–10 are obviously flushed with cash and have never wanted to free up capital or had funds tied up in illiquid holdings before.
One of the current issues in the market is that most DSO/STO posts are written by the blockchain/crypto/ICO groups, not traditional investors or issuers, who are the first ones actually needed for any issuance to occur. The only thing DSO has in common with BTC/ICO is components of the underlying technology, but most other characteristics of each are simply worlds apart.
You need a team of experts (legal, tax, due diligence, accounting, investment, fundraising etc) to run any security offering and with a DSO, you also need to add the technology specialists. This is why so many comments and DSO projects from the blockchain community do not tell the whole story as they are missing many pieces of the puzzle and not seeing the true opportunity here.
Also what this means is that most DSOs to date have been startups looking to raise capital, and startups are not the ideal underlying for a DSO. Why? because ultimately the goal of investing into a DSO is so that you can get your shares and trade them on an exchange. For a DSO to be trading on an exchange you must be able to calculate its value, which means DSO on exchanges lean toward underlying securities that are asset-backed and paying dividends or income to the holders where it is easy to value them on a frequent basis like real estate. 
As we look out to the future we see the true value of DSO in a completely different product than what we have discussed so far (i.e new projects raising money). The real opportunity is that you can start to take portions of existing assets/funds and sell them down to investors, so there is no “fundraising” risk, you have existing proven assets with audited financials (not just projections) and a much bigger product universe of offerings where issuers will pay strong returns for the ability to free up some liquidity from their assets. This hugely important point is currently almost never mentioned.
The initial wave of DSOs were start-ups and ICO projects that pivoted to try to raise capital but with teams lacking any understanding of capital markets and process flow, damaging the success of most of these projects. The other issue with startup DSO is that they typically pay no dividends and are difficult to value at any point in time. Unsuccessful fundraising campaigns for the wrong types of DSO projects, should not be used as the barometer of success for the future and promise of the “DSO industry.
There will be options for P2P or OTC trading of DSOs even as many will never get a listing on an exchange, but ultimately the best DSOs will be trading on DSO exchanges whereby there will be liquidity if the exchanges choose the right quality DSO to list.
If you could invest in a DSO issuance or a traditional issuance with the exact same underlying asset, 99.9% of investors are going to prefer to invest through the DSO structure, as there are liquidity options now available.
Another major issue today is that DSOs are being pushed out in the wrong places. The “DSO industry” needs to be “born” at private equity and traditional investor events and conferences, as it is simply digital shares of securities, it is not a “better ICO” or a cryptocurrency, it is completely different.  
We will still be suffering some growing pains as this all gets shaken out in 2019 but it is going to be massive and those that say DSOs are a 9–10 and not a 0–1, firstly, are not Peter Thiel, and secondly, do not own enough illiquid assets or have not spoken to enough private equity issuers to see the clear value proposition being created here and we are only just beginning…
Meanwhile in Crypto Wonderland....
“Huobi to Launch Fiat-to-Crypto Trading”
Huobi.com, the U.S.-based subsidiary of leading global digital asset exchange Huobi Group, is launching fiat-to-crypto trading services. Huobi.com’s fiat support is reportedly facilitated via a partnership with US financial institution Prime Trust, who specialize in custodian and escrow services for crypto assets and fiat transactions. Users who wish to trade fiat-to-crypto will be required to open a custodial account with Prime Trust.
“Little Interest in Crypto From Amazon Customers”
Only 12.7% of Amazon customers want the marketplace to sell crypto products or services. Global financial portal Investing.com surveyed more than 1,000 Amazon clients to study their consumption rate from the online portal. Respondents, who were allowed to select multiple options, voted mostly in favor of an Amazon-backed computer offering (72.9%), followed by local coupons and deals (51.7%), prescription drugs (36.7%), home security (31%) and even medical marijuana (29.5%).
“German Police Arrest Miners for Electricity”
In the German city of Klingenthal, Saxony, police have arrested a group of suspects for stealing electricity to operate a cryptocurrency mining farm. Police officers reportedly tracked down a system of 49 computers operating in the premises of former electrical services company PGH Elektro. Since at least 2017, the mining farm has reportedly consumed as much electricity as 30 households, with the damage for the affected electricity supplier estimated to around EUR 220,000.
“Bets on the Impending Bitcoin Halving Event”
United States-regulated trading and clearing platform LedgerX has released a new type of derivative contract unique to Bitcoin (BTC), according to a blog post published on Feb. 5. The new product called LedgerX Halving Contract (LXHC) represents a binary option —  an option where the payoff is either a fixed monetary amount or nothing — that settles to the estimated next time that Bitcoin halves. Bitcoin halving is an event that happens roughly once every four years, after which the amount of new Bitcoin created and earned by miners will be cut in half.
Crypto Twitter Pick
Tushar Jain
This vulnerability in Zcash strikes me as an extremely strong argument for why Bitcoin's or other chains' base layers should not have privacy. Privacy should exist in layer 2 but is unsafe for layer 1. https://t.co/bQkVqgtoqw
What We Are Reading / Listening To
Overnight Performance of Top 10 Currencies
You are getting this newsletter because you or someone in your organization signed up for this. You can find more stuff to read at our news and research portal, our crypto index token and our upcoming relayer.
Brought to you by Satoshi&Co
Brought to you by Satoshi&Co
This newsletter does not constitute an offering of securities in any jurisdiction. The contents of this note should not be construed as investment advice or as a recommendation to purchase securities. This note is intended for the consumption of the recipient alone and not for public distribution. Please consult a certified financial advisor or other appropriate practitioner as may be appropriate as per your jurisdiction.
ZPX Copyright © 2019
Did you enjoy this issue?
If you don't want these updates anymore, please unsubscribe here.
If you were forwarded this newsletter and you like it, you can subscribe here.
Powered by Revue
ZPX | 21-01, Clifford Center, Raffles Place, Singapore- 048621