From Research to Use-Case: How 8 Decimal Capital Strategically Constructs Its Security Token Landscape
8 Decimal Capital Overview:
- The evolution of digital tokens has coincided with a great deal of risk from being in the financial market ecosystem. But in the future with the development of RegTech, a compliance layer will be created to automatically ensure KYC/AML along with other compliance requirements. Then, the cross-border regulatory synergies will be likely to emerge.
- Although the Security Token industry is currently still in its nascent stage, many organizations and companies are debating how this new technology can be used. However, by investing early-on, investors can help to accelerate this process and help the industry maximize its potential.
- In the future, financial agents and regulatory agents will still exist. But the funds in the industry will provide more than just capital and there are more roles for them to fill.
Writer: Ran Wei
Translator: Zoe Qian
Editor: Brian Hough
8 Decimal Capital predicts that the tokenization of assets will likely catalyze future adoption of cryptocurrencies and blockchain technology. With the development of this new technology, the regulations of different countries will be programmed into tokens, and regulatory collaboration between countries will also occur.
This digital transformation is why 8 Decimal Capital is bullish on the Security Token space and investing across different segments of the market to help the industry grow.
The Development of Security Tokens Overview
The tokenization of securities will likely take place among more diverse types of assets. Some of these assets include mixtures of stocks and bonds, dividend rights, and non-traditional financial assets, such as real estate and art, which used to be difficult to trade.
The evolution of digital tokens has coincided with a great deal of risk from being in the financial market ecosystem. This proves why more regulations must be built at the protocol level. But in the future with the development of RegTech, a compliance layer will be created to automatically ensure KYC/AML (Know Your Customer / Anti-Money Laundering) along with other compliance requirements. Then, the cross-border regulatory synergies will be likely to emerge.
In China, the typical investor is familiar with public funding, IPOs and stocks. However, they are not used to, nor ever get the chance to, invest in the larger and more diverse market of private funding, private equity, debt, and alternative investments. Once the market is open to more participation from investors, then the liquidity of trade will provide investors with more opportunities to diversify their portfolios.
Some people would argue that by mandating the KYC process for every investor and requiring only accredited investors in the game would initially raise the bar for participation and in turn lower the liquidity of cryptocurrency. 8 Decimal Capital will argue that this is not the case.
The size of the U.S.’s private equity market is 22 times larger than the public market. Through being more compliant and including more institutional investors, the cryptocurrency market is opening up to an expanding market instead of a shrinking one.
Although the Security Token industry is currently still in its nascent stage, many organizations and companies are debating over how this new technology can be used. However, by investing early-on, 8 Decimal can accelerate this process and help the industry maximize its potential.
The Security Token Offering Process and the Main Platforms
The Security Token industry includes distribution platforms and rating agencies, payment platforms and stable currencies, exchanges, KYC, consulting services companies, and liquidity providers, among many others. The most important participants are the projects, the distribution platforms, and the ST exchanges.
At 8 Decimal Capital, we believe a successful Security Token Offering (STO) requires a legitimate company to launch a compliant Security Token, which will be traded by whitelisted investors on compliant exchanges.
- Issuance Platform
- Investment Banks
- Smart Contracts to Track Spending and Revenue
- Payment Platform and Stable Coin
- Governance Platform
- SaaS (Software-As-A-Service) Platform to Allow Investors to Vote
- Help with Company Charter
- Liquidity Providers
- Media/PR Agencies
- Rating Agencies
- Compliance, Law & Accounting
- Information Platforms
- Admin Consoles
Moving from Pre-STO to Issuance (release) to lifecycle-management (full process management), we are finding the best projects that deliver the required services and invest in them.
1.) Legal — Partnership with Tackett Bartlett
Regulation drives innovation locally and globally. Within the global market, various “blockchain friendly” countries have emerged which boast government encouragement of blockchain and cryptocurrencies, while other “blockchain unfriendly” countries have more regulations for companies and projects to pass through before reaching the public. For example, the United States has exemptions Reg D, Reg A+, Reg S, and Singapore MAS also has similar regulations that require specialized efforts to remain compliant. Companies in China that want to conduct STO may need to set up VIE architecture.
In terms of legal services, 8 Decimal Capital is partnering with firms, such as Tackett Bartlett LLP, which is experienced in the cryptocurrency space. For example, Berkley Vice Mayor, Ben Bartlett, is an advisor to 8 Decimal Capital. He is also a strong supporter of the blockchain field and an advocate for the concept of Crypto Municipal Bonds.
Ben Bartlett and Shane Tackett co-founded Tackett Bartlett LLP which consists of five service modules: Token Design, Global Taxation, Investment Fund , Corporate Structure, and Regulatory Compliance.
2.) Investment in Securitize, Issuance Platform
When it comes to Security Token issuance platforms, 8 Decimal is a strong supporter to Securitize.
In the future, RegTech must be a combination of manual, legal, and technological standards. The Securitize platform will provide standardized templates and processes for creating Security Tokens for real assets.
From a technical standpoint, ERC20 tokens are fungible. There are various securities in the traditional financial industry including partial stocks and ABS-type (Asset-Backed Security). Those securities are not fungible. There is a need to be a differentiation of characteristics between fungible tokens and non-fungible tokens. Examples include the ST20 standard for the Polymath platform, the SRC20 standard for Swarm, the R-token standard for Harbor, and the ERC-1400/ERC for the Ethereum community which are currently available, along with the 1410 standard and ERC-1404 standard.
The existing insurance platforms include Polymath, Harbor, Securitize (Securitize.io) and Swarm, among others. 8 Decimal’s decision to invest in Securitize (Securitize.io) was largely based on its stunning track record of successfully issuing projects. Also, SPiCE VC, Blockchain Capital, and 22x (22xFund) are all Digital Security Issuers that used the Securitize platform, all of which verify the success of Securitize.
3.) Trading Platforms: OpenFinance
Exchanges that are prepared to enter the STO market can be divided into two categories: (1) cryptocurrency exchanges; and (2) traditional stock market exchanges.
Coinbase (Coinbase) is one of the fastest growing crypto exchanges that dives into the ST market. Coinbase has successfully acquire a series of licensed financial institutions since last year, and now has multiple licenses such as BD, RIA and ATS. At the same time, tZERO and Templum (Templum Blog) are starting from scratch.
On the other hand, traditional exchanges are also looking for ways to cut into the field of cryptocurrency, including the London Stock Exchange and Nasdaq, among other big players. However, 8 Decimal believes that some countries with strong policy flexibility, such as Malta and Gibraltar, may be more likely to issue compliance licenses to Security Token exchanges.
The licenses required for the STO mainly include: ATS/ATLS (Alternative Trading System License), RIA (Registered Investment Advisor Licence), BD (Broker-Dealer Licence), RAE (Clearing and Transaction Execution Licence).
Overall, the existing cryptocurrency exchanges are more familiar with crypto trading, but they often do not have the necessary licenses in place, while the traditional exchanges are the opposite.
Private equity trading in secondary markets has already existed. Platforms such as Equidate, EquityZen, and the SecondMarket, LP interest trading platform are making equity trading more flexible and smooth. The main pain points they are addressing are the liquidity of private company equity and other Alternative Assets. They are working to provide a more transparent, wide-spreading online trading and hosting platform for such alternative assets.
We chose to invest in OpenFinance.
OpenFinance was founded in 2014 to provide trading and clearing and settlement services. OpenFinance CEO, Juan M. Hernandez, holds a Computer Science degree from Northwestern University and an MBA from the Kellogg School of Business, and has many years of experience in financial exchanges. OpenFinance already has multiple STOs in the pipeline, such as SPiCE VC (SPiCE). It is available for Regulation D, S, A+ or CF exemptions, and can also be traded on ATS (Alternative Trading System). In addition, OpenFinance and Firecoin have also reached a deep strategic cooperation.
4.) Investment in the Ecosystem
In terms of information platforms, 8 Decimal invested in DappRadar and is incubating STO.review.
Into the Future:
In the past, people bought stocks and signed contracts based on paper documents and signed them manually. Now with DocuSign’s electronic signature tools, electronic signatures in the US are beginning to have legal precedence. The future trend is to further develop and digitize the process of information matching, contracting and transaction.
For example, allowing multiple witnesses (changing the notary’s model), on-chain data non-tempertable, and compliance standards (such as KYC/AML/qualified investor certification standards) to be turned into contract layers.
Code is Law. To do this requires online and offline collaboration and the integration of regulations and technology.
8 Decimal also believes that in the future, the financial agents and regulatory agents will still exist. But the funds in the industry will provide more than just capital, there are more roles for them to fill.
8 DECIMAL CAPITAL is a multi-strategy investment firm focusing on token and equity investments. 8 Decimal currently has more than 40 portfolio companies with an AUM of 60M USD. The investment team consists of more than 10 venture capital veterans, researchers, and trading professionals. The advisory board comprises Fan Zhang (Former Founding Partner of Sequoia Capital China), Karen Chen (Former CEO of UBS China) and Ben Bartlett (Vice Mayor of Berkeley). Based on the professional fund index ranking agency Token Metrics, 8 Decimal was ranked second out of the 51 active crypto funds. 8 Decimal is also well-received in China, named one of the top 10 funds in the blockchain industry by both 36氪（36Kr.com）, Chain Capture , and Odaily, as well as named one of the top 20 funds by Tsinghua X-Lab and Youth Education Chain League.