Digital Securities: Unlocking The Cheapest Capital

Credit: jordanig.com

Digital Securities are units of ownership in a tradable asset managed by the blockchain. These are commonly referred to as Security Tokens.

This new financial tool isn’t a revolutionary idea, but rather an evolution from the current state of securities. It empowers fractional ownership, increased liquidity, breaking of capital controls, and a truly free market.

Simply, digital securities will flood the market with cheap capital.

We have seen this phenomenon before. In the 1980s, Mike Milken popularized the use of junk bonds for leveraged buyouts (LBOs). He found a new financial tool to access the cheapest capital in the market. The ensuing gold rush created some of the most successful financial institutions over the last 30+ years, while minting numerous individual billionaires.

Today the blockchain has created a new financial tool: Digital Securities.

The next 30 years will belong to the financial institutions and individuals who move with ruthless conviction to dominate the digital securities landscape. These winners will have the cheapest capital, the most liquidity, and the largest number of potential opportunities to evaluate.

The winning strategies

There will be two dominate strategies with digital securities:

  1. The Unbundler — asset owners convert their analog ownership structure into digital securities. They are “unbundling” their illiquid, single owner asset into a liquid, multi-owner asset. Asset prices will rise due to a combination of liquidity premiums, geographic arbitrage, and the increased number of potential investors from fractional ownership. The Unbundlers capture value through capital appreciation in the assets they previously owned.
  2. The Bundler— investors build portfolios of digital securities in previously illiquid assets. They are “bundling” small amounts of fractional ownership in a variety of assets to create new financial products & opportunities. The One way that Bundlers can capture value is by providing retail investors diversified portfolios of digital securities, which allows investors to own a wide-range of previously illiquid assets. This is similar to the ETF world today.

New York City Real Estate

A team recently used the example of New York City real estate to show how they saw these two strategies co-existing.

An institution purchases individual real estate properties via fiat currency. The analog ownership structure for each property is then converted into digital securities, creating tradable shares for every property. These digital securities are regulatory compliant and will be listed on Security Token exchanges for a global investor base to buy & sell 24x7x365. This is The Unbundlers’ world.

Another institution will come along and build portfolios of the individual properties’ digital securities. Some groups may choose to build a portfolio of fractional ownership in properties in the Lower East Side. Some may build a portfolio of properties in the West Village. Maybe only commercial buildings. Or properties within 3 blocks of Grand Central. This is The Bundlers’ world.

The unbundling and re-bundling of previously illiquid real estate will allow people to invest in different neighborhoods, property types, or even individual streets. The real benefit here is empowering investors to gain access to assets which were previously reserved for the ultra-wealthy and well-connected. This model transfers across geographies & asset types, and works for both large & small investors.

Conclusion

The blockchain has provided technology to create digital securities. This new financial tool will flood the market with cheap capital, leading to an attractive investment environment. The Kings of Digital Securities will be the institutions with high levels of conviction, large pools of capital, and a strong appetite for moving quickly.

The financial system of the future will look differently than our current system. There will be fewer barriers to entry and more global participation. It won’t be as revolutionary as people dreamed about, but rather a more efficient system that rewards those who embrace it.

Cheap capital is an advantage and Digital Securities will be the tool of choice.

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