Security Token Cross-Border Investment |Digital Security Frontier Vision #6
Welcome to Digital Security Frontier Vision: The Voice of the Core Builders from Global Digital Security Industry #6
Matthew Graham is the CEO of Sino Global Capital, a team of Beijing-based fintech investment bankers with rich experience in China and blockchain, and Managing Partner of Liquid Value, a consultancy focused on tokenizing traditional assets.
We are pleased to have Matthew as our interview guest! In this interview, he will be sharing his insights on the digital asset investment space.
Enjoy the read!
1. Why did Sino Global Capital invest in the digital security industry? Why are you optimistic about the digital security industry?
“100% of the stocks and bonds trading on Wall Street today COULD be tokenized, and in five years, 100% of the stocks and bonds on Wall Street WILL be tokenized” — Robert Greifeld (Former Chairman & CEO of Nasdaq)
As former bankers, economists, and techies, we belief that Robert’s quote is correct and that digital securities represent a paradigm shift for the financial markets. Digitization and tokenization has the potential to disrupt the trading of roughly $508 trillion USD in equities, bonds, and real estate.
We are so enthusiastic and optimistic about the space because we think that asset digitization represents a win-win solution for both consumers and businesses. Middlemen across the board will be eliminated, liquidity will increase, markets will be 24/7 and increasingly global, and compliance will be achieved through code. The benefits of applications are endless and we are proud to work with and invest in some of the best entrepreneurs in the business.
Figure 1: Programmability is one aspect that make security tokens a new asset class as opposed to current solution that only utilize blockchain.
(Credit: Jesus Rodriguez, Chief Scientist, Managing Partner at Invector Labs; https://hackernoon.com/some-ideas-to-unlock-programmability-in-security-tokens-19407dbd4bb7)
2. What assets do you think are suitable for security tokens (ST)?
One of the benefits of asset tokenization is that there is flexibility in how an offering can be structured. For example, a security token can be backed by debt, equity, revenue streams, or other physical assets. Other innovative structuring methods can be used as well. SEFtoken is digitizing a “covered warrant” which can be converted into shares on an underlying, fully regulated, Australian exchange that will be adding a digitized asset exchange to current offerings. Currently, those are all single asset backed tokens.
3. As an international investment institution, how does Sino Global Capital select a ST project suitable for investment?
We only partner with high quality “best-in breed” projects. In fact, the ST structure is the last part of a project that we evaluate. First, we get to know the team, their backgrounds, previous projects; then we evaluation the technology, barriers to entry in the field, ability to execute; finally, only after we are convinced of the quality of a project do we look at the ST structure and ensure that it makes sense from an investment perspective.
Through all this, we also want to make sure there is a “China angle” and that this is a project that brings transformative solutions to the Chinese market.
4. How to do background research on overseas projects?
Ultimately, to partner with a project you need to like and trust the project leadership. Background research always starts with relationship building and understanding what motivates the team. Then, of course, we go through an extensive DD list that includes evaluation of the tech stack, barriers to entry, competitors, regulatory concerns, etc.
Certainly, with ST projects we put more of an emphasis on DD in the regulatory areas than with more traditional structures.
5. How to do post-investment management of overseas projects?
As “China experts” we see our value add as helping a project to enter and scale into the Chinese markets. Many of the projects we partner with come from small countries with great technology like Switzerland, Finland, and the UK. Since these countries are small, the project teams often need to select other markets where they can introduce and scale their technology and reach large amounts of people. We help them to do this by introducing them to our network, people who see the value of their solutions and are willing to use them to solve pain points in their businesses.
6. How do you view the investment environment in the digital security market in Asia?
Increasing regulatory clarity is making the Asian digital securities ecosystem stronger and stronger as more projects, both western and eastern begin to see the market opportunity in Asia. Additionally, Asian VCs have begun to see the potential of digital securities and have begun to invest heavily in infrastructure. These two items, along with the hassle of structuring and raising funds in jurisdictions such as the U.S. have begun to shift the center of the digital securities ecosystem towards Asia.
The Asian ecosystem is still searching for a use case on par with the success of the tZero fundraise in the United States; however, we see numerous high quality projects in Asia that can lead the way.
7. Does Sino Global Capital currently have an investment plan in China? What potential do you think China has in the digital security industry?
China has always been pro blockchain even referencing blockchain as a “breakthrough” technology in China’s 13th Five-Year Plan. Additionally, as leaders in the technology field there is a huge base of motivated Chinese entrepreneurs with strong technical backgrounds. Finally, over 29 provinces and local governments in China have issued their own regulations supporting blockchain development, creating blockchain innovation labs, and even introducing VC style funds to fund promising projects. That’s why I think going forward we will see strong projects focusing on the digital securities space come out of China.
In the medium to longer term, I think there will be massive changes in the way that assets are traded. I think instantaneous settlement of trades will be demanded by consumers and I see China being willing to adopt technologies that represent mutual value adds for consumers and businesses.
8. Many people think that the biggest problem facing the global digital securities industry is the lack of liquidity. What do you think? As a well-known investment institution in the digital securities industry, how do you think this problem can be solved?
The digital securities industry is so young, it truly is in its infant years. To date, there are huge gaps and infrastructure needs in the digital securities ecosystem that have not been filled.
One of these gaps is exchanges; lack of exchanges has resulted in a lack of liquidity in the ecosystem. There are very few options to trade and those platforms have low liquidity and offerings. Additionally, most current platforms, such as tZero, are not exchanges, but rather Alternative Trading Systems (ATS), which is essentially an order matching system and is used in traditional markets to supplement exchange liquidity by catering to specialized traders and market participants.
However, there are numerous projects that are seeking to become digital assets exchanges. Two projects we are excited about are SEFtoken and TokenMarket which both come from tier 1 regulatory jurisdictions and have vast experience with blockchain and digital assets.
Once exchanges begin to come online, we will finally have an infrastructure piece that projects seeking to raise capital, regulators, services providers, traders, etc. can all gather around.
9. What scale do you think the global digital securities industry will reach in 2019?
I think 2019 being the year as the “year of the security token” was likely premature. However, I think that there are talented entrepreneurs who are heads down working hard to fill the gaps in the ecosystem and who are working hard with regulators to build understanding of the technology. Furthermore, large institutional type entrants have begun to enter the digital securities space to future proof their value propositions as companies. This has the positive effect of increasing interest, talent, and capital that is allocated to the ecosystem and is a huge positive.
As far as the Asian ecosystem is concerned. I see a lot of fantastic infrastructure projects (especially exchanges) being built and raising capital. My prediction is that one of these projects will turn into the use case Asia needs to catalyze the Security Token ecosystem and bring a wider group of participants into the fray.
Thank you for the interview!
- Check Chinese version of this interview here
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