Tokenized Debt Security — Tapping Into The “$415 Billion” Private Debt Securities Market

May 29, 2019 · 6 min read
Image for post
Image for post
Photo by frank mckenna on Unsplash

U.S.-China trade war is on again.

With recent discussions of U.S. President Donald Trump imposing tariffs on $250 billion of goods from China this May, will Beijing sell off its $1.1 trillion U.S. treasury securities in holding?

A recent Forbes article concluded that it will be a no-go for many reasons. With one of the key reasons being that flight-to-safety is not an option, “demand for U.S. debt tends to rise in the midst of global crises. U.S. treasuries are considered the safest assets in the world, so investors often turn to them during times of financial strain.”

This leads to the next question, which is given a generally uncertain macroeconomic backdrop, how can investors diversify global investment risks?

Image for post
Image for post
Photo by Brandon Jacoby on Unsplash

During a recent interview with World Blockchain Forum, CEO of Cadence, Nelson Chu, shared his thoughts on the current status and outlook of tokenized securities, cryptocurrencies, and stablecoins.

Image for post
Image for post

Nelson is the founder and CEO of Cadence the leading digital securitization and investment platform for private credit. He is a 3x startup founder with several years of experience at financial institutions including Bank of America and BlackRock. Prior to Cadence, he founded a strategy consulting firm specializing in helping companies build products and raise capital for growth, creating over $1B in equity value. He currently serves as an advisor to an ultra high net worth family office and is an active angel investor, with notable investments including BlockFi, Cadre, dv01, and Uala.

According to Chu, Cadence is “a digital securitization and an investment platform for private credit — by vertically integrating the securitization process from start to finish.”

With the Private Credit Market being the “fastest growing market in the private capital market,” the interesting thing is right now, there is “$415bn cash” sitting on the sidelines, waiting for investment opportunities.

Interesting Fact 1: US stocks tumbled this month after China retaliated with imposing tariffs on $60 bn of US goods, the cryptocurrency market displayed a rally. Notably, Bitcoin climbed above $8,000.

Image for post
Image for post
Photo by Roberto Júnior on Unsplash

A World Without Yield

In an increasingly yield-starved macroeconomic environment, investors globally have been in full pursuit of finding alternative sources for yield. Specifically, investors are looking for yield outside of the traditional asset classes that demonstrate low corrections to broader equity to debt markets.

Compared to the stock market, Cadence’s tokenized debt securities are comparatively “not tied to” what the general macroeconomic outlook is.

The debt securitized by Cadence are not conventional investment vehicles but hold all the same attributes of a debt instrument. As Chu mentioned, the tokenization debt are also fairly standardized at Cadence since all debt deals they do involve maturity, a yield, an underwriter, and servicer.

“You have people tokenizing real estate, companies, and funds, when the reality is that debt is actually what makes the economy grow. So we felt there was a tremendous opportunity here to securitize and digitize debt.”

Image for post
Image for post
Photo by Wojtek Witkowski on Unsplash

Interesting Fact 2: Tokenization among a variety of assets classes has gained meaningful traction since 2018. In fact, a $30M luxury Manhattan condo development was tokenized on the Ethereum blockchain in 2018, making it the first major asset in Manhattan in history to be tokenized on blockchain.

The potential for tokenization of well-performing debt instruments that have traditionally lacked liquidity is tremendous. Alternative investments can offer a shorter duration for investors paired with a higher yield.

“It is about giving the investors what they want. When there is hyper-volatility and a general sentiment of risk, investors tend to want more liquidity, alternative investments like what we offer at Cadence have durations that are as short as 30 days.”

Image for post
Image for post
Photo by Thomas Drouault on Unsplash

Both Institutional and Retail Audiences Welcome

Cadence’s target market includes both institutional investors and retail investors.

According to Chu, Cadence’s services actually look the most like what is called “commercial paper,” but their asset-based commercial paper is fairly unique with 30 day, 60 day, 3 months, 6 months, or 9 months maturities.

“I think there is tremendous opportunity on both sides. We strive to create the innovative products on the market that we think will generate the highest interest and we will continue to adapt accordingly.”

Image for post
Image for post
Photo by Andrew Wong on Unsplash

A New Payment System — Bitcoin or Stablecoins?

With the development within the cryptocurrency market, such as Facebook rolling out “Globalcoin” and WholeFoods now accepting Bitcoin, Chu shared his thoughts on cryptocurrency payments.

Above all else, Chu mentioned a critical point about this phenomenon is that in order to have a payment system that’s effective, “stability is key.”

“In general, payment systems need to have stability in order to be viewed as an effective means of transacting. The volatility of cryptocurrencies both up and down makes it very challenging and leads to vendors not wanting to take it in downturns and buyers not willing to part with it when it’s on the upswing.”

Image for post
Image for post
Photo by Colton Duke on Unsplash

For the global economy, it is hard to decide whether or not Bitcoin will become a “payment gateway.” There are a lot of factors needed to be considered, such as transaction volume and scalability. In addition,

“Stablecoins are here to stay, but stablecoins need to actually be more stable.”

The tricky question about stablecoins is even if they are backed by fiat currencies, “they have to be actually backed by a dollar.”

“Stablecoins that are backed by fiat currencies theoretically should be the most stable. But take Tether as an example — that stability goes away once people begin to think that it’s not really tied 1:1 with USD. So the critical question that needs to be answered is what exactly is backing these assets.”

Image for post
Image for post
Photo by ben o’bro on Unsplash

Final Note: Yield On The Horizon

“Securitization is always one of those things that I felt would be one of the best use cases of blockchain technology.”

Chu explained that securitization is something that is meant to be on-chain — not necessarily a public ledger, but more of a permissioned ledger. With a central source of truth for all asset level performance data, the entire ecosystem of originators, banks, rating agencies and hedge funds can all reference the same data to diligence, price and invest in structured products.

“We are in a golden age of Fintech… whether it is blockchain, cryptocurrency, or ledgers, all of it is here to stay. But which project will ultimately pan out, it is anyone’s guess as we’re still very early in the cycle.”

Image for post
Image for post
Photo by Todd Quackenbush on Unsplash

Cadence will announce several key institutional partnerships in the next few weeks. These partnerships will be “instrumental” in getting the adoption, the awareness and the actual acceptance of this type of assets at “a much broader scale.”

Conclusion: With a yield-starved global investment audience at hand and the mainstream adoption of tokenized securities on the horizon, Cadence is well positioned to lead investors to a new source of yield.

Company: World Blockchain Forum
Disclaimer: The content is for informational purposes only. This is not investment advice. I have no positions in any cryptocurrencies or related securities mentioned, and no plans to initiate any positions within the next 72 hours.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store