As people who work at a transfer agent and data management company, we are laser focused on data. Shareholder data, equities & stock records, primary issuance, estate transfers, change of ownership due to gift or private purchase, secondary trades, the source of data, the owner of the data, who makes use of the data, you name it.

Private markets suffer from a severe data problem: information asymmetry, no transparency, and no ability to share data seamlessly across multiple parties. There has been an enormous effort to streamline capital markets activity, indeed the world is able to operate financially in a way previous participants never could have thought of. Imagine trying to explain high frequency trading to someone alive in 1950. This is the beauty and wonder of technology. We simultaneously create and solve new challenges as we bring new technology into existence. It’s incredible and we love that we get to experience it.

We’re on the precipice of seeing the complete transformation and emergence of private markets onto the world stage. Admittedly, it will take some time for private markets look like public markets with regards to the volume of liquidity, activity, and secondary trading, but that’s the future the digital asset ecosystem is working to create. Getting not only to watch, but actually participate, in this process has been incredible to say the least.

Being up close and personal has afforded us the privilege to observe the differences between the public and private markets. It’s these core differences we’ll discuss today.

Before we begin, let’s level-set on several definitions that will aid us in our examination of public stock market activity vs. private secondary markets via the alternative trading system, abbreviated to “ATS”.

Registered Shareholders

Registered shareholders are those who’s names are directly registered with the company on their cap table under their name. The most obvious example of this is where public companies issue stock options or RSU’s to employees, upon vesting and exercise, those employees are added directly to the cap table by the transfer agent as shareholders. So John Smith, as an employee of Apple, is given shares as part of his compensation, and Apple instructs ComputerShare, their transfer agent, to increment those shares in John’s name on their cap table once he’s exercised and is a common stock shareholder.

Street Name Ownership

Through street name ownership, we come to the case where the name on the cap table is not the end user who benefits from the financial instrument, but rather a third party, like a bank, custodian, or broker. This introduces the concept of the “beneficial owner” of a security. From Investor.gov we get the following definition:

A beneficial owner holds shares indirectly, through a bank or broker-dealer. Beneficial owners holding their shares at a broker-dealer or bank are sometimes said to be holding shares in “street name.” The majority of U.S investors own their securities this way.

If John Smith was to go to his broker right now and purchase Apple stock, the de facto standard is for those securities to be incremented on a cap table in the name of the broker, say Fidelity, not the individual name of the investor. The “street name” owner is Fidelity, while the “beneficial owner” is John Smith. This will be critical since the differences in trading models and environments between public and private markets equate to a sharp contrast, as well as an interesting opportunity.

To start, let’s review how an investor actually purchases a security in the public markets as a contrast to how private markets work.

Buying a Public Security — An Overview

When buying Apple, here’s what your experience might look like:

• Investor logs into their broker
• Selects the security to purchase, in this case AAPL
• Brokers go to the stock exchange where that security is listed, in this case Nasdaq
• Broker buys the security on behalf of the investor
• Broker informs Transfer Agent that they (the broker) need to increment their total ownership of AAPL shares
• Transfer Agent records the updated purchase on their books in the Street Name owner of the Broker

Note: In reality most large brokers actually cache and store blue chip securities like Apple, and sell them directly to the investor when buy orders come through rather than needing to go to the Nasdaq for the purchase of the security from another broker, but we leave it like this to highlight the more complex case. In the cached example, the broker simply updates their internal ledger to reflect the change in beneficial owner from the broker to the investor, and both Transfer Agent and Issuer still have no conception of who the beneficial end investor is.

The thing to note here is that the transfer agent, and by association, the issuer themselves, has no direct relationship with the beneficial shareholder. The broker maintains control over every part of what the investor experiences, with the transfer agent and issuer kept in the dark about who that end investor is. If the issuer wants to know who is holding shares in the street name of the broker, they have to approach the broker directly and request it.

According to FINRA, there are roughly 3400 brokers in the United States, and while not all of them offer or emphasize NMS public market securities to their customers, many of them do!

Imagine the logistical nightmare of going one broker at a time and trying to gather the list of investors that have purchased and are holding securities in the street name of their brokerage. At any level of scale, you’d need multiple full-time employees to manage that tedious process.

A Singular Trading Venue

An important consideration in public markets is the fact that while there are many different brokers that investors can engage with to purchase securities and financial products, there is only one trading venue — the Nasdaq.

Apple is listed on Nasdaq, and not on the New York Stock Exchange, Boston Stock Exchange, Chicago Mercantile Exchange, or any others. This means that handling trades between brokers, who then turn around and offer those securities to their customers, is relatively straightforward. Nasdaq is the ultimate authority as the nationally registered stock exchange and trading venue for AAPL.

Dual Listings

There is a one caveat to what we present here around public securities, and that’s the dual listing. While exceptionally rare, it is possible for companies to list their equities on multiple stock exchanges simultaneously. Dual-listed companies, abbreviated to DLC’s, often use this dual listing mechanism to support trading in multiple jurisdictions, but it can also be done simultaneously on multiple domestic stock exchanges as well. For example, Barrick Gold is a dual-listed company, trading on both the Toronto Stock Exchange in Canada as well as the New York Stock Exchange in the US.

A recent example includes Nasdaq-listed Nutriband performing a dual listing on the Upstream app, underpinned by Horizon Fintex (providing NFT support) and MERJ Exchange, a regulated digital asset securities exchange based in Seychelles.

According to the Corporate Finance Institute, “Any company that is listed on more than one exchange must fully comply with the legal and listing requirements of all the countries and their respective exchanges that it is listed in. Complying with the regulations of only one of the countries or exchanges is not sufficient.” This means added complexity in following different compliance and reporting standards, which seems to be the primary deterrent for even the largest and most profitable of companies. One example was Charles Schwab, who was at one point, listed on both the NYSE and the Nasdaq. They have since delisted from NYSE (in 2005) and now trade exclusively on the Nasdaq.

Whereas proximity used to mean an advantage (you had to physically be on Wall St. to participate in market activity), the vast amount of digital infrastructure and work done in building out the large stock exchanges in the US mean that brokers, custodians, and retail investors have the ability to find and purchase securities despite there being multiple venues for trading. This has effectively rendered domestic dual-listings unnecessary.

Buying a Private Security — An Overview

An investor wishing to purchase ACME shares would experience the following:

• Investor goes to the executing broker dealer
• They place an order to buy ACME shares
• The order is routed to the ATS, the sole ATS of record for Acme
• The match is sent back to the broker
• The broker, if self clearing, allows the securities to move from seller to buyer and cash from buyer to seller
• The purchase and associated information is only sent back to the transfer agent should the investor initiate a withdrawal
• Vertalo as the transfer agent maintains a complete record of the full cap table, including the street name owner of the custodial broker, but has no insight into who holds shares within the omnibus holding listed on the cap table

Note: We’re highlighting how this works in Model #1 of our article, The 4 Unique ATS Models of Trading Secondaries, below. Of course there will be subtle differences should you employ one of the other models, but at a high level this is accurate to how the trading process works for privately held shares trading on an ATS.

The core difference here is that the ATS, the party responsible for handling order matching and trading, is far more ubiquitous than a nationally registered stock exchange. As of this writing there are 68 outstanding ATS licenses in the United States, as compared to 13 national stock exchanges.

If the executing broker is a special purpose broker dealer, they have the ability to take custody of the asset, necessitating a deposit from the transfer agent or issuer directly, into the broker-dealer’s possession. When this occurs, the shares move into the street name of the executing broker, and the identity of any new purchasers remains a mystery to the transfer agent and the issuer.

Now to be fair, if you as an issuer have a BD/ATS that has listed your private security for trading, and the cap table reflects the name of the broker due to the Street Name vs. Beneficial distinction, the trading and maintenance of the security and your investors is relatively straightforward. You would have a “split ledger” scenario where the cap table is divided between the registered shareholders at the transfer agent and the deposited shares held at the BD/ATS, so collecting a comprehensive list of shareholders becomes a gathering exercise, but not one that’s overly exhaustive or complex.

The question to ask here is, what happens if you list an asset on multiple ATS’s simultaneously? What happens the issuer would like to increase liquidity by bringing multiple ATS’s to the table?

Remember — there is only one Nasdaq. Except in the dual listing case, for all public companies there is only one trading venue for their securities, even if there are many unique venues for purchasing those securities. So what could listing on multiple ATS’s mean for issuers?

Multiple Trading Venues

Adding a second ATS into the trading mix introduces new, interesting, and unique challenges. Assuming the model is one whereby the transfer agent maintains the Good Control Location, one challenge includes race conditions, where two competing trading venues might try to simultaneously trade the same security held by one party, effectively leading to the double spend problem.

Consequently, the double spend problem is one of the primary challenges blockchain sought to solve for coming out of the Global Financial Crisis in 2008. It’s poignant that we’re here now, able to use blockchain technology to account for this, but it’s a tricky technical challenge nonetheless, especially where reporting is concerned for failed or rejected trades.

If an issuer wants to dual-list their shares, why not just tranche it out? Create one tranche or class per ATS, then list each respectively. Wouldn’t that solve the race condition and/or double spend problem?

Perhaps, but it might also bring with it problems around the bid density and depth, as well as equity management. In order to properly tranche out a dual listing, the securities might need to be different classes. This market is still young, so breaking up otherwise concentrated orders would not be the best approach to adding liquidity.

Additional Considerations

If an issuer was to dual list their securities, FINRA’s Rule 5310, Best Execution and Interpositioning, a detailed rule requiring trading venues to seek the best price for a security, might also come under consideration. Rule 5310 “…requires that, in any transaction for or with a customer or a customer of another broker-dealer, a member and persons associated with a member shall use reasonable diligence to ascertain the best market for the subject security, and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.”

This requirement has largely prevented dual listing of securities on ATS’s, as well as market making in the private digital asset securities space, since aggregate data feeds would have to be built to each ATS where the asset is listed. Typically this is handled by a Securities Information Processor, or SIP. To our knowledge, no singular player currently exists to perform this function within private markets.

If you’d like additional information on the role of SIP, Polygon.io has a great breakdown and description of how SIP’s function.

Why run a dual-listing on different ATS’s?

A simple Google search of this question yielded these results:

1. Access to a broader investor audience

One of the reasons a company may resort to dual listing is the opportunity to raise more capital. It provides the company with access to a larger investor base by tapping into the existing customers of multiple BD/ATS partners simultaneously.

2. More overall liquidity

Additionally, dual listing increases the overall liquidity of the traded stock. It allows a larger number of participants to engage in the buying and selling of the stock.

3. Broader trading windows

Furthermore, if a company is listed on an exchange in a different time zone, it provides participants opportunities to trade more often within a given 24-hour period. While there can be restrictions for trading windows of securities, certainly having operational windows that span the continental United States could be useful and unlock liquidity.

A more in-depth answer might be that in order for private markets to attain a healthy amount of liquidity, we’re going to need the market architecture and support necessary to create depth and healthy activity. Everywhere we look we see mention of the fact that private markets lack maturity and depth, and it’s precisely this void that those of us in this space are seeking to fill.

The Case for Lookthrough

We’ve established that private markets are still fragmented, and that a scenario whereby an asset could be listed on multiple ATS’s simultaneously is possible, albeit technically difficult. Now we’ll make the case for lookthrough into holdings held at a special-purpose broker-dealer or custodian.

Lookthrough is defined as the ability to pierce an omnibus holding (the street name owner on the cap table) and break out an omnibus or commingled singular holding into the holdings of each investor respectively. Technically this would simply require an API integration allowing a third party, like a transfer agent, access to see who holds what within the omnibus holding on the cap table.

One of the primary reasons companies who trade their assets on an ATS engage with Vertalo as their Transfer Agent is the fact that Vertalo’s technology can support beneficial ownership lookthrough, via API integration, with the ATS of record for that security. This has been one of the top named reasons existing customers of ours chose to migrate away from their existing transfer agent, in some cases legacy players with many clients, over to Vertalo. Lookthrough, and a consolidated cap table, is of the utmost importance.

But why should an issuer want to know who every beneficial shareholder is?

For this answer we turn briefly to the crypto space. We absolutely love the crypto industry which is what makes it so interesting to watch the passion and zeal with which investors defend their projects.

No where has this been more apparent than the NFT market. Buyers of these NFT’s had the ability, through the purchase and ownership itself, to join a club and participate in an exclusive community. We’ve tried, unsuccessfully, to find this video, but we remember seeing a Bored Ape Yacht Club (BAYC) owner and this was their experience:

• They arrived at some exclusive party in NYC
• While waiting outside the party, they signed a transaction with the wallet that held the BAYC NFT, and
• The door to the party was automatically opened and the NFT holder was allowed access because he proved, cryptographically, that he was a community member and NFT holder

It was straight out of Minority Report!

This cool technical experience aside, as an issuer, we want shareholders to have unique benefits. We want to establish a relationship with them that extends beyond simple ownership. We want them to have a vested stake in our activity as an issuer. In order to do that, we need to know who the end beneficial owner is.

While we don’t have hard data for this opinion, one thing we’ve noticed is that many who hold Apple stock also use Apple products: the iPhone, Macbook, or Apple TV. The same can be said of Tesla, many who drive Tesla cars also own Tesla stock. Of course, not everyone who owns Tesla stock drive Tesla vehicles, certainly the bull run of 2021 led to much speculation around TSLA specifically, but there’s something to be said for the value of your users and your shareholders being one and the same.

As an issuer, we want our shareholders engaged. We want their full buy in. We want them to talk about me to their friends, colleagues, and anyone else who will listen. We want them to feel like they’re a member of an elite community for buying our equity. This requires us to create and maintain a relationship with them.

We can already see the job title: Director of Investor Experience.

In a BBC documentary from 2011, neuroscientists noticed that Apple users defended Apple and its products with the same zeal as those who defend their own religious beliefs. That level of user commitment is something issuers could aspire to.

See: Apple Causes “Religious” Reactions in Brains of Fans, say Neuroscientists

Our ability to succeed as a company very well could hinge on our users and/or shareholders being fully bought in. And we want to create community and engagement like Apple, to spread our products or services via word-of-mouth advertising through our user/shareholders.

How does lookthrough work?

We imagine this breaking down in one of two ways. The first would be the where the transfer agent serves as the central repository of shareholder information, no matter how many ATS’s are trading the issuers asset like such:

Since registered shareholders will already be listed with the transfer agent, a logical place for lookthrough to occur would be at the transfer agent, as depicted in the diagram above. An issuer could list on as many ATS’s as they like, and require the ATS to offer lookthrough to the transfer agent as part of their listing. The transfer agent could then architect lookthrough with the ATS directly, allowing them to see both the Street Name of the custodian or custodial broker, as well as the ultimate prize of who the beneficial shareholders are at any given point. Executed trades and new shareholders coming within the Street name owner could be a simple API call from the ATS instructing the transfer agent that a new shareholder exists.

We refer to this as the “Shareholder table” rather than the cap table, since legally and definitionally, the cap table will be registered shareholders plus street name omnibus shareholders, so referring to the beneficial owners within an omnibus holding as “on the cap table” would not be correct.

Currently, Exodus’s Common Stock, trading on both the tZERO ATS, as well as Securitize Markets, fits this overall model, with the Securitize Transfer Agent sitting in between this process. Jonah Schulman, from Security Token Market, actually performed an arbitrage of a single share of Exodus off tZERO and onto Securitize, where it was trading at a premium (a $6 / share premium in fact) earlier this year. Securitize even has a breakdown of competitive pricing for why their ATS is preferable for investors. When service providers compete, prices come down, quality of service goes up, and that value is returned to the investor/end user.

Security Token Market Sources: Exodus Is Poised to Make 2022 Its Year, Tokenization in 2022 Review, Whoa, is it possible to arb security tokens?

The second model that could work to support lookthrough would be one whereby a single ATS is able to architect lookthrough themselves, then relaying new shareholder information to the transfer agent upon receiving it.

Why include the transfer agent as holding these records if the Master ATS will already maintain a full ledger? This comes down to the division of responsibilities, since the primary function of an ATS is order matching and trading, whereas the primary responsibility of a transfer agent is bookkeeping and shareholder ledger management.

The primary benefit here would come down to liquidity and the ability for dual (or triple, in the case of the diagram) listings to support market liquidity and depth. This would include order routing and best execution provisions, which would also require a SIP, but at a high level this could play a significant role in the private securities space. Indeed one of the missing elements in private markets is the support from, and technical integration of, market makers, non-technical brokers, and other liquidity providers like what exists in public markets.

Direct ATS → ATS integrations like this could radically enhance liquidity and market activity for every participant and variation thereof (brokers, issuers, banks, custodians, market makers, transfer agents, etc.). As ATS’s specialize, the ability for unique and new audiences to get access to new products could open up new relationships for all parties.

Lookthrough and Privacy

We can hear naysayers winding up — “This is all well and good, but what about privacy? What if shareholders don’t want their information recorded on the cap table, but would rather have their name listed in Street Name ownership only?”

This feels like a solvable operational challenge to me, since the primary benefit for lookthrough comes down to a more formal and individualized relationship with the end user. If that beneficial shareholder doesn’t want any sort of relationship beyond owning the product itself, they could certainly opt out of communications and/or contact from the issuer.

As privacy minded individuals, we personally wouldn’t want to share our securities purchase information either, so we completely respect this position. If we were supremely concerned with a private purchase, a well-designed corporate structure could be deployed to maintain our privacy.

Conclusion

While the private secondary market is growing every day, it still largely suffers from fragmentation, illiquidity, and information asymmetry. Issuers often don’t know who beneficial shareholders are, leaving them only able to use third parties to communicate with shareholders rather than host the communication directly.

There is power in crafting and developing a unique relationship with a shareholder, especially where new products, services, features, or feedback, is concerned.

Lookthrough into custodial accounts is one method to accomplish this. If properly implemented, it could provide issuers with powerful shareholder data, giving them access and key insights into their users and allow them the ability to include those shareholders on their journey. Private markets have an opportunity to create and offer direct relationships between issuers and investors, and we’d love to see what it could mean for participants in the space if we’re able to build it.

Till next time.

Disclaimer: We are not attorneys, broker-dealers, investment advisors, or wealth advisors. Nothing presented herein is nor should it be considered as legal, professional, business, investment, or any other kind of advice. The information presented here is done so for educational, informational, and entertainment purposes only. Always consult a licensed professional before taking professional, investment, or legal action.

We remember back in January of 2018 when we stumbled across an article about what blockchain technology could do for private assets and capital markets. From asset tokenization, to automated KYC via smart contract, to secondary trading, this article laid out the vision of private markets that many of us had shared for a long time.

Note: We’ve tried to find that article, we believe it was Forbes, but it could have been another large financial publication, but we cannot seem to locate it. Another otherwise great piece of content lost to the vast internet. 🤷‍♂️

Assets that could trade between users, middlemen being cut out due to optimization of technology, processes being streamlined, the list was impressive, and probably threatening to many who operate in this space. We’re just now seeing those promises fulfilled, and it’s the reality of how this industry works that we want to highlight here.

The boom of blockchain-enabled securities has really focused on a singular vision: Liquidity.

It’s the challenge for the entire private asset market. The private markets are anywhere from 3–5X larger than the public markets, but are 400–500X less liquid. The private capital markets raise double the amount of capital, and yet are hundreds of times less liquid.

Source: Harmonization of Securities Offering; Setter Volume Report FY 2018, World Federation of Exchanges database Note: Figures as of 2019

Private markets are plagued by:

• Systemic friction
• Information asymmetry
• Siloed information (investors don’t know where to look to find interesting deals, if you’re not an insider, you simply don’t hear about it)
• Paper processes that are outdated, unnecessary, and irrelevant (looking at you Medallion Signature Guarantee, or the drawn-out ROFR process)
• Lack of liquidity
• Illiquidity discounts (these instruments stay locked up, so the only buyers that want to buy do so at a large discount, leaving the seller with no option but to take a substantial discount to NAV to unwind their position)

Note: the typical method for secondary liquidity is through secondary market transfers and trading, whereas we believe the future method will be collateralized lending against privately held assets. That brings its own challenges, for this piece we’ll focus exclusively on secondary trading as the fulfillment of the liquidity promise.

Currently, if you want to transfer or trade a privately held asset maintained entirely by the issuer, you’ll be stuck with a papered process that can take weeks, or even months, to complete. Can you imagine getting a notification from Fidelity, Robinhood, or Schwab multiple weeks after the fact that the sell order you posted had been settled?

The Illiquidity Discount

The penalty for private assets that are illiquid. We’ve spoken with real estate operators whose investors suffer from the illiquidity discount if they ever come to unwind their position. In one case, an investor who had bought into an otherwise stable and solid commercial real estate asset ended up with a 38% discount to NAV in order to liquidate his position early. Insane.

Also, companies are staying private for longer

The most straightforward and understood method for liquidity is to go public. But this brings specific challenges too. We know for a fact that Intel’s legal and investor relations teams spent between $3–5 Million dollars per year on filing requirements and public company reporting compliance alone. And that’s perfectly in line with what the research reflects.

Simply put — it’s expensive to be a public company. There are filing requirements, disclosures, investor protection provisions, added personnel to support this compliance, you name it. Due to this, increasingly, we are seeing companies stay private for longer. Commissioner Caroline Crenshaw of the SEC noted that “The number of private companies is growing and they are staying private for longer….” in April 2022 in her remarks at the symposium on private firms.

History side note: With public companies, the Securities Exchange Act of 1934 outlined the requirements and required registration of stock exchanges on a national level. Before this, many cities in America had their own stock exchanges. Even obscure places like Salt Lake City had their own stock exchange known as the Intermountain Stock Exchange. San Francisco similarly had their own Stock & Bond Exchange. Kinda neat.

If we can solve the liquidity problem, it stands to reason that we could eradicate, or at the very least, dramatically reduce, the illiquidity discount that often plagues private markets.

The question here is, how does one attain liquidity for private held assets? They are, after all, securities, and thus must be treated as such. This means that simple blockchain enablement via the ERC20 or similar standard will not work. The upgraded and enhanced treatment of these instruments is required, since they are not widgets you are buying on Shopify, but securities, subject to all securities regulations that have been established. This includes investor protections, anti-money laundering checks, know-your-customer rules, and many others.

We can’t tell you how many conversations we’ve had with operators who are passionate and believe blockchain can solve the liquidity problem for a private asset, like real estate, only to learn that since these are securities, the treatment is completely different from cryptoassets like Bitcoin or Ethereum. Many ask about enabling decentralized trading of these assets, like on a Uniswap or SushiSwap type of exchange, but that isn’t legal in the United States. Indeed, Kim Kardashian’s $1 Million Fine Could Impact Uniswap, SushiSwap And Other Decentralized Exchanges.

A famous example of securities trading outside of a regulated exchange was in 1999 when the SEC filed suit against 3 Individuals for attempting to sell securities on eBay.

eBay is not a registered stock exchange or brokerage firm. By law, you cannot sell securities on their platform just like you can’t sell them on Binance, Coinbase, Uniswap or any other crypto exchange. The matching of buyers and sellers for securities transactions is a highly regulated activity. So the question stands — how can we attain liquidity for private assets without acquisition or IPO?

Enter the alternative trading system (ATS).

We won’t get too detailed into the history of alternative trading systems, although a good friend wrote an outstanding piece on Alternative Trading Systems, feel free to dig into his treatment of them there.

At a high level, ATS operators are registered members of FINRA, they are broker-dealers, and are subject to reporting compliance and standards similar to national stock exchanges, although admittedly the reporting standards are less stringent than stock exchanges like the Nasdaq or NYSE.

At their core, ATS’s have the regulatory ability to match trades of buy and sell orders between investors in an asset. This trading activity is one of the primary ways the digital asset ecosystem is seeking to solve the liquidity challenge. Like a “mini IPO” of sorts, where the issuer can list on an ATS but still remain a private company.

Since the introduction of blockchain-based securities trading on ATS’s, FINRA has released two different models for how to trade and settle tokenized private assets compliantly. These are the 3 Step Process and the 4 Step Process.

We believe the real intent in laying out the 3 vs. the 4 Step processes comes from a desire to separate interests and responsibilities for the various actions that occur within the trading and settlement processes. Indeed Gary Gensler himself has commented on the problematic fact that crypto exchanges are unilaterally performing the following functions:

• Order matching & trading
• Clearing & Settlement
• Collateralized lending
• Account management (largely a brokerage function)
• Cash management & money transfer agency

In the world of securities, these functions are almost all distinct and performed by different entities, which helps to separate and divide the interests of each party involved. Most investors are unaware of this fact, since technology, integration, and a lot of existing infrastructure makes the purchase, sale, lending, margin, trading, clearing, and settlement, of securities seamless and easy. ATS’s operate within the existing FINRA frameworks to divide the interests of these activities and legally trade, settle, and clear securities.

Here is how both processes work.

FINRA 4 Step Process

Step 1. The buyer and seller send their respective orders to the ATS

Step 2. The ATS matches the orders

Step 3. The ATS notifies the buyer and sellers of the matched trade

Step 4. The buyer and seller settle the transaction bilaterally, either directly with each other or by instructing their respective custodians to settle the transaction on their behalf.

In the 4 Step Process, buyer and seller are required to interpose themselves, not only to initiate a trade as you’d expect, but also to confirm that cash should move. They either interact with one another directly for the purposes of moving the cash from buyer to seller, or instruct their custodian(s) to enact the movement of money, after which the securities can move from seller to buyer.

This creates enormous friction and an unpleasant user experience, since it introduces counter-party risk. ATS’s that operate this model typically create rules around the communication of cash settlement, in order to facilitate trades more seamlessly. If buyers and sellers in this process are institutions, brokers, banks, or other large players, this isn’t as much of a problem since there will be an employee (or team) who’s job it is to handle these instructions. It’s the retail case where this model displays its ineptitude. Imagine instructing retail investors to a. send cash to the seller, and b. send the security to the buyer, OR to post a trade, then confirm with their custodian or on their own that it was legitimate and yes, please allow the movement of cash & securities. Not an ideal user experience.

FINRA 3 Step Process

Step 1. The buyer and seller send their respective orders to the ATS

Step 2. The ATS matches the orders

Step 3. The ATS notifies the buyer and seller and their respective custodians of the matched trade and the custodians carry out the conditional instructions

The difference here is that the ATS, not the investor themselves, is able to instruct the custodian to move cash and securities respectively. It’s simpler and produces a far better user experience that is closer to what retail investors have come to expect from public markets. It also reduces the counter-party risk introduced in the 4 Step Process, since instructions are sent to to the custodial partner, who can follow them explicitly thereby reducing the possibility that buyer or seller back out of the trade after it’s been initialized. We expect the lion’s share of the growth in the digital asset securities industry to be through ATS’s using the 3 Step Process and automating the process on behalf of retail investors.

Remember the cardinal rule of user experience — “Don’t make me think.”

Before we dig into the models themselves, there are several critical elements that must be considered when examining how securities are traded and settled, in both the 3 and 4 Step Processes. Those considerations are:

• Good Control Location
• Cash Settlement
• Update Balance Instructions
• Asset Custody

Good Control Location

We’ve written on the Good Control Location (GCL) in a previous post, but this strikes at the heart of the SEC’s goals to protect investors. It includes provisions that protect investors from their securities being lost, destroyed, or otherwise changed without authority. It also includes provision for the ability to unwind an illicit trade, or enact a transfer outside the permission of the investor (like an orderly estate transfer after death, for example). This is what makes digital asset securities so radically different from ERC20 digital bearer instruments on-chain.

The question here is, who maintains the Good Control Location over the securities? It can be:

• a custodial broker
• the transfer agent
• the issuer themselves
• or a registered custodian, wholly separate from the broker

Additionally, if the broker applies a custody model, there may be a “split ledger” situation whereby some of the ledger, and its associated Good Control Location is held by the Transfer Agent, and the GCL over deposited shares at the ATS are maintained by the custodial broker.

This custodial deposit function highlights the difference between beneficial and street name ownership, and it brings its own challenges of shareholder management and communication, but also additional benefits. The challenge is that there is no centralized ledger of full beneficial ownership but rather a fragmented one, because of how the deposit process and street name ownership works. If an issuer wanted to list your asset on multiple ATS’s for added liquidity and market exposure, the maintaining of your list of beneficial shareholders would become very tedious very quickly.

This is one of the biggest problems that public markets deal with, which we will give adequate treatment to in another post.

Cash Settlement

The second critical element is who handles cash settlement? If the broker is self-clearing, they can handle cash themselves. This eliminates the need for an outside custodial party and can simplify integration efforts between distinct entities, like the Transfer Agent, clearing broker, and ATS. For blockchain-based securities, the SEC does not allow a Broker-Dealer to perform cash settlements, thereby introducing unnecessary inefficiencies into this process.

If the broker is not self-clearing, this responsibility would fall to a custodian that is registered as a Licensed Money Transmitter or Money Service Business (MSB). They would be responsible for the movement of cash from buyer to seller, and relaying that information (purchase amount, date, confirmation of the movement itself) to the broker. This information must be recorded for securities purposes, as well as reporting & compliance. FINRA requires ATS’s to record and report on failed trades, for example.

Update Balance Instructions

The next critical element for consideration and is the core difference between the 3 Step and 4 Step Processes. Where do the instructions come from, which party, and what sort of sign-off or regulatory licenses are needed to certify legitimacy?

The reason this makes the cut as a critical element is that “update balances” is the same as certifying ownership changes — changing the cap table and recording new shareholder ownership. Once a share is owned by an investor, they have special protections and rights, as outlined by the capital stack and defined through the nature of the instrument and/or PPM or offering memorandum (is it profit-sharing, does it carry voting rights, etc.) Beyond these standard measures, shareholders usually have more firm and distinct grounds for legal recourse should they deem that necessary.

Asset Custody

Is the broker-dealer a custodial broker under the customer protection rule, 15c3–3?

Finally, we come to matter of custody. If the brokers take custody of the asset, and it’s a security token on-chain, they have to have blockchain infrastructure to support the proper custody and ledger management of the asset itself. This has been a huge hindrance to the growth and adoption of the digital asset securities industry, since many large brokerages, like all large companies, struggle to adopt new technology and build with/around it. It is growing though, as companies like Fidelity, NYDIG, Nasdaq, BlackRock, and others, are building digital asset strategies and engaging with the opportunity in this space.

Now that we’ve clearly identified the factors for consideration, let’s look at the each of the four models and consider how they work with regards to the required parties involved and the investor experience.

Model 1: Self Clearing Custodial Broker

In this model, we see a unique corporate structuring that allows the same parent company the ability to custody the securities under the Broker-Dealer entity, and then handle trading and order matching through the registered ATS. The parties are separate and distinct, but the Transfer Agent > Broker-Dealer integration, and subsequent end user experience, are much more seamless and pleasant.

In this model, the ATS simply exists to match orders between buyers and sellers, the rest of the process is handled in the Broker-Dealer’s environment.

Investors start either at Vertalo with a request for deposit, or at the broker-dealer themselves. With express permission from the issuer, Vertalo collects the deposit request from the BD on behalf of the investor. There are a number of elements we gather to ensure it is the investor acting themselves (collect signatures, confirm information like address and email address match, the ATS partner uses 2FA upon login, etc.) that allow us to streamline this process.

• Investors request deposit (either at Transfer Agent or from the BD directly)
• Transfer Agent receives the deposit request
• Transfer Agent verifies all information is accurate
• Deposit is submitted, cap table is incremented to reflect Street Name Ownership of the custodial broker
• Investors submit orders on Broker Dealer
• Orders are relayed to ATS
• Order match occurs at the ATS
• Settlement instructions are sent back to the broker-dealer
• Broker settles transaction through moving cash and securities respectively
• Trade is complete

Once deposited, the Broker Dealer holds the securities in Street Name ownership, and can handle the movement of cash and securities once orders are matched on the ATS. Since this is the same parent company, these integrations are easy to maintain, and the investor doesn’t have to log in to multiple locations to initiate the trade or send instructions.

Model 2: Non-Custodial ATS, Custodian Takes Deposit of Securities

In this model, the custodian is the king of the settlement process by handling the custody of securities and movement of cash between buyer & seller in the secondary transaction. The ATS fulfills order matching, and the ledger is kept, but only contains the names of those who are registered shareholders, since the line item entry for all shares held through the custodian are listed in the name of the custodian.

Like Model 1, there is a depository process whereby the investors balances are moved from the Transfer Agent to the Custodian. This allows the ATS to query those balances before a trade is initiated to guarantee that shareholder is, in fact, long the balance they wish to sell. For any investor wishing to purchase, no such query need take place, although there may be restrictions that would necessitate that, such as a pull to see if a shareholder is restricted or otherwise barred from purchase. A common example of this is when employees are not allowed to own more than X% of voting shares of a company.

Here’s what the flow typically looks like in this model:

• Investors deposit shares to the custodial account
• Investors link their custodial account to the account at the ATS (this linking can be done asynchronously to the account creation at the ATS)
• Investors log in to ATS and submit buy/sell orders
• ATS queries custodian to confirm the selling investor is long the shares they want to sell, receives confirmation or rejection of the request
• Order is matched on the ATS
• ATS instructs custodian to move shares & cash respectively, receives notification that is has been done per the instructions
• Trade is complete

The “Update Balance Instructions” you see from the Custodian to the Transfer Agent is reflective of when investors wish to remove their shares from custody and transfer them back into their name directly. In this case, the investor’s share count is deducted from the omnibus custodial account, and they are added as the Street Name Owner of the security. This is not required, most investors would likely leave their shares in the Street Name Ownership of the custodian, but could still happen if the investor was keen to hold the securities in their name, say for shareholder voting purposes where the investor didn’t want the custodian to cast their vote as a proxy for the investor.

Model 3: Non-Custodial BD, Same Corporate Entity Behind BD & ATS

This model uses the 4 Step Process, requiring investors to settle cash between one another. Otherwise, it’s similar in nature to Model 1, in that a parent company holds both the broker dealer and the ATS, even though they are distinct and separate legal entities.

In this model, the steps are functionally the same as the previous models with regards to order matching, except that rather than query a custodian for long balance information held by investors, the broker queries the Transfer Agent directly, since they are responsible for the maintenance of Good Control Location.

The flow of steps might look like this:

• Buyer submits a buy order, shareholder submits a sell order (buy & sell orders can be asynchronous and unrelated to one another)
• The executing broker queries the TA to confirm the seller is long the number of shares they want to sell
• Orders are sent to the ATS for match
• Orders are matched
• Confirmation thereof is sent to the executing broker
• Broker informs buyer and seller for the purpose of cash settlement
• Buyer & seller handle cash settlement between one another directly
• Cash settlement is confirmed to the executing broker
• Broker instructs Transfer Agent to update the cap table with the requisite trade information (buyer information, purchase info, etc.)
• Trade is complete

The critical difference here is that since there is no custodian involved, there is no deposit process, and the Broker can communicate directly with the Transfer Agent for the purposes of maintaining the cap table and shareholder ledger.

The obvious flaw here is that of user experience, since the investors have to deal directly with one another for the movement and settlement of cash. The benefit, however, is that the Transfer Agent is always aware of what the shareholder ledger looks like. This is especially important should an issuer want to list on multiple ATS venues. We’ll write more on this specifically in a future post.

Model 4: Order Match via Order Management System (OMS)

Model 4 looks like Model 3 except for two critical differences:

1. The executing broker has no formal relationship to the ATS, they can be completely separate and distinct companies with no shared parent company.
2. The broker was also the same one involved in the primary issuance of the security, meaning that suitability checks and KYC information has already been collected from each investor.

This model is also unique, because rather than a custodian handling the Good Control of the securities, that responsibility is held by the issuer themselves. Many issuers seek to hire out this role, since it’s so critical, and doing so improperly often bears hefty fines and problems with audit and filing with the SEC.

Here’s what the flow could look like in this model, this assumes the investor account has already been setup and suitability has been handled by the broker:

• Buyers and sellers send their respective orders on the issuer platform
• Issuer relays the orders to the ATS, including the broker ID
• Orders are matched on the ATS
• Order match confirmation is sent to the Broker & Issuer
• Issuer sends cash settlement instructions to the payment processor
• Once cash movement is confirmed, the issuer sends “Update Balance” instructions to the Transfer Agent
• Transfer Agent confirms the share transfer is properly documented, then documents the move of shares from seller to buyer
• Confirmation of the transfer is sent to the issuer
• Trade is complete

We have seen this model often used for issuers seeking to create liquidity and platforms that buy, sell, and trade private assets in context on their own websites. Rally Road is a prime example of where this model functions very well from a regulatory and user experience standpoint. Rally uses North Capital’s PPEX ATS, and has partnered with Dalmore for the Broker Dealer requirements, who was also the broker of record for their Reg A+ filing process. We’re unaware of who Rally uses for payment processing, but this model also necessitates a payment processor (typically a tech-enabled provider like Dwolla) to handle the movement of cash for securities via API integration.

Conclusion

The realities and subtle nuances of each of these models are still being discovered as the operators in the ecosystem grow together, integrate with one another, and bring on new issuers both large and small.

It’s been a real pleasure to have a front seat to exactly how these models behave and the impact it has on issuers and investors. We hope this was valuable for all you readers too. Feel free to subscribe (it’s free!) for more content like this around the digital asset ecosystem, private capital markets, finance, and blockchain.

Till next time.

Disclaimer: None of this information is nor should it be considered as professional, legal, investment, or any other sort of advice or recommendation. The information presented herein is done so for informational, entertainment, & educational purposes only. Please consult an attorney or licensed investment professional before taking any investment or professional action.

Bitcoin serves a critical purpose in storing value, disintermediating third parties, and transferring control over assets to the owners of those assets. With this however, there is a trade off — those who hold their own bitcoin in sovereign wallets run the risk that they might lose those assets, never to be recovered.

The trade is sovereignty for security.

With privately managed wallets, you forfeit security in exchange for the right to sovereignly hold your bitcoin. No one is coming to recover lost keys. If you lose the wallet or private keys, your bitcoin is lost to you forever. In the bitcoin case, this is a feature, not a bug. One unique element of modern finance (we may write more on this later) is the power one surrenders to third parties in this case. We’re reminded of the ethos of the original cypherpunks, especially Nick Szabo’s outstanding piece from 1997 entitled The God Protocols. It is as applicable today, if not more so, then when it was originally penned a quarter century ago.

Admittedly, he was talking about banking and cash, not securities as controlled instruments vs. bearer assets, but the primary point is worth noting: when you grant an intermediary supreme control over your assets, THEY OWN YOUR ASSETS. And they can shut you out of them at any time. A dear friend of ours was locked out of his Business PayPal account, that had hundreds of thousands of dollars in it, for no stated reason, and there was basically nothing he could do.

This is why bitcoin is so revolutionary. Your bitcoin are YOURS, and no one can take them away from you.

This assumes proper storage and handling of wallets, private keys, etc. We are very familiar with the long list of fraud (Mt. Gox, Quadriga, NEM, Celsius, Voyager, 3AC, et al) that has occurred in the blockchain space.

Bitcoin was the original bearer asset in the digital asset space, but since then we’ve seen staggering growth, particularly in DeFi, with the ERC20 instrument. Most cryptocurrencies, statistically speaking, are ERC20 tokens. They’re lightweight, dead simple to create, and relatively cheap to move (network/activity fees permitting). For the balance of this piece, please assume when we talk about bearer instruments, we’re referring to the ERC20 token standard, since it’s the most commonly used instrument to represent something (crypto, utility token, securities, etc.) on chain.

Before we make the case against ERC20 tokens for securities, let’s go back to beginning.

Where do bearer assets come from? And where’d they go?

According to Investopedia, Bearer Bonds (a form of bearer asset) “…are government- or corporate-issued debt instruments that differ from traditional bonds in that they’re unregistered as investment securities. Consequently, no records exist that list the owners’ names. As a result, whoever physically holds the paper on which the bond is issued is the presumed owner, giving them a greater measure of anonymity than more common bond offerings present. But since no investor names physically appear on bearer bond papers, it’s nearly impossible to recover such bonds if they’re lost or destroyed.”

Bearer instruments are unique because the logic is completely circular — the owner of bearer asset is defined by the person who owns the bearer asset.

We should key that into excel and record the circular logic error it throws when trying to do that type of calculation.

Bearer assets were outlawed in 1982, particularly since they could be used to evade taxes. The Tax Equity & Fiscal Responsibility Act of 1982 made the issuance of new bearer assets illegal. Previously issued bearer bonds can still be held and used in transactions, but since there are no new bonds being issued, the number of bearer bonds in existence has dwindled, and will most likely be altogether forgotten except to historians and perhaps rare document collectors as time goes on.

After nearly 30 years of no new bearer instruments being issued, we saw bitcoin emerge in 2009. This was amazing for privacy and sovereignty minded individuals who took the time to learn about Public Key Infrastructure & Private Key Management. There was a way to transact pseudonymously, and own your assets end to end. It marked the start of a new period of the internet.

While we’d love to see the world return to privacy with regards to asset ownership, we think that may be a naive desire. The world of securities simply doesn’t operate this way.

Securities are not sovereign.

Haven’t been since 1934. The most broad and sweeping of regulations for the securities industry came through the Securities Exchange Act of 1934, which highlighted a number of requirements for issuers, brokers, and other intermediaries like custodians, around the treatment of these assets. The most important of these center around investor protections. They include things like:

1. the ability to restore a security in case of a loss
2. an escheatment of a security (stems from prolonged lack of contact with an investor, sometimes due to death, estate transfer, or abandonment)
3. the unwinding of an illicit trade or transaction

It also named required standards for the following:

• Corporate Reporting
• Proxy Solicitations & Shareholder Voting
• Tender Offers
• Insider Trading
• Registration of Exchanges, Associations, etc.

If you’re interested, read the entirety of the SEA of ’34 here…

Please note — the investor protection requirements stated above are not possible with ERC20 instruments held in sovereign wallets. That’s the point…they’re sovereign! Holders can do what they please with them, including transferring them, staking them (in the securities case this could look like margin within your brokerage account, although there are fundamental differences), or even burning (destroying) them. As Richard Epstein aptly notes, disposition is an essential characteristic of ownership.

Since the SEA of ’34 we’ve seen massive growth of the regulations in this space, particularly focused on preventing money laundering. You have the Bank Secrecy Act, the Patriot Act, the Anti-Money Laundering Act of 2020, to name a few, but these furthered the notion that issuers, brokers, and custodians, need to know who owns their asset, while still satisfying the restoration, clawback, transfer, or escheatment instances of issued securities.

Now, in the bearer asset case, architecting control over securities is simple: no sovereign wallets.

Custodians, or in some cases, custody technology providers, can custody the assets for you, and the burden of maintaining private keys, wallets, and ledger balances falls to the custodian to manage. This harkens back hundreds of years, to the first goldsmiths who could not only work, shape, and smelt gold, but vault and store it also. Their expertise of gold smithing put them in an extraordinary position of power and control.

As a depositor, your gold was co-mingled in the same vault as all the other depositors, and the custodian managed an internal ledger of who was owed what. Side note: this was also closely tied to the introduction of fractional reserve banking, since the custodians realized, through their bookkeeping efforts, that only about 15% of depositors would withdraw their gold at any given time, leaving the other 85% to be lent out in exchange for interest. See Edward Griffin’s work, “The Creature from Jekyll Island” for more on the history of gold as commodity money and the inception of fractional reserve banking.

If one was to use a bearer instrument for securities issuance, and it somehow got out the custody of a registered custodian, the issuer could be faced with a litany of problematic scenarios. A few that come to mind:

• What if the wallet holding the securities is lost, will you re-issue those securities to a new wallet?
• What if that transfer was fraudulent, and the receiver wants to redeem the securities later?
• How would you flag securities as abandoned?
• How would you handle death, divorce, escheatment, clawback, or estate transfer, and maintain compliance with securities laws?
• How would you prevent decentralized trading of these assets? (hint: you can’t)

The risks of using sovereign bearer instruments as securities are severe to say the least.

That said, it stands to reason that custodians would simply treat digital assets the same as cash, gold, or other assets they take custody of. They are the vault and can maintain these assets without issue. Many of the digital custodians today have done exactly this, with multi-party computation and other multi-sig protocols giving the holder the comfort that the bearer instrument won’t be lost.

But as we’ve noted, securities behave very differently from bearer instruments.

This is where blockchain offers an interesting promise. The bearer instrument is only one type of instrument that can be issued as a token; there are many different types. NFT’s for example, while still bearer in nature due to their sovereignty, carry unique characteristics that make them distinct from a fungible bearer token like an ERC20. Most NFT’s on Ethereum are issued under the ERC-721, ERC-722, or ERC-1155 standards, which all differ from ERC20.

When considering the control requirements of securities, the issuing protocol (ERC-777, ERC-1404, ERC1155 etc.) has the ability to encode controls, trade and transfer restrictions, programmatic tendering, and other guardrails as dictated and required by securities law.

Having held many conversations with regulators in support of our clients business efforts, we’re convinced that most of the hesitancy from regulators stemmed initially from a lack of understanding of how blockchain and token protocols work. Having spoken to the SEC, FINRA, and other regulatory bodies, the primary concern underpinning most of their questions seemed to fall around sovereignty and the lack of oversight and control of sovereign, irrecoverable bearer assets.

Just recently , the SEC’s enforcement division released comments on how they are focused on investor protections of digital assets.Additionally, the SEC just set an astounding precedent by naming 9 coins trading on Coinbase as “crypto asset securities” per the Howey Test.

We’ll say it again, securities are not sovereign, but controlled instruments.

Enter the Transfer Controller

In order to properly satisfy regulatory requirements, Vertalo treats tokenized securities as controlled instruments. They are not:

1. Sovereign
2. Transferable or tradable, without the permission of the issuer
3. Losable or otherwise corruptible (paper certificates can decay after all)
4. Stake-able, without the permission of the issuer

Within the ERC20 protocol are nine different methods that you can call when interacting with the token. One function includes:

function transfer(address _to, uint256 _value) public returns (bool success)

The transfer:to function allows users to send their tokens from one address to another. This happens every day with ERC20 tokens (and similar tokens on different chains), especially within DeFi. Currently the Ethereum network boasts an impressive 1.2M transactions per day.

Rather than allow blanket transfer and tradability of these assets, which is not legal where securities are concerned (see: Ethereum DEX Uniswap Drops Tokenized Stocks As Regulators Close In) Vertalo created the controlTransfer function; its holder is the “Transfer Controller.”

To reiterate, as an SEC-registered Transfer Agent, Vertalo has the ability to conduct transfers from shareholders, including the cases outlined above where transfers need to happen outside the purview or approval of the investor (escheatment, estate transfer upon death or divorce, restoring a lost security, abandoned property, etc.)

The Transfer Controller function satisfies the legal requirements outlined in the SEA of 1934 surrounding investor protections. This is also where the history is fascinating, since the law doesn’t actually state you need to have a custodian manage the asset.

Rather, it says that brokers and issuers must “establish a good control location” over the security. In 1934, both public and private markets suffered from friction, from information asymmetry, and from a lack of transparency. As part of a way to protect investors, the SEC enacted this provision, which would prevent the loss or destruction of a certificate (all paper-based) by requiring that it’s location be deemed a good control location. Think paper certificates in physical bank vaults.

The Transfer Controller function is a good control location for digital asset securities on chain. It can satisfy all the requirements and remove the risk of loss, theft, or destruction for issuers, brokers, banks, transfer agents, or any other market participant. Further, the Transfer Control function can be delegated to third parties, like custodians, banks, brokers, ATS’s, or other regulated entities. Rather than treating these as sovereign, we should take a more mature approach that stands in line with regulation and established case precedent. Using ERC20 for securities only makes sense if a custodian is involved end-to-end, otherwise it’s a poor choice for securities issuance on chain.

Blockchain, distributed ledgers, and smart contracts have so many real & functional implications (hopefully more on this later) and we are only beginning to see the promise it offers to capital markets and private asset ownership. We have a chance to manage on-chain securities issuance properly, let’s take it.

Disclaimer: None of this information is nor should it be considered as professional, legal, investment, or any other sort of advice or recommendation. The information presented herein is done so for informational, entertainment, & educational purposes only. Please consult an attorney or licensed investment professional before taking any investment or professional action.

The Vertalo team researched and curated over 100 examples of Enterprise Blockchain Applications across financial and non-financial Global 1000 corporations. This slide presentation breaks it down for you in an easy to consume fashion.

Download the Blockchain Use Cases report Going Beyond Cryptocurrencies along with our whitepapers at vertalo.com/whitepapers.

✂️ Larry Fink on DLT and Tokenization of Securities

The digital asset markets have seen tremendous growth and volatility since the Bitcoin genesis block. What began as a weird, libertarian, nerd fever-dream turned — over an eventful decade — into an asset class worth over $3 trillion dollars at its all-time high in late 2021.

As big as it sounds, a $3T market value of crypto is only as big as the combined capitalization of Apple and Amazon — two public companies. And if we can assume that crypto investors hold small pools of assets and are actively trading and largely distrustful of centralized control, it’s unlikely that most crypto assets are going to be managed or traded by large custodians or investment banks.

So if ‘size’ is what drives profits and scale at large financial institutions, the crypto currency markets are not big enough to scale to accommodate the business plans of dozens of profit-seeking tradfi players.

Obviously the bigger players have done the math. Yet they still make regular announcements about new forays into ‘digital asset’ markets. Are they talking about the same market we think they are?

In this time when everything is an ‘asset’ and everything is ‘digital’, what exactly counts as a digital asset? Is it possible that large financial institutions have a broader definition of digital assets than mere currencies?

It’s possible, but to most ‘Digital Assets’ still largely means Bitcoin, Ethereum, and other crypto currencies like Dogecoin, Solana, and Ripple — what many refer to as ‘tokens’. Some might even add NFTs to this list and certainly stable coins. But for banks and large financial institutions, where IT investments for security and efficiency are the largest budget line items after human costs, where can we expect them to focus. How can such a small and fragmented digital assets market offer size and growth worthy of this much attention and investment? By expanding the definition of ‘digital assets’ to include blockchain-enabled equities, debt, and collateral. These are often referred to as ‘security tokens’, but perhaps best called ‘digital asset securities’, to better distinguish them from their crypto currency cousins.

There is ample evidence that this expansionist mindset — an evolution that includes digital asset securities — has found proponents in the boardrooms and C-suites of the world’s largest institutions. In December 2022 at the NYT Dealbook summit, while the crowd was hanging on every ill-advised admission from Sam Bankman Fried, Blackrock’s CEO Larry Fink, who runs the largest asset management firm in the world, clearly declared that his firm is taking a hard look at digital asset securities.

“the next generation for markets, the next generation for securities, will be tokenization of securities.”

Not surprisingly, given all the other things going on that week with FTX, this didn’t make news. But as the CEO of a company that tokenizes securities, I found this to benothing short of a revelation and confirmation of what many of us have thought was the logical application of distributed ledger technology within the largest asset managers and custodians. (the session can be found here)

Blackrock represents ‘size’, with more than $10T in assets under management. And they are the street name owner of more securities than any other firm in the world. In today’s parlance, these securities — often private held — are referred to as ‘Real World Assets’, as compared to crypto currencies, which, other than stablecoins, possess no underlying asset as basis for their value.

But as much as Larry Fink and BlackRock moves markets, he isn’t the only big banker thinking about the application of blockchain technology to markets beyond crypto currencies. Why is this important for the expansion of the crypto market beyond currencies and stablecoins?

It’s simple: large financial institutions need size to scale. Real World Assets represent trillions of dollars of ‘size’. After riding the wave of the last 6 years, big players gained an appreciation for the market beyond their prop desk. In retrospect, crypto was the beginning of something much bigger — the unlocking of much larger markets including the tokenization of private equities and debt, the largest and most illiquid asset classes. Like any startup, Big FIs couldn’t start at the destination: crypto was the warm up.

The evidence for the evolution of large financial institutions away from thinking about digital assets merely as currencies towards considering them as platforms for improving efficiencies in traditional financial markets. In a recent report called ‘Institutional Defi: The Next Generation of Finance?’, JPMorgan’s Onyx team asserted:

“The cost savings and new business opportunities of creating a “tokenized” version of real-world assets for transacting through DeFi protocols could be significant for issuers and investors, as well as for financial institutions that can adapt their technology and business models.”

BlackRock and JPMorgan are just two examples of the large players that are looking at the emerging digital asset securities market. As public markets wait for the dust — and valuations — to settle after a 10 year bull run in IPOs, and as crypto currencies continue to suffer from regulatory uncertainty and various scandals, the opportunity represented by the entrance of large players into the digital asset securities market should make builders optimistic that their investments over the last few years will pay off and finally fulfill their destiny. The inclusion of Tokenized Real World Assets will transform both the thinking about crypto and DLT, as well as the business opportunities available to the builders and buyers of this technology.

In this presentation, Dave Hendricks sits down with Lee Bratcher. Lee is the founder and President of the Texas Blockchain Council, and is working to make Texas the head of blockchain innovation in the U.S. They talk about what the Texas Blockchain Council is doing to create this change, how far they have come since the start, and more on how Texas is creating a new frontier for blockchain. In this video, you will learn about how Texas is on its way to becoming the Bitcoin mining capital of the U.S., ways to trade digital assets in the state of Texas, and what the Texas Blockchain Council sees for the future.

Lee Bratcher is the President and Founder of the Texas Blockchain Council. The Texas Blockchain Council is an industry association with more than 75 member companies that seeks to make Texas the jurisdiction of choice for Bitcoin, crypto and blockchain innovation. The TBC helped to research two pieces of blockchain legislation that were passed in the 87th Legislative session and were signed into effect by Governor Abbott. Lee and the TBC team have a specific focus on the regulatory environment around Bitcoin mining in Texas. The TBC hosted the Texas Blockchain Summit in Austin at which speakers like Senator Ted Cruz, Senator Cynthia Lummis and SEC Commissioner Hester Peirce addressed the sold-out audience. He is also a Captain in the US Army reserves working as Tech Scout for the 75th Innovation Command that supports Army Futures Command. Formerly, Lee was a political science professor at Dallas Baptist University teaching international relations and blockchain courses. Lee received his blockchain instructional training from the IBM Watson Research Center in New York.

This video was recorded at the Digital Assets and Securities Conference in Austin, Texas in May 2022. The Digital Assets AND Securities (DAAS) conference is an informative and integrative conference that brings together builders, issuers, investors, business and tech leaders, and anyone else involved in all things web3. Put together annually by Vertalo, the purpose of the conference is to connect and enable a stronger ecosystem to further the understanding of the intersection of digital assets and securities.

For more educational videos about the Digital Asset Securities ecosystem and its growing roster of participants, please visit https://www.vertalo.com/.

For more information about Lee Bratcher, please visit his LinkedIn: https://www.linkedin.com/in/lee-bratcher-7a949892/

For more information about the Texas Blockchain Council, please visit their website: https://texasblockchaincouncil.org/

For more information about Dave Hendricks, please visit his LinkedIn: https://www.linkedin.com/in/davehendricks/

In this legal panel featuring Steve Lofchie and Gautam Gujral, they have a conversation about regulatory updates for crypto. They go over multiple types of tokens and how their regulation might differ from others. They also talk about what they see for the future of crypto and SEC crypto regulation. You will learn about what they see for the future of stablecoins and CBDCs, what the SEC is doing to regulate crypto, and so much more.

Steven Lofchie is a corporate partner resident in Fried Frank’s New York office. He advises financial institutions on regulatory issues and financial instruments. His regulatory practice encompasses the securities laws, the CEA and related bankruptcy issues. His transactional practice focuses on securities credit and derivative transactions. Steven is the founder and manager of an acclaimed legal website (now renamed Fried Frank Regulatory Intelligence) that has been endorsed by former chairpersons of both the SEC and CFTC. Subscribers to the website include government regulators and major buy- and sell-side firms.

This video was recorded at the Digital Assets and Securities Conference in Austin, Texas in May 2022. The Digital Assets AND Securities (DAAS) conference is an informative and integrative conference that brings together builders, issuers, investors, business and tech leaders, and anyone else involved in all things web3. Put together annually by Vertalo, the purpose of the conference is to connect and enable a stronger ecosystem to further the understanding of the intersection of digital assets and securities.

For more educational videos about the Digital Asset Securities ecosystem and its growing roster of participants, please visit https://www.vertalo.com/.

For more information about Gautam Gujral, please visit his LinkedIn: https://www.linkedin.com/in/gautamgujral/

For more information about Steven Lofchie, please visit his LinkedIn: https://www.linkedin.com/in/steven-lofchie/

For more information about Fried Frank, please visit their website: https://www.friedfrank.com/

In this video, Will Conley and Gautam Gujral talk about different types of tokens and how to issue them. They cover a wide range of topics, including play-to-earn gaming, NFTs, how to start the process of issuing a token, and more. Throughout the video you will learn about all of these things as well as how Will Conley and Perkins Coie assist in the issuance of these tokens.

Will Conley provides counsel to clients of all sizes, advising both emerging companies and established industry leaders on matters related to entity formation, venture capital fundraising, corporate governance, litigation, and regulatory compliance. As a member of Perkins Coie’s Blockchain, Digital Assets & Custody industry group, Will regularly guides clients through the design and implementation of business plans related to digital assets and Web3, including issuances and product counseling related to fungible and non-fungible tokens (NFTs), advising on the applicability of U.S. laws and regulations, and counseling on corporate and transactional matters. Will’s clients include companies involved in social metaverses, play-to-earn gaming, tokenized funds, DAOs, and payments.

This video was recorded at the Digital Assets and Securities Conference in Austin, Texas in May 2022. The Digital Assets AND Securities (DAAS) conference is an informative and integrative conference that brings together builders, issuers, investors, business and tech leaders, and anyone else involved in all things web3. Put together annually by Vertalo, the purpose of the conference is to connect and enable a stronger ecosystem to further the understanding of the intersection of digital assets and securities.

For more educational videos about the Digital Asset Securities ecosystem and its growing roster of participants, please visit https://www.vertalo.com/.

For more information about Gautam Gujral, please visit his LinkedIn: https://www.linkedin.com/in/gautamgujral/

For more information about Will Conley, please visit his LinkedIn: https://www.linkedin.com/in/conleywill/

For more information about Perkins Coie, please visit their website: https://www.perkinscoie.com/en/

In this video, Daniel Coheur and Dave Hendricks have a conversation about their companies’ business models and respective operations. With both presenters being co-founders of a digital asset company, they have both gone through similar trials and challenges. They start from the beginning of their company’s journeys and go through what they do today, and what they see in their future. You’ll learn about the early days of Tokeny and Vertalo, why they had to change their business models, and more about their everyday operations.

Daniel Coheur is result-oriented with a drive to achieve ambitious targets. An entrepreneur/investor with a proven track record for expanding existing markets and creating new ones for consumer brands and technology products. He’s able to work within diverse teams to bring products to market successfully. In-house consulting and mentoring, and inspiring team leader.

This video was recorded at the Digital Assets and Securities Conference in Austin, Texas in May 2022. The Digital Assets AND Securities (DAAS) conference is an informative and integrative conference that brings together builders, issuers, investors, business and tech leaders, and anyone else involved in all things web3. Put together annually by Vertalo, the purpose of the conference is to connect and enable a stronger ecosystem to further the understanding of the intersection of digital assets and securities.

For more educational videos about the Digital Asset Securities ecosystem and its growing roster of participants, please visit https://www.vertalo.com/.

For more information about Daniel Coheur, please visit his LinkedIn, https://www.linkedin.com/in/coheurdaniel/

For more information about Tokeny Solutions, please visit their website: https://tokeny.com/

For more information about Dave Hendricks, please visit his LinkedIn: https://www.linkedin.com/in/davehendricks/

In this video, Jackie Kuiper and Steve Tafoya talk about Rowe Capital and Launch Velocity Group. This is Jackie and Steve’s first of two presentations at the DAAS Conference, and in this one, they cover raising capital, Launch Velocity Group, their team and more about Rowe’s enterprise. You will learn about ways Rowe helps companies raise capital, their intelligent team, and about Launch Velocity Group. Launch Velocity is an affiliate of Rowe Capital Group, and is the engine behind the scenes that powers Rowe.

Rowe Capital Group is committed to providing educational resources to accredited investors and providing them with access to investments offered by innovative, disruptor-style companies. The company is led by an experienced team and focuses on opportunities in the technology, real estate, and non-traditional asset sectors.

Steve Tafoya is Managing Partner at Rowe and brings over two decades of experience in technology and healthcare. Steve guides all aspects of the company’s operations and assists with the company’s technology investment interests.

Jackie Kuiper is Chief Legal Officer at Rowe and oversees compliance initiatives for the company’s investment funds. As a solutions-oriented leader, Jackie leverages over fifteen years of experience in financial transaction law, bankruptcy debtor and creditor rights and remedies, and asset identification to help guide the company’s vision.

This video was recorded at the Digital Assets and Securities Conference in Austin, Texas in May 2022. The Digital Assets AND Securities (DAAS) conference is an informative and integrative conference that brings together builders, issuers, investors, business and tech leaders, and anyone else involved in all things web3. Put together annually by Vertalo, the purpose of the conference is to connect and enable a stronger ecosystem to further the understanding of the intersection of digital assets and securities.

For more educational videos about the Digital Asset Securities ecosystem and its growing roster of participants, please visit https://www.vertalo.com/.

For more information about Rowe Capital Group, please visit their website: https://www.rowecapitalgroup.com/.

For more information about Steve Tafoya, please visit his LinkedIn, https://www.linkedin.com/in/steventafoya/

For more information about Jackie Kuiper, please visit her LinkedIn, https://www.linkedin.com/in/jacqueline-kuiper-03948716/