How security tokens will help you get a slice of a $162 trillion market
Guest post from David Bradley-Ward.
The regulated poor cousin to the DeFi tokens are set to make an impact and you really don’t want to miss it.
The DeFi token space has a current market capitalization of $1.8 trillion and has been as high as $3 trillion. This, however, is dwarfed by the global securities market at $37 trillion (depending on when you are reading this).
There are those that believe that CeFi and DeFi are two different beasts and never the twain shall meet. I address that here so I won’t make an argument in this article.
There are a number of companies ( full disclosure, mine is one of them) that are working on the the solution to bring securities tokens into the mainstream. It is inevitable that this will happen in a BIG way.
A report by Quinland and Associates estimates that the volume traded in security tokens by 2030 will be $162 trillion.
With an estimated USD 4.1 trillion in listed security token issuance volumes (and USD 162.7 trillion in security token trading volumes) up for grabs by 2030, we see an immense opportunity for players who can ultimately succeed in cracking the code.
I am aware that there are some skeptics here and if I am entirely honest I have to agree that there are potential pitfalls if the industry executes incorrectly. Here are my thoughts on the potential problems for the space and where you should be seeking opportunity.
So what would make a difference and where should you look for opportunity? Smart equity is my bet.
We have had digitized securities for decades, it’s not clever and its not innovative. Sticking a security onto a blockchain and reducing settlement time is great, but in reality who really cares? As far as the average punter using eToro, or similar, everything settles instantly anyway. Not one eToro customer is concerned about settlement. If the legacy businesses use security tokens to save a bit of cash on settlement, it does not make them innovative.
We have a rule in the office; you can’t call anything smart equity unless it does something smart. Being digitized, as I have said above is not smart, it’s boring.
What holds great promise is the prospect of equity doing something other than sitting in a nominee account until you sell it. The crypto industry, largely unfettered by regulation, has invented and experimented with numerous financial innovations. For security tokens to really be the next big thing, outside of crypto, there needs to be innovations that take it beyond just being a digital share certificate.
2. Security Tokens that mimic some of the features of NFTs will be valuable revenue generators.
Photo by Andrey Metelev on Unsplash
Opportunity: Watch those companies that are doing something in the space, there are not many but there will be monster projects that come from this.
Imagine that Jeff Bezos had created an Security token, let’s call it a ‘Security Revenue Token’ that gave holders the rights to 1% of Amazon Revenue in the early days. Let’s say he raised $5,000,000 from that structure from 50 people who each put in $100,000. They got no equity, no votes, nothing, other then the rights to 1% of Amazon revenue if they held that security token. Lets also say that the original holder also gets 1% of the sale price of that security token every time it is sold.
Amazon revenue is $386 billion, 1% of that is £3.86 billion. Divide that by 50 and you get £77.2 million per annum. On a 10% yield basis that SRT would be worth circa £772 million each and if it is being sold you, as the holder, would get £7.7 million every time it changes hands.
It is an extreme example of the potential of these types of securities but it is another dimension in investing. From a company perspective you have a non-dilutive, balance sheet friendly capital raise (it’s not debt) and have a fan club of people who are willing your company to be successful.
3. Non-Fungible Asset Tokens will be huge.
Photo by Swapnil Potdar on Unsplash
Opportunity: If you have a specific expertise, say gaming companies for example, search for any SRTs being listed and make your own assessment it could be a lucrative portfolio move.
(Fungible, by the way, just means one token is the same as another. Gold, for example, is stored on a fungible basis. I can by an ounce of gold and have it stored. I may get a batch number or something similar, but basically if I ask for it to be delivered it will be an ounce of gold, and it doesn’t matter which ounce the storage facility sends me.)
NFTs are associated with digital art presently and the term essentially relates to the underlying assets, i.e the digital art.
If we are tokenising a real-world asset like a commercial building the ‘non-fungible’ part is the assets itself (one building is unique i.e non-fungible). The fractionalisation of the building can still take place, hence many referring to these type of assets as ‘Non-Fungible Asset Tokens’.
These have immense opportunities for investors and owners alike. Trillions of liquidity could be released in the tokenization of the real estate market alone. There will be specialists sectors that emerge to service this and other spaces. How about museums tokenizing their artifacts and giving a share of the revenue? What about the airline industry fractionalising aircraft and sharing seat revenue? What about power generation business forward selling some of their revenue for development? What if you could use the securities you bought from those power generation companies to pay or offset your bills?
All of these and more can be manage on the blockchain and as such we are at the dawning of an era where assets become currency.
Let me leave you with this; the financial system was removed from an asset-backed currency system in 1972 when Nixon abandoned the Gold Standard. Prior to that if you owned Dollars you could, in theory ask for delivery of the gold that was underpinning the USD. Now, you can’t and it isn’t.
In a world where shit hits the fan there is room for security tokens that are underpinned by real world things a new ‘Asset Standard’ if you like. There is massive opportunity in that and it is a space you should watch like a hawk.