The State of Security Tokens 2022 — Tokenization in Private Markets
RealT
RealT tokenizes individual properties rather than taking the portfolio route. Specifically, RealT focuses on Section 8 and affordable housing in cities like Detroit, Chicago, and Cleveland to ensure near-guaranteed rental revenues for token holders, as the majority of Section 8 terms on RealT properties are >75% subsidized. Distributions are made monthly to investors primarily via DAI stablecoin with expanding cryptocurrency support. As one of the most active issuers in the industry, Realt started 2021 with 12 properties and ended with 83 properties — a 591% increase, or a monthly CAGR of 17.5%.
What’s interesting about this is the ability for investors to truly pinpoint a property and be able to say “I own 5 tokens in 10024–28 Appoline Street, Detroit, MI 48227 worth $970 yielding 11.47% annually.” When it comes to precision investing, RealT is enabling accredited and international investors with the goal of opening up to retail investors in the future. Investors can even become “Digital Real Estate Agents” and earn commissions through the RealT Affiliate Program.
Additionally, RealT is actually executing on the collateral basis that was covered earlier in this publication. Working with Aave as an open source real estate lending platform, RealT is bringing decentralization to the existing financial landscape, and will likely be viewed as one of the trailblazers in the real estate industry for doing so.
tZERO (TZROP)
The secondary trading venue tZERO issued its own security token representing Class A shares of preferred stock in 2018. The $TZROP token, amassing $134 million in initial fundraising across accredited investors, entitles investors to 10% of adjusted gross revenues through tZERO’s operations, mainly consisting of listing and trading fees, on a quarterly basis. Since this was done as an accredited-only private placement, the tokens became tradable and open for retail investors in mid-2019.
The unique feature of this offering is its token-agnostic bet on the security token industry as a whole itself. Owning a $TZROP token could be comparable to owning a piece of the Nasdaq and enjoying a portion of all of the trading revenues generated through it. As the number of security token investors and issuances grow, tZERO will be able to capture an exponential amount of trading fees and grow its own revenue lines out further, which will directly benefit token holders.
For general reference, the first chart below shows the breakdown of tZERO’s role in supported assets relative to the entire secondary trading market cap, and the second chart shows the portion of all volumes that tZERO accounts for. Even as the “tZERO dominance” decreases, the absolute value of the industry market cap is on an upwards ascent, which is bullish for the future magnitude of trading volumes, tZERO revenue, and TZROP distributions. Feel free to draw a similar parallel to Bitcoin’s Dominance currently at 40% — down from 70% in January 2021 — yet up 25% in price over the same time frame.
Blockchain Capital (BCAP)
As one of the original security tokens, Blockchain Capital’s BCAP token provides venture capital exposure to investors. Announced in early 2017 amidst the ICO boom, Blockchain Capital took the compliant route and seeked to work with regulators rather than circumventing them, which is why the token is still actively trading and out of the SEC’s microscope. As a prime example of a tokenized venture capital fund, initial accredited investors and concurrent retail investors were enabled exposure into the following opportunities, as of June 2021. See more BCAP details courtesy of Security Token Market Analyst Sam Sachs.
Société Générale <> AXA IM: Tokenized Bond Offering
As a recurring name in this publication, Société Générale announced in Q4 2021 that it engaged AXA Investment Management as a purchaser of €3 million EUR worth of unsecured bonds, per its press release. The unsecured bonds originated from European Investment Bank (EIB) but were repackaged as security tokens facilitated on the Ethereum blockchain by Société Générale. In regards to this decision, AXA IM’s Head of Innovation Management and Strategic Initiatives Laurence Arnold stated, “Blockchain can have a disruptive power for asset management processes, as part/or the entire asset management value chain could benefit from this technology over the long term. We believe this could improve the customer experience by accelerating the treatment of financial transactions and facilitating the exchange and storage of data.”
Blockstream Mining Offerings
Listed on STOKR, “The Blockstream Mining Note (BMN) provides qualified investors with access to Bitcoin hashrate at our enterprise-grade facilities.” Now on its sixth tranche that raised over $16 million in a matter of minutes, Blockstream has raised $36 million from 70 qualified/accredited investors to fund and expand its Bitcoin mining operations. The revenue-share note is not yet tradable on secondary markets although it is transferable among other qualified investors, which is a testament to the portability and transferability of security tokens versus paper shares.
Partners Group — Private Equity in 401(k)
Partners Group has been working on democratizing private equity access for over a decade. The proof is in its 2009 closed-end fund that reduced the minimum buy-in from $250,000 to $50,000. Six years later, the firm developed a “collective investment trust” that would enable investors to gain private equity access in their 401(k). For its most recent endeavor, Partners Group tokenized a Singaporean-based private equity fund on the ADDX digital securities exchange. While the minimum investment size is still $10,000 (likely for accredited Singapore investors), Rob Collins acknowledged that tokenization allows for the fractionalization of any asset all the way down to $1, in theory. The real firepower will come when Partners Group bridges the gap between tokenized assets and defined contribution plans, as they are poised to.
Set Labs: Tokenized ETF Solutions
While not a true security token, Set Labs raised $14 million to build out DeFi “Tokenized ETFs” representing a range of DeFi assets. Recognizing the value in these “Token Sets,” a tradable basket of DeFi products is a great way to gain exposure to the vertical without being “in the weeds” on individual protocols and opportunities. Examples like the DeFi Pulse Index and Metaverse Index are great foundations to build upon, but do not yet cover every base. As these assets will act like unregistered securities upon distributions and returns to investors, it’s likely that they will need to register as securities or risk being halted like Coinbase’s staking dreams.
Nonetheless, the idea of using a security token as a tradable wrapper for an underlying basket of both private and public assets is extremely feasible and will likely emerge as one of the greatest contributions that tokenization makes to the asset management world.
Next week’s edition will cover Tokenization in Public Markets.
