Bancor Meets SPiCE VC: Bringing Liquidity to Security Tokens
We believe all paper-based security certificates will eventually be replaced by digital securities on the Blockchain.
This post is by Ami Ben-David, Co-Founder/Managing Partner of SPiCE VC, with thanks to Eyal Hertzog, Product Architect at Bancor, and advisor to SPiCE VC.
TL;DR: Until now, VCs have been disrupting other industries. SPiCE VC is integrating the Bancor Protocol to finally disrupt the venture capital industry itself with continuous liquidity on the blockchain. www.spicevc.com
Everybody’s talking about blockchain, and the biggest question we constantly hear is, what are some actual blockchain killer use-cases (apart from cryptocurrencies, obviously.)
ICOs, popularized on the Ethereum network, are arguably the second killer app for blockchain, but we believe that what we have seen to date (over $3B raised this year) is not even the tip of the iceberg — maybe an ice cube resting on the tip…
The reason we believe that, is because until now most ICOs have offered “utility tokens” — a new asset model which will take time to mature before companies can adopt it more widely. However, millions of companies around the world already have equity. Until today, outside of public stock exchanges, these equity stocks have all been paper based, manually signed in a lawyer’s office stating ownership, preferences, options — an analog relic in a digital world.
Enter SPiCE VC
SPiCE is digitizing the securities of its venture capital fund, which will invest in technology companies (to learn about the fund’s investment thesis, visit www.spicevc.com ). The fund was founded by a team of entrepreneurs including Carlos Domingo, former CTO of Telefonica and a VC investor, Tal Elyashiv, former CIO at Bank of America and founder/angel investor of multiple startups, and Ami Ben David, serial entrepreneur, founder of EverythingMe and a product innovator.
Why start with venture capital?
Because the analog structure of VC funds is severely limiting the resources available to tech innovation outside Silicon Valley and the closed networks of the influentials.
Yes, VCs are funding the biggest success stories and the coolest unicorns, but to invest in a VC fund, you have to be able to afford to say goodbye to millions of dollars, for 7–12 years. You won’t see a cent until the exits arrive, if they do.
This limits the investor pool to only those with so much capital — that they can afford not to care about liquidity for long amounts of time, and are also close enough to the pie to get in.
So what do we have? We have a financial industry which powers humanity’s tech progress, generating billions of dollars in the process, and as every VC will tell you, its biggest limitation when raising funds — is illiquidity.
How blockchains helps — tokenizing securities
SPiCE uses the concept of security tokenization to solve the illiquidity problem in a very simple and elegant way.
- The fund issues security tokens to its investors.
- The tokens entitle holders to their pro-rata portion of 100% of net exit money. (So the fund returns money very much like a traditional VC fund)
- These tokens are also tradable.
It’s that simple. Take the regular model of a VC, and make the securities digital and tradable on the blockchain.
It is clear that the option to trade VC fund tokens doesn’t instantly mean liquidity at increased prices, the fund itself has to invest in great startups in order for its tokens to be desirable.. This is true for any VC fund. However, assuming the fund’s portfolio is doing well and its companies go up the ladder, increasing their valuations on their way to an exit - liquidity can allow an investor to decide when to exit, and how much to hold or trade.
As an innovator in the space, SPiCE intends to be very active in both its own token’s fundamentals as well as helping portfolio companies to tokenize whenever appropriate.. We believe once an industry goes liquid, there is no way back, because the non-liquid entities will have a hard time explaining to investors why they are locked for so many years.
We’ve been asked many times why blockchain is needed to achieve this goal, instead of traditional software platforms?
- The blockchain ushers in the first era where ownership can be can be held and traded in a digital form without a central entity to verify who owns what. In the same way that bitcoin allows value (money) to be held and traded, so do security tokens allow value (ownership) to be held and traded.
- The simplicity and minimal costs of issuing tokens. Public stock exchanges provide a similar function in a centralized way, but they are prohibitively expensive and complicated. In comparison, security tokens will be simpler and less expensive even when compared to the current paper based model.
- The ability to trade fractions of ownership, instantly with anyone in the world in seconds, 24x7, as opposed to the manual lawyer alternative which is extremely complicated, expensive and slow.
- A ready-made global, transparent marketplace.
- Smart contracts, enabling the parties to embed sophisticated business logic into each token.
The result is a VC fund as we know it, only liquid, which means investors do not have to wait until exits arrive, but instead have the choice of deciding when they want to trade parts of their holdings.
More Liquidity = More Inclusivity
With blockchain tokens and increased liquidity, more people can finally participate. That’s also where regulators come in, to make sure that the public is shielded from abuse. SPiCE is working under existing regulations in each country, and therefore can market and sell its digital security-tokens only according to those regulations. For example, in the US SPiCE is working under Reg D, 506c.
Security Tokens Meet Bancor
With the digitization of securities, new models of liquidity are suddenly made available that were not imaginable in the paper-based world. One of these liquidity options is the solution offered by the Bancor Protocol, which uses a smart contract’s ability to own another token in order to network tokens (and prices) to eachother.
The importance of the model developed by Bancor for the future of security tokens can not be underestimated. In fact, we believe it can be one of the key enablers of the security token economy.
We strongly believe bringing liquidity to securities is one of Bancor’s top killer use cases, with applications potentially far beyond utility tokens in scope and market size.
Unlike cryptocurrencies where there are only a few leading currencies (Bitcoin, Ether… though certainly many more are expected in the future), when securities start to become tokenized, every fund and every company may want to have its own security tokens. There will be a very long tail of securities, and not all of them will have buyers and sellers at the same time.
Bancor is the perfect automated solution, allowing people to convert their security tokens without having to find a buyer or a seller on the other side . The ability to do this asynchronously will contribute significantly to price stability.
SPiCE has joined the Bancor Network, and will hold up to 5% of its capital to use BNT as a connector token in the Spice Token’s smart contract, which will give SPiCE Token holders some liquidity by allowing them to automatically convert their SPiCE Tokens to any token or currency in the Bancor Network, including ETH, and in the future, across blockchain networks as well.
The algorithm developed by Bancor automatically adjusts the price of each conversion, and since the SPiCE Tokens will have inherent value (as they represent future exits in a known portfolio) the Bancor model will be a perfect way to allow the fund to offer some liquidity to investors who need it.
Interestingly, this liquidity solution will be possible even in a country like the US where trading securities in the first year is limited — but getting liquidity directly from the fund in this way will be allowed because tokens are not changing hands between people.
Example Use Case
In reality, how does liquidity help VC fund investors be in a better position than non-liquid, traditional VC fund investors?
Imagine two funds, a liquid fund, and a traditional, non-liquid fund, investing in the same example company X. Now let’s assume this specific company is doing really well in the first few years (remember, this is just an example, most tech startups do not achieve this level of success), but let’s also assume that later the company has difficulties, and it drops down in valuation.
This is what liquidity enables — choice. A liquid fund investor can decide to sell tokens when the fund’s portfolio is doing well (or when they need money), and non-liquid funds, usually don’t have that freedom of choice, and are therefore limited in their ability to manage risk.
We believe making all stocks and other securities digital, will do to the business world what streaming music has done to vinyl records — it will allow securities to flow much more freely and efficiently, and will revolutionize the concepts of ownership.