Asset Tokenization
Public and private fundraisings are important features of modern capital markets. To raise funds, corporations account for their assets, performances, and other valuables to determine their monetary worth. Corporations can then decide to offer and sell portions of ownership (e.g. stocks) in the corporations or other rights and agreements (e.g. options, debts) in the corporations to investors in return for monetary investments from them.
Through this process, investors gain a level of ownership or obtain certain rights in corporations proportional to the amounts and types of their investments. In return, the corporations receive funds that they can use toward their operational expenses, growth, and development costs.
The shares of corporate ownership (stocks) or other rights and agreements (e.g. options and debts) and similar instruments are generally referred to as corporate securities. Once a corporation offers and sells securities, the investors who buy those securities will become the new owners of the securities and can in turn sell them to other interested investors and make trades on the securities.
To put developments in capital markets in perspective, it should be noted that offers, sales, and trades in securities are not new concepts. Trades in securities have been happening in basic forms, at least, since the 17th century. However, like many other things, trades in securities have evolved through time. Across the past centuries, and more so in the recent decades, the processes of offering, sales, and trades in securities have gradually developed into a very structured, institutional, and regulated complex of entities and processes. The technologies facilitating the offers, sales, and trades in securities have advanced significantly. The arrival and application of each new technology and procedure has pushed the capital markets forward, advanced its operations, and offered new possibilities.
In the past decades, before the arrival of the blockchain technologies and their expansion into many foreseen and unforeseen domains, public securities have been issued and traded in the form of certificates (sometimes in paper form) and kept at central repositories (e.g. Depository Trust and Clearing Corporation) for safekeeping, accountability, and trade facilitation. The currently existing system of public securities offering, sales, and trade (even those existing in book-entry form) requires the participation and actions of central third-parties to record and facilitate the transfer of securities from sellers to buyers. The current processes are time consuming, somewhat inefficient, and at times expensive for investors.
The advent of blockchain technologies, presents a viable opportunity to revolutionize the capital markets. Blockchain technologies, with their decentralized character, eliminate the need for central third-parties as designated and ultimate facilitators of trades. Instead, by utilizing blockchain technologies, buyers and sellers can trade directly with each other and settle their trades without the involvement of central entities.
In order for securities to be offered, sold, traded, and settled on a blockchain, they must first be deployed as security tokens, minted, and issued within blocks of the blockchain.
Security tokens are the equivalent of traditional securities, except, instead of being created as certifications and stored at central repositories, security tokens are defined and created (“minted”) on blockchains. Security tokens are equivalent to traditional securities with identical rights and financial functions. For example, a security token that is designed and created to be the equivalent of a corporate stock or a corporate bond, serves and acts identically to a corporate stock or corporate bond. The only difference between security tokens and traditional securities are in their underlying technological implementation.
tZERO’s regulatory compliance, technical design, offering, sale, and trades in its own securities serves as a first-hand proof that this new model works; that traditional securities can be successfully implemented using blockchain technologies in the form of security tokens. In June, July, and August of 2018, tZERO conducted a private sale of securities (tZERO Preferred Equity Tokens) to investors in the form of security tokens minted on the Ethereum blockchain.
Similar to traditional securities, security tokens can receive a “ticker symbol”. tZERO chose the ticker symbol “TZROP” for the security tokens it offered. tZERO designed its token to be compatible with a design standard for security tokens known as ERC-20. By following the ERC-20 standard, the TZROP will share common features and functions with other existing and future tokens that follow the same standard.
Tokenization
As discussed thus far, traditional securities can be minted on blockchains in the form of security tokens. However, traditional securities are not the only things that can be created on blockchains as tokens. A large number of financial instruments and other concepts can be designed for and accounted for in the form of digital tokens. Any entity that can be identified, documented, measured, and quantified can be reasonably marked on a blockchain and its representation can take the form of a token. The process of defining and minting tokens on a blockchain for an entity is called tokenization.
Traditional securities are only one type of entities that can be tokenized. Other assets classes can be tokenized as well. For example, land ownership can be tokenized; commodities (e.g. minerals, fuels, and other natural resources) can be tokenized; works of arts (e.g. a Van Gough painting) can be tokenized; and ownership in real estate properties can be tokenized.
Tokenization is still in early phases of market introduction, familiarization, and adoption. The concept is novel, the underlying technology is still new, and most people at the time lack a clear and accurate understanding of it. Regulations that directly and specifically address token offerings, sales, and trades are for the most part still being proposed, debated, before receiving official votes and enactments at some point in the future.
While the legal and technology frameworks are under continuous development and progress, it is tZERO’s belief and business practice to communicate with the regulatory authorities and be compliant with the regulations. tZERO obtained and engaged outside legal counsel through its product conception, design, and development phases to ensure compliance with the SEC’s, FINRA’s, and the rules of other relevant authorities.
tZERO continues moving forward with its mission of revolutionizing the capital markets using blockchain technologies. Now that tZERO has shown that equity securities can be minted as security tokens, tZERO is marching forward on its product roadmap and aims to extend the benefits of blockchain technologies to other areas of capital markets beyond equity securities.
