Liquidity Delenda Est
The buzz around security tokens and digital assets has faded recently, in favor of the greener pastures of fintech API’s (Plaid, Finicity) and decentralized finance (Compound, Maker). The promises of liquidity were too embellished and the growth of market cap and daily volume, $287m and ~$2.6m respectively at writing, has been too slow. However, digital assets are not going away.
While many in our industry view daily volume and market cap as meaningful KPI’s that suggest the ‘state of adoption’ for digital assets, liquidity and the formation of robust liquid private digital asset markets are just one of many possibilities, and are not the sole goal of the digital asset space. Further, the combination of digital assets, fintech APIs, and decentralized finance platforms, cumulatively representing last-mile delivery of modern financial services, is where the industry should be focusing their efforts. Liquidity shouldn’t be the focus as an industry-wide goal, as it’s just a piece of the larger puzzle of lowering the friction in capital markets and financial services.
Security Tokens and Liquidity
One of the focal benefits of digital assets is improved liquidity.
There is a wide consensus that tokenized securities have inherently higher liquidity than their traditional paper-based counterparts, largely driven by efficiency improvements in settlement and automated ownership records. While transactions will be easier to effect with next generation technologies, digital assets do not achieve robust liquidity simply due to token issuance alone.
Improvements in transferability can lead to liquidity, but it is important to note that liquidity forms on the basis of asset quality and market demand. Many believe that a large, efficient, and liquid market will form simply by tokenizing and listing an asset on an exchange venue. This is wishful thinking in the case of most private assets — liquidity doesn’t form overnight and certainly not in a vacuum.
That’s not to say digital assets won’t or can’t achieve liquidity — in many cases they do. The STO market cap has grown to $287m! That’s great! But also, it’s $287m (tiny!), you can count the number of $1m+ market cap listings on two hands (not a lie!), and 80% of the daily volume is concentrated in 1 or 2 issues depending on the day. It’s growing slowly, but market liquidity on comparatively small venues isn’t a good indicator of industry health.
The industry-wide fixation on liquidity, where daily volume and market cap are watched like pulse-oximeters, is misplaced.
Why are we here?
In 2018, security tokens were billed as the panacea for illiquid assets.
The idea was that it would be empirically more efficient to transact securities whose ownership is digitally represented in a blockchain-native token than those whose ownership are recorded on paper or a spreadsheet. But in this sense, digital assets only ‘enable liquidity’, rather than ‘provide liquidity’. The hill-top shouting of “tokenize the world!” and “liquidity for all!” were functional memes — useful for spawning awareness and adoption — but they should not be mistaken for industry wide mission statements.
Digital assets do not provide liquidity on their own, and as such, the degree of liquidity, via market cap and trading volume, is not necessarily the most meaningful KPI measurements of the state of the digital asset ecosystem.
This isn’t an indication of any failure of development in the digital asset space. For many issuers, just having an interface for stakeholder management and a portal for investors is already a significant UX improvement on paper-based ownership models. There are a number of improvements in cost, cycle times, and UX afforded by security tokens even in the absence of robust liquid markets.
Beyond Liquidity
Digital assets are not just about issuing tokens. Asset ownership recorded in token form is the first step in a cascade of benefits. As each asset issuer, owner, entity, starts to tokenize their capital structures, the API connections between these siloed ownership databases and the tokens that indicate ownership, will finally allow that siloed data to become usable in other venues.
In the case of assets listed on ATS’s, yes, that can include the formation of a liquid private market. But it can also include the significant operational improvements for dormant assets prior to liquidity, as well as a number of new financial services that can be delivered to asset owners and issuers instantly.
Alternatives to Liquidity
Vertalo is committed to connecting and enabling the digital asset ecosystem — in the face of liquidity or otherwise. As such, we are developing frameworks for assets on our platform to interact with decentralized finance platforms and smart contracts, such as Maker and Compound. DeFi platforms offer a unique ability to deliver financial services and products in a cheap, quick, and permissionless fashion, expanding the possibilities for digital asset users.
Rather than relieving oneself of asset ownership and accepting the corresponding tax liability, assets should be able to be leveraged as loan collateral for liquidity or provisioned for stablecoin issuance for a return.
DeFi is not an alternative avenue for liquidity, it’s an alternative to liquidity.
Last Mile Delivery of Financial Services
Digital assets do not exist for the purpose of tokenizing the world or providing liquidity for everything, rather, they’re a piece of the puzzle that spans the next generation of banking, capital markets, and personal finance.
While many token issuance service providers may focus on big AUM numbers afforded by real estate, or the flashy NBA Dinwiddie payday loan, the real innovation is occurring with multidisciplinary collaboration. The magic happens where digital assets, DeFi, and fintech APIs converge. If tokens can be connected to the suite of services offered by, for example, broker dealers and investment banks, it can also be a powerful enabling technology. I’m hopeful that the next few years of development in the digital asset space focuses more on reducing the friction included in providing financial services, through the growing connectivity and interoperability of ownership data.
This is why Vertalo is connecting asset ownership registries via API to custodians, ATS’s and exchange venues, broker dealers, and decentralized finance platforms. Vertalo is developing workflows and APIs that enable our clients to harness the power of institutional finance and decentralized finance under the same roof. This is a necessary step to realize the fully formed future for last-mile delivery of financial services.
ABOUT BLAKE
Blake Richman is an investor and entrepreneur focused on building fintech solutions for the next generation of private capital markets. He currently serves as VP of Finance at Vertalo, a leading data management platform connecting and enabling the digital asset ecosystem. Blake invested in Vertalo while at NovaBlock Capital, a blockchain-based capital market infrastructure focused venture fund, where he previously served as Chief Investment Officer and remains a Partner. Blake entered the blockchain world while serving at Hercules Capital (NYSE: HTGC), a $2.3B public BDC, where he assisted with the structuring and underwriting of $135M in debt and equity transactions. Blake has previously held various positions in venture capital, asset management, and debt capital markets, and holds a BA in Economics from University of Maryland.
Twitter — https://twitter.com/thebrichman
LinkedIn — https://www.linkedin.com/in/blakerichman/
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ABOUT VERTALO
Launched after their own March 2018 STO, Vertalo is a B2B SaaS company founded to map the gaps between primary and secondary trading of digital securities offerings. As the ‘Operating System for Digital Assets’, Vertalo is focused on connecting and enabling the digital asset economy, providing an industry-leading cap table and investor onboarding solution that facilitates direct ownership and direct listing of any private asset. In addition to offering direct issuance services to private companies, Vertalo also offers white-label, licensed, and joint venture opportunities to capital advisors, broker-dealers, and investment banks. A subsidiary of SeriesX, Vertalo is headquartered in Austin, TX with offices in New York City and Seoul. Learn more about SeriesX and Vertalo at www.vertalo.com.
