The concept of digital securities or blockchain security tokens has been around for a while now. In other words, the tokenization of stocks, bonds, real estate, private equity and other assets. While there is some activity from startups like tZERO and ADDX and even the European Investment Bank’s €100 million bond last year, it’s still far from being mainstream. Two startups with big-name partnerships, Ownera and Inveniam, are likely to be critical to the growth of the sector. Inveniam is backed by Apex, one of the world’s largest fund administrators. And Ownera reckons security token lift-off could be next year.
The benefits of tokenization include fractionalization, lower issuance costs and improved liquidity for alternative assets like real estate and private equity.
At the Security Token Summit earlier this week, Ownera’s CEO Ami Ben-David had a similar but nuanced perspective. Firstly primary issuance typically takes two months and can be radically reduced. Additionally, security tokens will enable secondary trading, which is non-existent for some of these assets.
“On top of that, people can start borrowing DeFi style,” said Ben-David. “So if you have $10 million in a real estate investment and you want to borrow money against it and use it for leverage, at the click of a button, any one of the banks on the network – or peer-to-peer as well – can offer you money against the security. These are three advantages, real life benefits to everybody, that can only be achieved through digitization.”
However, there are a couple of obstacles that these two startups aim to address. One is data. Listed stocks have regular reports. Alternative investments like private equity and real estate also need regular data to create liquid markets, which is where Inveniam comes in.
And second is liquidity, or the ability to create one huge pool of potential investors rather than each issuing platform targeting its own little pond of users.
Ownera and finP2P
There are already numerous token issuance platforms and that number will grow significantly. Plus, they use various blockchain technologies, both public and private, on which the tokens are issued. If an institution wanted to enable access for its clients to ten different token issuance platforms, it would need numerous integrations. Blockchain was intended to address silos, not create them.
Enter Ownera with its finP2P solution, which will merge all those ponds into one big pool. Working with the Global Digital Finance (GDF) association and a working group of 80 organizations, it has developed finP2P that enables interoperability between security token platforms using a routing solution. Participants include R3 and IBM on the tech front, the DTCC and ING in finance, and blockchain startups such as Fireblocks.
The platform plans to launch in Q3 of this year. It’s about to announce a funding round, and Inveniam is investing.
Inveniam’s data solution
If you think about real estate as an asset, there’s quite a bit of data that could be automatically made available. Rent payments are the most obvious, but for a shopping mall, it could be water usage, energy usage, and footfall.
“This gives you real-time visibility into what that asset’s doing so a third party can set a mark on it,” said Pat O’Meara, Inveniam’s CEO. Subject matter experts adding data include Cushman & Wakefield, JLL, CBRE on the real estate front, accountants Deloitte and Baker Tilly, as well as Houlihan Lokey and Mercer.
“These are the people who are using our software who are marking the asset. All of the inputs for their marks now are fully observable on-chain,” said O’Meara. “Because of this observability, this changes the accounting treatment for a real estate asset from a level three illiquid asset to a level two marketable alternative. This has a massive impact on people’s balance sheets.” That’s because the asset can be valued at fair market value.
So far Inveniam has data on more than $20 billion worth of assets. Last year it raised a $25 million funding round led by Apex Group, which has $2.5 trillion in assets under administration, custody and management.
O’Meara said that Apex’s head of innovation reckons in five years, it won’t be a fund administrator but an on-chain systems operator. Apex recently acquired a majority stake in another blockchain startup FundAdminChain.