Cryptonomist had the chance to interview Patrick L. Springer, former Managing Director at Morgan Stanley and now on the advisory board of Polybird Global Exchange, a global trading platform for blockchain securities and tokenized assets.
After a 20+ year career at Morgan Stanley, where he was a Managing Director at the institutional securities department, Springer can be considered one of the leader in the field of global equities.
He advised North-American based institutional equity investors and led the distribution of numerous international equity offerings deals, helping raise upwards of $50 billion of capital for global corporations in technology and other industries over the past 10 years.
Asset tokenization: what is it and how will it change the financial markets – will it expand and open up to capital markets?
Asset tokenization is the process by which a financial asset is digitized and made available for exchange through blockchain technology. The keywords in the last sentence are digitized and blockchain, and these two terms are enabling a trend that will be paradigm-shifting.
Prior to the blockchain, there has been a finite way in which to exchange assets. At the top end, an asset owner could list an instrument on a physical exchange, this would be limited mostly to equity and some types of debt securities; an elaborate trading and settlement system, and a somewhat costly one, has been created for this purpose.
Or it could be exchanged via a bank, who could form a loan or project financing syndicate with a party of entities the banks know. Finally, one could sell it to someone who is an acquaintance or through a lawyer, which is how most people buy or sell their #1 financial asset, their homes.
In each of these cases, a financial intermediary is needed to secure the transaction – the exchange, the bank, or the lawyer, respectively. Each of these methods has toll costs that need to be paid, and friction that may or may not lead to getting the best market-clearing price, for both the buyer and seller.
Digitizing an asset and securing it cryptographically via a blockchain can open new ways for assets to be exchanged and for investors to more specifically target their investments. With digitization, investments can be fractionalized into smaller denominations, making an investment available to larger numbers of investors, thereby making it potentially more liquid.
An example of this is a real estate project – from a large multi-billion-dollar mixed-use project to a new fifteen-unit condo project being constructed – it becomes possible via tokenization for more types of investors to participate in more types of real estate transactions.
Asset tokenization enables better micro-targeting of investments – for example, equity ownership vs. a coupon of cash flows, ability to buy an investment unit in Brooklyn and/or a unit in Miami, or a retail mall project in Arizona vs. a single-family unit in Colorado).
Asset tokenization has significant economies of scale that also reduce costs. Smart contracts on the blockchain will take on many of the legal and administrative functions of a transaction and will automate processes that until now require many steps, many hands, and a lot more time.
Automated rules via smart contracts will ensure that only appropriate investors – investors who meet regulatory requirements and financial suitability requirements – participate in an offering. All of this can reduce the toll costs I referenced above, and it reduces frictions. For financial markets, historically this cost reduction has caused massive growth in financial markets driven by increased participation and higher turnover.
To be clear, however, asset tokenization is just getting started, and it will move and proceed in a stair-step pattern. Right now, the technology is being built to tokenize assets. But asset owners need help getting through the tokenization process, and there needs to be a marketplace where investors, especially institutional investors, can see, compare, and value different types of tokens.
In other words, a parallel system of digital capital markets advisors and a digital marketplace or marketplaces needs to be formed. I am an advisor for Polybird Exchange, (www.polybird.io) and this is where our business model resides. Remember that blockchain by design is decentralized by its nature, so the ecosystem that will be created for digital assets may look quite different than the one we know for current asset markets today.
Why is it worth tokenizing company/rare assets?
In a world that is very concerned about inequality and asymmetrical access to financial opportunities, continued financial innovation is extremely important. There is no doubt that access to the global financial markets through stocks, bonds, ETFs, investment funds, and 401-Ks has made achieving risk and inflation-adjusted investment returns more possible for more people than ever before.
And for all those that think innovation has not gone far enough to democratize financial markets and improve investment access, then they should be very interested in tokenization and blockchain.
Today’s institutional investors continuing to gravitate towards the markets for private securities, such as private equity and private credit, because they are having continued trouble making money in public markets dominated by ETFs and computer-based trading. The markets for private securities are opaque, hard to access, and have limited price transparency and liquidity.
Over time, more of these private securities will be digitized and made available on the Blockchain. More types of investors will be able to access these investments over time. This is very democratizing.
Why put stocks and bonds on the blockchain?
There are two ways to look at this. One is that the current equity and debt markets are very efficient and will not need to change. It is infinitely easier for you to buy and sell a share of Apple than it is to buy or sell a car, a home, or a family antique. The needs case for digitizing the largest, currently traded equity securities is not here.
But there are many small companies that go public in off-exchange offerings, and there are many companies that avoid the costs of being a public company. These may find asset tokenization a financial opportunity.
Separately, there are many parts of the publicly traded bond market where price transparency and liquidity are controlled by a very small number of dealers. Have you ever tried to buy a municipal bond? Investors can only buy them in denominations of $5,000. Given the public finances of so many of our states, I can see the case that those securities should be fractionalized!
What else can be tokenized? What are the benefits for these entities to do so?
There are a lot of use cases for different types of assets, and there are use cases that have not even been thought of yet.
Take the case of the biotech company, Agenus. This is a NASDAQ-listed biotech company with a market cap of about $450 million. Recall what I said about the efficiency of the capital markets for currently listed equities.
Well in January 2019, Agenus raised capital via a security token offering that offers investors a way to invest in a specific biotechnology product of theirs in return for a portion of potential future US sales of that product. This has been offered to qualified investors via Atomic Capital, and so my understanding is that this has been done in conjunction with current US securities laws.