Investing in the Security Token Ecosystem
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8 Decimal Capital is a blockchain investment firm with $60 million AUM that focuses on security token projects. The presentation discusses why security tokens are focusing on asset-backed tokens, tokenized VC funds, share-like tokens, and crypto-bonds. It also outlines 8 Decimal Capital's investment criteria and provides an example of a potential security token issuance for a tourism company. The presentation concludes with contact information for 8 Decimal Capital.
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Investing in the Security Token Ecosystem
- 1. Disclaimer: The information contained in this document and its included confidential information should not be disclosed. In addition to the fund investors, no person shall distribute, copy, print or use any part of this document set out for any content thereof Investing in the Security Token Ecosystem 11 Remi Gai, Senior Investment Associate at 8 Decimal Capital
- 2. Agenda 22 I. Who We Are II. Why Focus on Security Token Market? III.What We Look for in Projects IV.Portfolio Example V. Security Token Project Example VI.Additional Services We Provide Overview: 8 Decimal Capital will share its investment perspective on the Security Token Ecosystem. Disclosure: This is not financial advice.
- 3. 8 DECIMAL CAPITAL is a multi-strategy investment firm focusing on the blockchain industry with an AUM of $60M. We thematically invests in core projects that addressees Public Chains, Cross-Chains, Exchanges, Decentralized Exchanges, Privacy, Storage, Telecom, Stable Coin, Security Token and also invest in projects in the blockchain ecosystem layer. 3 Who We Are
- 4. 4 Industry Recognition 36Kr TOP3 Chinese Blokchain Investment Firm Lianbushou TOP10 Blockchain Investment Agencies Tsinghua X-lab Research Center TOP20 Most Influencial Blockchain VC Forbes Article “8 Decimal has consistently been ranked a top fund in crypto space”
- 5. For Trustology Lending ST Exchange Development Crypto Exchange Media Stable Coin Security Token and Financial Ecosystem Payment Issuance Platform 8 Decimal Incubation
- 6. STs Address the Issues of Four Large Markets 66 Asset-Backed Tokens CRE is a popular use case for security tokens $54 trillion size of global commercial real estate market (Source: Fortune) Tokenized VC Funds shorter holding periods will attracts more LPs $5.2 trillion amount invested in VC firms (Source: McKinsey & Company) Share-Like Tokens Given easier exit opportunities, VCs will invest more $1.8 trillion cash not being used by VCs (Source: McKinsey & Company) Crypto-Bonds local governments are exploring the benefits of STs $3.8 trillion size of municipal bond market (Source: Bloomberg)
- 7. Security Tokens Have 8 Major Benefits 7 Rapid settlement Reduction in direct costs Fractional ownership Automated compliance 24/7 markets Flexibility of smart contracts Increased liquidity & market depth Asset interoperability
- 8. Hype cycle of the Security Token industry
- 10. US focused Issuance Platform Successful cases include SPiCE VC, BCAP, Lottery.com Major Security Token Issuance Provider 10 Investors Blockchain Capital, Ripple, Coinbase Venture and OKEX Capital, 8 Decimal Capital
- 11. Security Token Exchange platform First mover in the space, quickly built out the technology combined with an ATS Major Security Token Exchange 11 Investors Huobi Capital, Morgan Creek, Sharpe Ventures, Harvard Angels and more
- 12. First Crypto-Bond Offered Bibox Exchange’s Crypto-Bond First mover in the crypto-bond space, providing a low risk, fixed-income asset to the cryptocurrency space Bibox Bond $1m worth of bond, pegged to the exchange’s native token BIX, providing 4.8% bi-annual coupon bond with 1 year maturity
- 13. What Makes a Good Asset Class to be Tokenized First? 1313 Real Estate Startups and Small Businesses Mature BusinessesFine Art Venture Fund Private Equity
- 14. Security Token Example 1414 Client Background Forise Holdings is a Global Culture and Tourism Industry Investor and Operator. Fuhua Tourism is wholly owned by Forise Holding. ● Forise Holdings has over 5000 employees and managed capital exceeding hundreds of billions. Deal Background Fuhua Tourism will tokenize its $1 billion building/hotel in Lijiang, Yunnan Province. Services Offered by 8 Decimal: ○ Token Design ○ Token Issuance ○ Exchange Listing ○ Marketing ○ Legal Service
- 15. STO Services from 8 Decimal Capital 15 Fees: ● Basic service fee ● Other service fees: provide underwriting, roadshow, media promotion and other services according to customer needs and charge service fees accordingly; charge a certain percentage of underwriting fees according to the amount of funds raised.
- 16. 16 Contact Please reach us out at remi@8dcapital.com if you have any questions or inquiries Website: http://www.8dcapital.com/ Medium: https://medium.com/@8DecimalCapital
Notas do Editor
- 8 Decimal Capital, started in 2017, is a VC firm based in San Francisco and Beijing focused on blockchain and cryptocurrency with currently $60M under management. Some of our advisors include Fan Zhang, a co-founder of Sequoia Capital in China, and Karen Chen, former CEO of UBS in China. Over the last year, we have invested in over 40 different projects, ranging from protocols, public chains, exchanges, stable coins to media firms. In addition to investment in the cryptocurrency ecosystem, we are now focused in investing into the building blocks of the security token ecosystem, in the same way we’re looking into the different building blocks such as issuance protocols, security token exchanges, custodians etc. Our check size is typically between 100-250k. In addition to providing capital, we help our portfolio companies form strategic alliances with many exchanges, media outlets, consultancy services, and developer communities, create synergies among our portfolio companies and provide media & PR services both in the US and China. Remove basis, include SendFriend
- 8 Decimal has obtained great performance over the past year and half. Token Metrics ranked 8 Decimal second place out of the 51 active crypto funds. The firm is also known in China, named one of the top 10 funds in the blockchain industry by both 36Kr, and Odaily, one of the top 20 funds by Tsinghua X-Lab and Youth Education Chain League.
- Among the security token ecosystem, we have invested in security token exchanges, such as Open Finance; Issuance platforms such as securitize; stable coin projects such as TrustToken; We are also incubating 2 projects, STO review, a security token review platform, partnership with stomarket.io
- Why should we pay attention to security token landscape? The most straightforward answer is after we looked into all the industries blockchain can disrupt, the financial industry has the largest market size. According to McKinsey, 5.2T were invested in VC firms; According to Fortune, there are $54T worth of global commercial real estate in the world and according to Bloomberg, there are $3.8T worth of global municipal bonds.
- We believe that Security Tokens will bring transformation changes to the financial legacy system. This is similar to before the Internet came out, people were using Snail mail, in which to send a message you had to print out, put in an envelope, pay $0.5 and wait 3 day to send over mail vs now with email it’s one click, instantaneous message, with order of magnitude faster, cheaper and simplicity. In a similar way, with tokenization if you can allow securities to have an electronic format and to be inter exchangeable on different exchanges, enabling new use cases that weren’t practical before. Ex: you wouldn’t mail someone a letter to schedule for lunch, but can do through email. In the same way in the future, you can tokenize assets that were not possible before due to the high costs. A lot of these are not in the market yet but we can imagine what are some new use cases. For example, tokenizing a sports team, Celtics. Right now you could sell the ownership of the team to a major investor, but let’s say if you tokenize 10% of the ownership and sell it 2000 people, which is the maximum holders you can have for a single class of equity, you can allow for dividends, capital appreciation, and add in other interesting rights. Since consumer demand nowadays is more focused on experience rather than ownership, as we have seen with Netflix and Spotify, you could for example offer token holders new experiences, such as first dibs on box seats, meet players after the game etc. Because the cost of ownership transfer is much lower, you can create new models like this and make it accessible to consumers. Transparency, establishing trust (ultimate cap table of who owns what + calls the blockchain for each trade, if compliance, the trade goes through, if not, there would be an error blocking the transaction) Liquidity (Right now buyers and sellers can’t find each other, need to go through fund managers to make transactions happen because of all these complicated and contractual rules that you have to enforce “who/what/where”, which takes months or years for investors to get out of positions, creating a lot of risks) 24/7 365 market, world-wide, and portable to different exchanges because it’s sharing the same blockchain Cost Reduction Overall, 8 Decimal Capital is looking for an evolution rather than a revolution: to change the analogue world into a hybrid digital world instead of directly going into a purely digital world, because we would still need central authorities to provide us the ultimate guarantee and protect us. This hybrid world combines the traditional business world with new technology without completely replacing current business structures. This will allow for steady and sustainable growth of blockchain technology. We think tokenized securities will not replace all financial services, it's just providing better tools. For example, Salesforce didn't replace sales people, but simply provided better tools for salesman. In the same way, tokenized securities can help companies, brokers and investment banks raise money more efficiently, but they will still exist. So security tokens will not remove all the middleman, but digitize the processes and make them more efficient.
- This is inspired by the hype cycles that Gartner create for emergent technologies. As of now, we are still in the early stages of the Security Token ecosystem, in which different issuance solutions are still being developed and tested. We believe that it will take at least another 4 years for the STO ecosystem to grow and mature from both a technical and regulatory perspective, allowing for a sustainable transition from the traditional securities system into a tokenized system. Until the space becomes more mature and viable, the majority of the early adopters of STs are going to be from the cryptocurrency space rather than the traditional players. As the different STOs and exchanges launch next year, we predict that the lack of liquidity and challenges around implementing complex use cases and securities laws will bring us closer to the reality and decrease the overall hype and expectations around STOs. We have spoken to dozens of projects launching an exchange for security tokens and we always ask them the same question “How will you create liquidity for the tokens listed on your platform?”. Oftentimes, they answer this question by mentioning the market makers they will partner with and their plans to attract users to their platform. In our opinion, this method won’t produce the results that these exchanges anticipate. Market makers can create liquidity for those exiting a position, but won’t be able to sell the tokens for a profit if there isn’t a market of buyers. In our opinion, exchanges don’t create liquidity. Exchanges are a way of managing an already liquid market and facilitating the trading of liquid assets. Prior to liquidity, still focus on traditional model of broker-dealer making intros of projects to investors. At this point, we believe that the market is too nascent for exchanges to bring any value to the tokens that are being listed on them, and we can see that through the low liquidity on some of the security exchanges. In the future, major traditional exchanges, such as the Nasdaq, will also develop their own solutions to facilitate the trade of security tokens in 2019. Would be an easy transition. We have seen a recent project Bakkt created by The Intercontinental Exchange’s (ICE), an operator of several global exchanges including the New York Stock Exchange,which just raised over $182M in funding to enable consumers and institutions to buy, sell, store and spend digital assets. It would be very easy for them to offer security tokens down the line. How would we know that the industry is mature enough for adoption? We still need a lot more user-friendly UI/UX. We know the industry will be ready for adoption when using blockchain based technology will feel like a regular software, so that we can focus on the investment projects rather than focusing on the technology. Over time, more efficient technology and new regulations will appear and help drive the growth and adoption from the traditional players.
- Team: Since most of the project are early stage, we focus heavily on the team’s background. Ideally, the team has directly worked in the industry, with previous start-up & exit experiences. For example, in the case of a security token exchange, ideally the founders worked or built a crypto exchange and also worked in the traditional financial industry. Overall, the existing cryptocurrency exchanges are more familiar with crypto trading, but they often do not have the necessary licenses in place, while the traditional exchanges are the opposite. Licenses: We have seen a lot of projects getting licenses from small places that have security token friendly legislations. Due to the size of their governments, these countries are able to adapt at a quicker pace than larger countries. However, we prefer if the licenses are from large countries, such as the US, Singapore, European countries versus small places like Gibraltar, Mauritius, Malta. Large countries would give more credibility to the company down the line and unlike ICOs, regulators around the world are showing positive sentiment towards the STO market, even the SEC. We believe that global regulation will come quickly after the SEC creates regulations which are specific for digital assets. In addition to knowing where the projects got their licenses, ATS/ATLS (Alternative Trading System License), RIA (Registered Investment Advisor Licence), BD (Broker-Dealer Licence), RAE (Clearing and Transaction Execution Licence), we also pay attention if they own their licenses or are utilizing a partner’s license for a revenue split. If it’s from a third party, then we would like to get more details on the terms of the partnership. Competitive advantage: All things considered, we’re trying to select the companies that has the best shot at succeeding in this new emerging market. Similar to the approach taken by Don Valentine from Sequoia, we really focus on understanding the market, how it could potential evolve, pay attention to the different players in the space, then identify the companies who can be a good fit to execute in the market. Valuation: We have seen a lot of security token exchanges and issuance platforms have too big of a valuation. We think this might be due to the previous inflated valuations and frenzy from the cryptocurrency bull run. If it’s just a team with an idea without any licenses or tech, the valuation should be under 10M. If they do have an edge around licenses or technology, then it can go up to 20M, and depending on traction, up 40M. Technology: It’s probably not the most important component because we’re early and you can fairly quickly switch and catch up on tech once a better solution is proven to be successful. But it helps to understand how the entrepreneur thinks about tokenization and how much thoughts are put into considering the compliance requirements (investor whitelist, trading permissions in smart contract, backdoor to help on re-issuing security tokens if a major problem occurs etc.), regulatory limitations (GDPR around data), disclosure, privacy etc. It’s important to understand that unlike cryptocurrencies, security tokens doesn't represent ownership, but the record of ownership. This is fundamentally different and necessary because if an investor loses his/her private keys or is deceased, you should be able to cancel token ownerships and issue new ones. Shares of a company cannot automatically disappear if the company is still there. This back-door mechanism is available in Harbor for example. Go-to-market: We have our own opinion but we always keep an open mind to hear how the entrepreneurs are planning to tackle this emergent industry, how they think about the space, and the timing of releasing products in order to build a sustainable business. For example, if the maturity of the industry is not there and cannot provide liquidity, then focusing on finding great projects to be tokenized and bridging capital from more traditional investors might make more sense at this stage, then launch the exchange business once the industry matures and has more liquidity.
- Team is coming from Spice VC, and developed their own security token protocol, which right now is focused on Ethereum but we like the fact that it can be applied to different blockchains down the line. Securitize has established a good foundation for its marketing and digital presence in the space, with many of the first tokenized projects in the space, such as Spice VC, BCap, Lottery.com, becoming a first mover. The lead investor is Blockchain Capital along with other investors including Coinbase, and Ripple.
- Also a first mover in the space, quickly built out the trading technology with an ATS compatible Regulation D, S, A+ or CF exemptions. OpenFinance CEO, Juan M. Hernandez, also has many years of experience in financial exchanges.
- Currently, there is a lack of debt products in the security token and cryptocurrency market. Bonds are often regarded as a stable, low return investment asset, that is most popular during market downturns. Over the year 2018, the cryptocurrency market has fallen from over $850B to sub $100B total market cap, with most of the tokens falling 90% of their all-time high values. During the bear market, the market movements are very difficult to predict and investors are now shifting their attention towards more stable and income generating assets. Additionally recent volatility in the US markets and a 10-year bull market has led many to believe that a downturn will happen in the next 6 months. With this in mind, we have invested into Bibox bond, the world’s first tokenized bond. In this market downturn, Bibox is providing a stable and low risk investment asset in the form of bond, providing fixed-income to the investors. Bibox has a hedging mechanism to increase the stability of the bond price and the Bibox has proven itself to be a solid and grounded platform, becoming the 8th largest cryptocurrency exchange in a year and half. Since the amount of bond and duration are fairly small ($1M for one year window), we believe that the risk is minimal. By being the first platform to offer crypto bonds, Bibox is in an interesting position to test out the water for this new market and allow us to closely monitor the development of the crypto bonds.
- As we are early in the industry, it’s important to identify which assets make more sense to be tokenized first. We recently sent out a questionnaire to 20 of our partner channels, asking what they would prefer investing in tokenized products. The majority preferred real estate and fixed income producing assets and the last thing they want are actually equity. People are currently looking for more stable assets, even with small returns of 3-5 %. They prefer something in which the model is clear, for example if you buy airplanes and rent them, you can easily forecast revenues vs investing into the equity of a startup. What makes sense to tokenized at this point, are also things that are capital intensive and the identity of investor doesn't matter too much, as long as they are legal. For example Real Estate is a good example in which you can unbundle into smaller units of investment, gather funds from investors around the world, and lower cost of capital vs investing in tech startups. Additionally, early stage tech startups wouldn’t like investors trading around their equities, in which speculations can create bloated or poor valuations, affecting their growth. Security tokens aren’t the new ICO. You need companies with revenues which allow to value on asset. We think a good way to think about which asset class to tokenize first would be based on how much information do you need to know on the investor side to make this happen. Currency is easiest to tokenize as you don’t really need to know the information about the investors (who tracks who owns cash?), then it’s followed by commodity, then real estate and equity as the most complex asset. This is the approach taken by Trusttoken, who is first focused on stablecoins. As of now, you don't need to know the identity of everybody holding TUSD, just like you don't need to know who's holding cash but this might change in the future. And finally, this is often under considered by platforms in this market. We think a lot of the security tokens coming out this year won’t be of high quality, as many would be chasing the hype and utilize the first mover’s advantage to raise capital. However, for a project to be liquid, it still has to be fundamentally good, else tokenization will still make it an illiquid asset.
- An example of a Security Token project is Fuhua Group. Fuhua Tourism will tokenize its $1 billion building/hotel in Lijiang, Yunnan Province. They are very large real estate company in China, and saw some examples of tokenized assets happening in US. The project is tokenizing their real estate in order to get Cashflow. We are currently helping providing services to help tokenize the project, as an end to end solution by working with different issuance and exchanges partners.
- 8 Decimal is uniquely positioned to have a deep understanding of the industry and work with our portfolio companies to provide services to companies who want to tokenize assets. We have incubated an advisory service, that can help Chinese financial groups issue security tokens offshore (in US, Singapore), some of the services include: Token issuance, select the tokenization platform (blockchain agnostic, Ethereum, stellar) and issue tokens through our backend system, with KYC and file management system Set up Legal structure, for example help Chinese companies restructure assets into a legal entity in the US or Singapore Register with the SEC (Reg D or A), then offer private placements through our partnered law firms Provide Fundraising support, and help reach out to investors and high network individuals, as we have previously done with some of our portfolio company (ex: helped raise series B for CoinSuper)