The Weekly Mule: Digital Securities are Coming, Slowly

To the London Stock Exchange

The past few weeks have been marked by several positive developments in the world of digital securities. The community was pleasantly surprised by the news that the London Stock Exchange Group (LSEG), one of the world’s largest and oldest stock exchanges (founded in 1571), was testing the issuance of security tokens. Specifically, the 2030 Group, the name that may ring the bell as the creator of the crypto mobile wallet Pillar Project, issued the first digital securities on the LSEG.

In this historic event, around £3m (~$3.9m) worth of shares in 2030 were issued in the token form and settled in a test environment on the LSEG’s Turquoise equity trading service. The trading of digital securities in question will be regulated by the Financial Conduct Authority (FCA), protecting the investors from any potential problems of technical and systemic nature. LSEG already has a history of dealing with blockchain companies, for instance with IBM through its subsidiary Borsa Italiana to develop a securities data blockchain solution for European SMEs, as well as partnering with fintech startup Nivaura to help develop its digital securities issuance platform. These activities add LSEG to the growing list of mainstream institutions and organizations that support the wider acceptance of digital securities.

LSEG | Source: Wikimedia Commons

Continuing the trend, a group of investors has recently started a blockchain-based venture capital fund worth $50 million. The group gathers some of the veterans of blockchain-related projects – the former partner at Horizons Ventures and current HTC’s decentralized chief officer Phil Chen, the former community lead at Greylock Partners Chris McCann, as well as the partner at 500 Startups Edith Yeung. The trio created the fund, called Proof of Capital (a confident name), with a mission to create a decentralized, democratic ecosystem. The fund will deal with investing in early-stage startups that focus on fintech, hardware, and consumer aspects of the blockchain ecosystem including remittances, wallets, custody, security, and identity. Although the fund is traditional in its setup, as in it is held in fiat currency and focuses on regular VC deals, its launch is nonetheless an interesting addition in the world of blockchain and security tokens.

This is not a new development in the blockchain area, but rather a continuation of the trend of blockchain venture funds. The rise in private sales began last year, with even the major blockchain companies venturing (pun intended) into VC funding. Moreover, some of the projects are even delaying token issuance, raising money this way first.

But Wait, There’s More – Treasury Fund Coming in the US

It doesn’t end there, though. A United States-based institutional asset manager and fund creator for digital assets Arca Funds has filed with the US Securities and Exchange Commission (SEC) a request for permission to launch the Arca US Treasury Fund. The fund will issue shares as digital securities in the form of ERC-20 compatible tokens on Ethereum blockchain, which will be called ‘Arca UST Coins.’

The tokenized bonds will basically function as a stablecoin and the reference asset will be the fund’s portfolio. The fund will hold at least 80% of its assets in US Treasury’s securities portfolio that covers bills, notes, and bonds. The other 20% is planned for other kinds of fixed income vehicles like bonds, debt securities and alike issued by the US and non-US public and private entities. The initial net assets of the fund will be set at $1 and the minimum investment will be $1,000, with subsequent investments in the amount of at least $100. The SEC doesn’t always have to be “the bad cop” in this matter and is not at war with the technology, as seen in its efforts to help crypto issuers determine if their token is a security. Specifically, the agency’s Strategic Hub for Innovation and Financial Technology (FinHub) revealed a framework earlier this month written by two of its employees concerning this issue.

Last But Not Least – GSX to List Digital Securities

In other news, the Gibraltar Stock Exchange (GSX) is preparing to list digital securities. Using blockchain technology, the GSX will list a wide range of tokenized assets on GSX Global Market (GSX GM). Investors will now be able to access a regulated secondary market for trading digital securities. Through the GSX ecosystem, issuers will have access to all the benefits of blockchain technology, without the unnecessary costs. This will make GSX one of the pioneers in offering the listing services of digital debt securities and digital funds, while also listing corporate and convertible bonds, open-ended funds, close-ended funds, asset-backed securities, as well as derivative securities. This will pave the way for the many STOs that took place in 2018 and 2019 to become liquid, a very positive development for the concerned STOs heading into future endeavors.

It is also expected that this development will improve the levels of liquidity traditionally experienced in similar asset types, in addition to increasing the potential GSX user base and turning the exchange into a pioneer in transforming the capital markets. This announcement is not surprising coming from the GSX, which has a history of positive activities in the field of tokenized securities. In December 2018, it announced it would start offering insurance for the digital assets in its custody, while in April 2019, it partnered with STO Global-X to provide a comprehensive solution for digital securities.

GSX is only going with the tide. After the crypto winter set in, it became obvious that ICO was not the ideal way for pooling investments, as it is not clearly dealt with under legal frameworks, nor do tokens sold in this way represent anything more than a speculative element. Digital securities are fully regulated as they are usually transacted in controlled and legalized platforms. They can also be seen as a middle ground between traditional banking and blockchain technology, bringing digital assets under regulatory frameworks and ushering the democratization of financial markets. We have witnessed several developments in this direction in just past two weeks and we are confident that more are coming.
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