Issuers of private securities have reasons to be excited about the possibility of greater liquidity. One reason is that many investors cannot afford to have their money locked in a single investment for years. More liquid securities are accessible by a larger pool of investors. It also gives issuers access to the so-called “liquidity premium” where investors are willing to pay more for liquid securities than illiquid ones, therefore achieving higher prices in the market. The ability to trade out of a position reduces risk for investors, which means they can allocate more of their capital for liquid assets than illiquid ones. Industry estimates put the “liquidity premium” at up to 30%.

So why are private securities so illiquid? Well, there are a number of reasons. Of course, some private issuers might not want liquidity or the value of their securities might be too difficult to discern given a lack of disclosed information about the underlying asset or issuer. Private companies typically have multiple classes of securities issued, complex regulatory restrictions around initial investment and secondary market trading, and clunky clearing and settlement processes. Also, for the most part, private securities are poorly digitized, which adds substantial time and complexity to the transaction process. While we don’t expect private securities to ever trade with the frequency of public securities, we do think there is room for improvement in closing the gap between the annualized trading volumes of private and public securities. The right number is probably somewhere in between existing figures.

So how do we solve this? Blockchain-enabled securities, or security tokens, partially address these problems since they are programmable. As a registered transfer agent, Securitize has coded the regulatory complexities of private securities into smart contracts, which govern the movement of the security token on the blockchain. We do this through our Digital Securities (DS) protocol. On top of that, you can represent in the same ledger cash or cash-like instruments like stable coins alongside the other asset representing the security and perform clearing and settlement automatically and nearly instantly as we have also shown here. And you can track the trades on the blockchain and reconstruct the cap table so you can track the beneficial ownership of the securities in real-time.

But technology only addresses part of the problem. A trading venue for private securities in the United States requires regulatory approval. For example, there are registrations like ATS (Alternative Trading System) in the US, MTF (MultiLateral Trading Facility) in Europe and PTS (Proprietary Trading System) in Japan. These registrations are scarce, there around 50 ATS registrations in the US, around a dozen MTFs in Europe and two PTS in Japan. On top of that, those registrations are typically invalid for digital asset securities and require additional approvals from the regulators.

When the security token industry started, there was a lot of excitement about creating security token marketplaces across the globe. The Security Token Group published a list of more than 60 projects in development. We at Securitize signed MOUs or had discussions with over 40 different companies that were working on launching a regulated marketplace for security tokens and hoped to list the securities of our customers.

Unfortunately, very few of these projects have launched, and those that have, haven’t been particularly successful in driving liquidity.

One of the US-based marketplaces announced it was shutting down in April and since then liquidity has dried up with only slightly above $30K trading volume in the three months between July and September for 5 securities trading. Due to the lack of liquidity some of the securities actually trade at a discount of their intrinsic value (e.g. BCAP trades at $3.45 although BCAP’s more recently announced NAV is $5.53). Instead of enjoying the liquidity premium mentioned above, issuers are actually being penalized for trading at a low liquidity venue!

Others are building centralized trading approaches with a traditional clearing system and no usage of tokens or blockchain at all. This approach prevents some issuers from listing their securities simultaneously on other regulated marketplaces. We believe this negates a primary advantage of security tokens on the blockchain, which is the use of a common decentralized ledger as a communication layer for multiple parties.

We faced a conundrum in early 2020. Should we partner with others attempting to solve the liquidity problem or proactively go and try to fix the problem ourselves? After extensive internal discussions with our team and board, we decided to pursue the second option. And project Aquaman was born.

Aquaman as some of you might know is the DC superhero that can breathe underwater and control fish and other underwater life. If someone understands liquidity it is definitely Aquaman, so we adopted this as our internal project name and our symbol to solve the liquidity problem for security tokens.

For Securitize to start from scratch and go through the broker-dealer and ATS registration process would have been an expensive, long and uncertain process. We looked at potential acquisition opportunities in the US given the size of the market, our existing operations, and registration with the SEC as a transfer agent. As mentioned above, there are very few registrations and even less already approved or in the process of being approved for digital asset securities. Moreover, we obviously have our own opinion on the fair value for this and preferably wanted to avoid inheriting legacy operations and technology so we could start fresh building things the way we envision it.

Our search was fruitful, and today we are announcing that we have signed a definitive agreement to acquire Distributed Technology Markets, LLC, (“DTM”), a broker-dealer/ATS. DTM, formerly known as Orchard Platform Markets, LLC, that received approval in 2020 for the primary issuance and secondary trading of privately placed securities, including digital asset securities. The acquisition is subject to regulatory approval. As part of the acquisition, Securitize would also acquire Velocity Platform, LLC, a money services business with money transmitter licenses in several states.

The acquisition of DTM will pave the way for Securitize to develop a suite of services for private capital markets that will be better from top to bottom than anything available in the market today. The acquisition will leverage Securitize’s existing technology stack to simultaneously enable seamless liquidity for issuers and investors, which, as discussed in this article, is currently one of the most underdeveloped yet critical components of the digital securities industry.

We couldn’t be more excited about this new expansion of our business and look forward to unleashing the superpowers of Aquaman in the security token industry and solving the long-standing puzzle of security token liquidity.

Introducing project Aquaman: driving liquidity in the digital securities market was originally published in securitize on Medium, where people are continuing the conversation by highlighting and responding to this story.

At Securitize, we have been tracking the growth of Decentralized Finance (DeFi) protocols and projects over the last few months with the intent of learning how we might improve upon these compelling innovations through the use of Digital Securities (security tokens).

The DeFi space presents an exciting opportunity to create dynamic new markets by utilizing different decentralized applications (DApps) running as financial smart contracts. These DApps run predominantly on the Ethereum blockchain today, where they can interact with each other and digital assets represented in tokenized form.

DeFi Pulse uses a great analogy that compares DeFi to Lego pieces where elements of existing financial software can be mixed and matched together on the blockchain to produce new and innovative financial products and solutions.

DeFi is designed for digital assets, but what happens when these assets represent an underlying security that exists off-chain? How does DeFi and Digital Securities work together?

We believe that the relationship between securities represented digitally by tokens on a blockchain and DeFI is very important because the advantage of “programmable assets” can only be fully realized through composability, which is the ability to leverage capabilities available in the ecosystem that have not been built with a specific asset in mind.

Composability means that the thousands of developers and service providers working to make assets more valuable (through liquidity, usage as collateral, or as a part of an automatic portfolio rebalancing strategy) can do so without having to take any specific asset into consideration. This is the birth of a real ecosystem where new innovations for capital markets can thrive.

DeFi enables functionality that already exists in traditional capital markets in various forms, but that typically is performed by intermediaries requiring complex value chains and cumbersome manual processes. Capabilities like programmatic AMM (automatic market-making) can drive liquidity and generate arbitrage opportunities for Digital Securities, in which their value will factor market demand in the short term, but also long term value based on some traditional performance indicators (revenue flows, dividend distributions, repayments from asset redemptions). So there should be a way to benefit from those in the context of Digital Securities.

The advantage of composability comes from Digital Securities behaving in a consistent way in relation to digital assets, which in the DeFi world currently means being represented as ERC20 tokens on the Ethereum blockchain.

There are specifics to consider when dealing with Digital Securities, which are not simple “tokens.” One of the main issues is that securities are regulated and have several control mechanisms that must be enforced. If we want to consider the implication of using Digital Securities in this context, then the solution will not be pure “DeFi”, but more likely a “HyFi”: Hybrid Finance, which combines some decentralization aspects when dealing with smart contracts and protocols, with some centralized aspects derived from regulatory obligations from the asset manager and their agents.

A few months ago, we announced Instant Access as a way to trade tokens representing securities P2P between two investors, which was a massive leap forward, making securities easier to trade through a fully digital experience, where an owner of the shares makes an offer privately to another investor. They can then “swap” the security for a stablecoin (like USDC) instantly with no counter-party risk.

And while Instant Access is one of the building blocks for the introduction of Digital Securities into the DeFi world there remain a number of other challenges that need to be solved to be able to use the existing protocols, namely:

1. KYC’d identities, AML, and transfer controls. Digital Securities require holders’ identities to be known beyond a simple wallet address, AML checks being performed, and transactions may be restricted due to certain regulatory requirements. This must hold true when interacting with DeFi protocols as well. This is easily accomplished via the integration of tools like Securitize ID and our Digital Securities (DS) protocol.

2.- Authorizing the deposit of Digital Securities in a DeFi Smart Contract. Most DeFi protocols require being able to deposit tokens into a smart contract rather than a wallet, which produces a contract with pooled assets. This raises the issue of custody and control for the securities depending on who controls that smart contract. Regulators will also be highly concerned with the safety of the assets.

3. Pooled assets. If holders are depositing their securities into a pool, then the transfer agent for the securities must be able to discern the appropriate record holders of the securities while they sit in the pool. Such records are maintained by the transfer agent off-chain in what is usually referred to as Master Securityholder File or “cap table”.

4. A final topic of focus is the concept of receipt tokens, which are the tokens issued by DeFi protocols to represent the deposits made into their smart contracts. There are a plethora of new questions that must be resolved like: Are receipt tokens securities? If so, how do we control how they move around wallets, potentially changing investor’s hands? Even if the underlying securities represented by tokens are not, are receipt tokens bearer instruments?

We will attempt to address those questions in subsequent posts and how those fit with existing DeFi protocols, but today we want to announce a new and exciting integration with DeFi protocol Tinlake from Centrifuge (you can read their announcement here), one of the few DeFi protocols that enable real-world assets to participate in a DeFI protocol. Tinlake will be using the Securitize platform for investor onboarding and management, including KYC, accreditation, signing subscription agreements, etc.

Tinlake’s set of smart contracts pool NFTs that represent non-fungible real-world assets and use them as collateral to finance an asset in a stable cryptocurrency such as DAI or USDC. Asset Originators are able to create individual Tinlake pools per asset type, such as one dedicated pool for invoices and one pool for mortgages. For funders, risk and proceeds are shared for each pool but not across pools.

Currently, the receipt tokens for investors on Tinlake pools cannot be used by other investors (tracked by their wallet) to receive contributions from the pool, and the current pools enabled by Tinlake and its asset originators are short term loans that return the money to the investor within a short period of time. Therefore, there is little relevance in enabling liquidity for these tokens.

Centrifuge is looking at enabling rolling pools that reinvest the dividends, thereby enabling meaningful liquidity, but this will require more integration work with the DS Protocol to control the transfer restrictions and this will be an interesting extension of the current work.

DeFi is a fascinating space with rapid growth and many interesting innovations. We believe that with the right checks and balances and the involvement of regulated entities when necessary, these innovations can also be applied to Digital Securities in a “HyFI” format and benefit the capital markets space.

DeFi and Security Tokens — balancing compliance with new financial innovations was originally published in securitize on Medium, where people are continuing the conversation by highlighting and responding to this story.

A lot has changed in the world since our last public update and over a year has passed so it is time for another company update.

The pandemic that hit us in early 2020 continues to this day and has challenged many facets of our society, including our social and economic realities. Everyone has been impacted by the events of 2020 and it’s impossible not to first recognize those who have suffered from illness, injury, and economic hardship during this time and to extend our thoughts to them.

After the initial shutdown in March, we closed all our offices and began working remotely, as did most of our partners and customers. We adapted to this new reality and have for the most part regained the momentum and focus we had at the beginning of the year.

As Securitize approaches its three-year anniversary in November 2020, I’d like to once again take a moment to share an update of where we are as a company and explain where we think the market is headed.

When we first got the idea for SPiCE VC in early 2017 and then launched Securitize, we knew that digital securities would someday become the global standard for issuing and trading the world’s assets, and in particular, private securities and alternative assets.

My co-founders and I had seen first hand how digitization became an unstoppable wave, transforming industries like entertainment, news, and communications only years before. We recognized that blockchain technology opened the door to digitizing all the world’s assets while simultaneously improving critical aspects like security, efficiency, and compliance. It was only a matter of time, so in late 2017 after successfully building the technology to issue and manage SPiCE VC’s digital securities, we spun off the tech and launched Securitize with the mission to make all the world’s assets digital.

Progress from our perspective has been steady, even when you consider the unprecedented challenges of 2020. Today we are more convinced than ever that digital securities are the future of capital markets and that both issuers and investors will continue to benefit as the technology evolves.

In terms of overall company growth over the last 14 months, we’ve launched multiple new features and improvements, including a new marketing website and version 3.0 of our Investor Experience platform. In July of 2019, we became an SEC-registered Transfer Agent, a first in the blockchain space and a move that was subsequently followed by our competitors — although according to their SEC filings none of them have any customers (now the industry has become more transparent in terms of reporting progress).

Becoming a registered transfer agent was a big deal for us. It allows us to provide regulated services around the issuance and asset servicing of securities represented digitally by tokens on the blockchain beyond just providing a technology platform while bringing overall transparency to the space since we are now under the purview of the SEC.

A couple of months ago, Securitize eclipsed the 100 customer threshold. Today we count over 130 issuers and close to 30,000 investors that use our technology to make the private security investing experience better for both issuers and investors. Both are impressive numbers that we are extremely proud of. Fourteen months ago when I gave our last public update, we only had 43 customers with just a few thousand investors using our platform, and at that time we had just finished a record quarter where we signed seventeen customers. In our last quarter (Q2’20) we signed 27 customers, and this quarter (Q3’20) we will sign 35 new customers — all good signs for fans of the digital securities industry.

To expedite the login process for the close to 30,000 investors using the Securitize platform and facilitate the mobility of their investor information across issuers and partners sites, we recently released our new portable investor identification service, Securitize ID. This exciting new service only houses investors that have been verified by our compliance team and allows them one-click access to issuer’s sites powered by Securitize technology. Additionally, Securitize iD is open for integration with partners to facilitate investor access to other related services without having to create separate accounts and repeat the identification and approval process. If you are an investor interested in the digital securities space, you can create your own Securitize iD here.

On the customer front, we have signed a number of significant and innovative new projects like Curzio (see the case study here), Lead Real Estate (first STO in Japan), World Chess (first hybrid IPO that will be the first security token issued on Algorand), DreamFanShares (the first professional athlete security token issued by Spencer Dinwiddie of the Brooklyn Nets), and Current (a blockchain-enabled media network that rewards users for streaming media). Since inception, we’ve always had several funds using our platform, like Blockchain Capital, SPiCE VC, Protos, Science, Cityblock, 22x Fund, and Cosimo X (which recently became the first security token fund to receive institutional investment from a university). More recently, we have also launched a new full-service offering for funds with Stonegate Global that gives new and existing funds a cost-effective turn-key solution. We also announced a partnership with AltoIRA that allows customers to place security tokens in their Investment Retirement Accounts for a more favorable tax treatment, which is also an industry first.

Which brings me back to our status as an SEC-registered transfer agent, which effectively allows us to provide not just technology to issuers, but also regulated services as a transfer agent. A recent example of this is Lottery.com’s first-ever on-chain royalty payment where over half of the tokenholders elected to receive their payouts in the stablecoin USDC, making the whole process more efficient and streamlined than a traditional ACH, wire, or bank transfer. We believe that stable coins will play a key role to enable digital securities functionality and recently wrote about it at our partner Circle’s blog.

Liquidity has been, and will continue to be, the holy grail of the digital securities industry and continues to be the most underdeveloped part of the market. For this reason, we have not stopped working to help facilitate market liquidity for our issuers. In addition to already having the most widely adopted secondary market protocol in the industry, our DS Protocol, and integrations in virtually all of the available and pending secondary market options, in April of this year we launched Instant Access, a new feature that gives issuers the option to offer compliant peer-to-peer atomic swap transactions for holders of their digital securities. With this new technology, you can transact private securities in real-time without any counterparty risk, a first in the industry, you can see a demo below where a real private security is transacted legally in real time without any manual intervention from a broker dealer or a transfer agent. Expect a lot of progress on this front during the next 12–18 months as fixing this problem is one of our main focuses for the remainder of 2020 and 2021.

We also raised additional funding from some of the world’s largest financial institutions, like Santander InnoVenture (recently rebranded to Mouro Capital), MUFG, Nomura Holdings, SBI, and Sony Financial Ventures (SFV) as well as some additional great blockchain investors like Algo Capital (the Algorand ecosystem fund that was recently renamed to Borderless Capital), Blockchain Ventures, Fenbushi, Kinetic, and the Tezos Foundation, to bring our series A total to over $30M. Our early backers Blockchain Capital and SPiCE VC also participated in the new round showing support and confidence for our progress to date. The fact that global financial institutions alongside some of the top investors in the blockchain space are backing us is something we are very proud of.

Another major advantage of digital securities is their ability to enable issuers and investors to interact instantly across international borders. We continue to field inquiries from potential issuers from around the world but have made a significant commitment to servicing the Japanese market and the greater APAC region.

We believe that Japan, with its penchant for technology and history of early adoption, will be a global leader in both adoption and advancing the digital securities industry. Japan recently announced a new law that clarifies the status of security tokens that we think will greatly help to advance the industry there. For more information on the status of the development of the security token industry in Japan, our friends from the Security Token Market recently published a great summary with a timeline of events here.

Securitize has already joined a number of distinguished industry groups in Japan to advance digital securities development and adoption, including the MUFG led Security Token Research Consortium in November of 2019, and the SBI Holdings led JSTOA in June of 2020. Securitize is also putting its technology to work in Japan with the Japanese real estate powerhouse LIFULL announcing in August 2020 the launch of its full-service real estate crowdfunding platform that runs on Securitize technology.

In order to solidify our already strong foothold in Japan, where we also have investors such as Global Brain, Mitsui Fudosan, and KDDI, we bought the successful Japanese blockchain consulting company, BUIDL, and launched Securitize Japan which operates out of our new Tokyo office. This was our first corporate acquisition and an important bet to quickly establish us as the market leader in Japan.

And we’re not alone, a lot of firms in the industry have also been making great inroads. Given that there’s an over-abundance of news in our industry and it’s sometimes difficult to authenticate or follow up with all the announcements (many past announcements have never actually delivered anything, a consistent problem for the credibility of our industry), I would like to highlight the ones that both caught my attention and are credible, namely, Figure issuing $150M in securities on their proprietary and permissioned based blockchain Provenance, Symbiont work with Vanguard on FX Forwards, RealT with their tokenized real estate offerings and an interesting Uniswap integration, Arca with their tokenized fund of US treasuries, and finally industry giant DTCC with their pilot program for security tokens, Project Whitney. We also saw an exit from the market by one of the pioneering companies in the space, Harbor, which was acquired by Bitgo and had their platform subsequently shut down.

Ah, and we also made the CoinDesk top 50 this year, the only pure-play company in the security token space on the list, something we are very proud of.

It’s easy to look at this moment in the digital securities industry and correctly deduce that we have a long way to go to reach mass adoption. But it’s also important to recognize how a few dedicated teams at many startups in the space, along with internal teams at major financial institutions like Santander, MUFG, Nomura, and more, are coordinating their efforts to iterate existing technology in a rapid cycle of innovation, deployment, and improvement.

Securitize is dedicated to playing our part and expanding our capabilities to purposefully drive the industry forward. We see this as a critical, creative moment before the inevitable digitization of capital formation and asset management takes off and never looks back, and we are proud to be a part of it.

We all hope you stay tuned for what’s coming next.

The Securitize team

Update on Securitize’s Progress and the Path to Adoption of Digital Securities — 2020 edition was originally published in securitize on Medium, where people are continuing the conversation by highlighting and responding to this story.

When we started the project of tokenizing SPiCE VC and subsequently founded Securitize, the market for security tokens barely existed. Only one company, Blockchain Capital, had pioneered the technology and successfully issued a security token. At that time, we envisioned a tokenized VC fund that would provide automation and liquidity to the fund’s LP interests, which traditionally had been illiquid assets. Early on, we were inspired by articles and interviews with people like Stephen McKeon and David Sacks (that went on to fund another company in the space, Harbor) and more recently by the writings of prolific author Jesus Rodriguez.

However, our drive was also based on a hunch that the sector was ripe for development. That development ended up taking some time, as it was not until late 2017 and early 2018 that companies like OpenFinance, tZERO and later Sharespost, announced their intention to launch trading venues for security tokens. It took nearly a year after those announcements for trading to become a reality.

Meanwhile, the market for primary issuances has continued growing in anticipation of a developed and robust secondary market.

Let’s look at some statistics from our customers:

Securitize has signed a total of 43 customers. We just had a record number of signings with 17 new customers coming in Q2 2019 (it was also our record quarterly revenue). Out of our total customers, nine have already issued security tokens on the public Ethereum blockchain, which are listed below with their Etherscan addresses for transparency purposes (we do not advertise the names of customers that have not issued their securities yet) with the total value of the securities reaching close to $200M. All of these securities are digitally represented on the blockchain through tokens issued using our Digital Securities compliance protocol (DS Protocol). We have recently open sourced the interfaces of the protocol and you can learn more about it reading the posts in Medium from Jorge Serna, our VP of product.

As a company, we have grown to a strong team of more than 30 people in two main sites, San Francisco and Tel Aviv and other offices in New York, London and Madrid.

The nine issued securities are held by more than 1,500 investors, with an average of more than 150 investors per project. Out of those, five have been traded on OpenFinance over the past few months and one is now trading on SharesPost. Across both marketplaces, hundreds of trades have already been made.

While liquidity today is limited — due to factors including the nascent state of exchanges, restrictions on trading for US investors, limited numbers of listed tokens and the fact that a very low number of marketplaces have launched — we expect the market to improve dramatically with security tokens using Securitize’s DS Protocol being traded on tZERO as well as the launch of new regulated security token marketplaces across the globe. We believe increased liquidity will lead to an increase in the number of new issuances in the market.

Our customers have been digitizing a variety of securities. We have tokenized LP interests in VCs, hedge funds, real estate, and operating businesses (equity and other instruments) coming from both the blockchain space and other tech businesses. This variety shows the breadth of options available to customers when it comes to issuing digital securities.

Another important part of the ecosystem that was also missing initially was custody services for digital securities. Recently, companies like Coinbase Custody and BitGo have entered the sector, and we have already integrated with them and several others to bring together this necessary piece of the puzzle to make the issuance and management of digital securities a success.

Recently we have seen other companies, like Provenance, conduct successful security token offerings, and Facebook announcing what will surely become the largest security token offering for their new blockchain initiative, Libra.

From a big picture perspective, the security token market is still in its infancy, but it has come a long way since we first started building it in 2017. There are a lot of positive signs that things will continue to improve over the next 12–18 months and we expect adoption rates to increase substantially. At Securitize, we continue growing strongly and remain committed to working with our partners to make the market a success.

Securitize’s technology has been successfully used to create the following digital securities tokens on the Ethereum blockchain:

• SPiCE VC (spice): https://etherscan.io/token/0x0324dd195d0cd53f9f07bee6a48ee7a20bad738f
• 22x Fund (22x): https://etherscan.io/token/0x0073e5e52e2b4fe218d75d994ee2b3c82f9c87ea
• Blockchain Capital (bcap): https://etherscan.io/token/0x1f41e42d0a9e3c0dd3ba15b527342783b43200a9
• Aspencoin : https://etherscan.io/token/0x95e6737ef3d4a65535cdfab02f4de54d904bea0b
• Augmate (mate): https://etherscan.io/token/0x93047ce776e3decdc837598f5a752083ccfedb32
• Science Blockchain (sci2): https://etherscan.io/token/0x682ef9cc637ef56577092b29ae9275a629aae7db
• Lottery.com (LDCC): https://etherscan.io/token/0x82017d0409fb4ea27d4ae799c9e3b9b4f847c837
• Protos (PRTS): https://etherscan.io/token/0x5e17f6f450dcb0bc69b232ea554e224d7e88067a
• Cityblock Capital (NYCQ): https://etherscan.io/token/0xd74bee51abbeff07a89dd90305667c1e17212afa

Update on Securitize’s Progress and the Path to Adoption of Digital Securities was originally published in securitize on Medium, where people are continuing the conversation by highlighting and responding to this story.

Decentralized Compliance is the Key

Earlier this year, Templum announced that it was to be the first company to execute a secondary market Security Token transaction of Blockchain Capital’s BCAP token. Given our intimate knowledge of the BCAP token (the original version, and not the current one upgraded with our protocol), we well know that this was not done using a decentralized compliance protocol on the blockchain, so the approval and necessary checks were presumably done manually.

What we will show you here is the first ever usage of a Security Token protocol to approve a trade on an exchange. The compliance checks for this exchange were run on the blockchain in a completely automated and decentralized way, implementing Securitize’s Digital Securities (DS) Protocol’s set of smart contracts. The trades were done in two different marketplaces — two of the many that are integrating our compliance protocol. Please note that while some exchanges choose to use their own internal protocols for compliance, the advantage of using an independent one (like ours) is that the same token can be issued with a single protocol, and traded compliantly on multiple exchanges simultaneously, which will increase liquidity for issuers. We believe that, as in capital markets today, the role of the exchanges versus the role of the so-called transfer agents (which in this case are just protocols on the blockchain for Security Tokens, decentralized transfer agents) will be delineated. A protocol (transfer agent) that is proprietary in one exchange is less likely to be adopted by competing exchanges.

Trading via Open Finance Network

We started working with Open Finance Network (OFN) back in May and have integrated the DS Protocol into their system. Thanks to the integrations made, we have now seen how an investor who onboards and runs KYC checks via the OFN platform can be cleared into the Registry Service associated with a DS Token. We saw this happen with the SPiCE VC Token, and it was possible because SPiCE VC “trusted” OFN via the DS Protocol to execute.

With this possibility, a new investor is able to buy SPiCE VC Tokens from other investors selling them. The OFN platform matches such orders and clears them via the transferFrom() method in the DS Token (a standard ERC20 method since we are ERC20 compatible). The DS Protocol then checks not only that both parties in the transaction are in the Registry Service (what would be a basic whitelisting), but also that the current context and the parties' categories allow such a transfer to happen. Note here that simply creating whitelists of investors on a contract is not enough to run a decentralized compliance protocol; you also must check compliance rules and investor limits in real time.

The approved transfer will move tokens from one party's wallet to the other’s.

And here is the first transaction that ever executed such a transfer between parties using the DS Protocol via the OFN platform, which happened a couple of weeks ago:

Ethereum Transaction 0x721c5bce52230148d810cc153e3f556eb482582e4a40063c125b986f2d35267a

The transaction shows how 4 SPiCE tokens were exchanged. There is no other token being exchanged as part of this transaction because the trade was made for US dollars held in custody by the OFN system.

This trade was facilitated between two European investors (one in Spain, one in Germany), and therefore was approved following Reg S and the local restrictions of those two countries.

Trading via AirSwap Spaces

We have also been working with AirSwap, so that their bulletin-board service can facilitate trades between individuals holding DS Tokens — but in a controlled way. The way AirSwap works is different than OFN which is a licensed ATS. AirSwap provides pure P2P (person to person) trades, has no order book, no order matching and no transaction fees, and simply acts as a place where people that want to buy and sell tokens find each other and agree on a price to trade. But still, we must ensure that these trades happen in a compliant way and this is where our protocol plays a role.

The tests, done via AirSwap Spaces, permitted trades between investors who were identified by their holding of a wallet owning an SPiCE VC token issued with our DS Token protocol. Since they own tokens, they are already part of the DS Token Registry Service, and therefore are registered investors. AirSwap Spaces then facilitates the tools for these investors to create a personal chat channel in which they can arrange a trade. Such a trade will materialize in a buy or sell order, to exchange some quantity of a DS Token for some other token.

The trade is then executed via the AirSwap smart contract, which manages both exchanges (the DS Token and the counterpart token) as part of a single transaction, so that both exchanges, or neither, are cleared. AirSwap also relies on the ERC20 transferFrom() method, which the DS Protocol controls to ensure the validity of the transaction.

This is the first transaction that ever processed such a trade of DS Tokens via the AirSwap protocol:

Ethereum Transaction 0xe6988ff8b12f33724b28150699b3b64ff1060496c511563a9dac7c853bb5d177

In this case we can see how the AirSwap contract linked two transfers in the same transaction, allowing the exchange of 1 SPiCE VC token for 0.00875 ($1.77) of WETH (Wrapped Ether).

And many more to come!

We are very proud to be working with OFN and AirSwap to advance the future of Security Tokens, and provide compliant trade via a decentralized protocol on the blockchain — the first time that has ever been done in the world. The above transactions are still not real transactions but tests done using tokens just for that purpose but completely simulate how it will work in a real situation when they launch, something that is happening very soon. We are also working with other partners to enable compliant liquidity for Digital Securities, like Blocktrade, BnkToTheFuture, ERC Dex, Hyperion, Tzero and SharesPost, and we will very soon be listing many more Security Tokens, issued by us beyond SPiCE VC, on all of these marketplaces.

For many more digital securities to trade…

First ever Security Tokens traded with a decentralized compliance protocol was originally published in securitize on Medium, where people are continuing the conversation by highlighting and responding to this story.

When I started SPiCE VC with my partners Ami and Tal, the main reference we had in the industry was the security token offering that Blockchain Capital had done for its fund. Not only did they issue a security token, which was what we believed we needed to do, but they also tokenized a fund. I wrote about how it became a source of inspiration for us and how we evolved their model. We decided to build our own platform to tokenize SPiCE VC, and that platform ended up becoming Securitize, which today is one of the leading primary issuance and compliance platforms for security tokens. What we built at Securitize and subsequently with the Digital Securities Protocol (“DS Protocol”) was meant to address some of the compliance and transfer restrictions applicable to security tokens like BCAP.

In March of this year, I met for the first time Brad Stephens, one of the founders and managing partner of Blockchain Capital, and we then first talked about the idea of working together.

Today, we have publicly announced that the BCAP tokens issued by the Blockchain Capital TokenHub entity in April 2017 will be upgraded utilizing the Securitize platform and the newly released DS Protocol in order to further enhance the compliance process with respect to securities regulations and transfer restrictions applicable to the BCAP tokens. This upgrade is expected to provide BCAP Token holders with liquidity on secondary trading platforms that are integrated with the DS Protocol.

What is believed to be the first token ever issued as a security is now on the Securitize platform and using our DS protocol. This validates our platform as the most market-ready platform and protocol for security tokens today. I cannot tell you how excited and personally proud I am of this project given how much we studied Blockchain Capital’s work and what a source of inspiration it was for us their pioneering work on security tokens when we started SPiCE VC and subsequently Securitize.

If you are a BCAP Token holder, you can access the upgrade process here https://bcap.securitize.io/

BCAP Tokens to be Upgraded Utilizing Securitize Platform was originally published in securitize on Medium, where people are continuing the conversation by highlighting and responding to this story.

It is clear that security tokens or more adequately digital securities (not to be confused with the currently more popular utility tokens) are becoming the talk of the street these days as they have the potential to improve on a massive market. According to a recent article from the the Wall Street Journal, $1.6 trillion securities were sold privately in the US alone in 2017. Our research shows that the global market without China is closed to $2.6 trillion.

Digital securities address the fundraising, automation and liquidity needs of a very large pool of financial assets including companies (traditional and blockchain-based), funds (VC, PE, etc.) and other illiquid assets like real estate or art. Tokens digitizing any kind of securities in the blockchain are a huge play and are what really gets us excited about this market because of their potential benefits, namely:

• Better capital formation: Enabling fractional ownership in a scalable way and reaching out to more investors globally. Security tokens basically allow anyone with an internet connection and the right accreditation (depending on their home jurisdiction) to invest in a deal. While providing legal compliance may reduce the number of potential investors (compared to utility tokens where legal status/standards still remains unclear), the available investor pool for tokenized securities is still quite large. In the US alone, there are more than 12 million accredited investors and only less than 2.5% have participated in a private placement of securities last year.
• Automation of the entire lifecycle of a security: From the investment side (automating the process of passing KYC/AML, determining the accreditation level of an investor as well as outlining the collection of funds, token issuance) to the complaince on the secondary market trading (more on this below) and the process of token reimbursement, when needed. You can even automate governance on the blockchain and provide transparency to the entire process.
• Liquidity. Security tokens are digitally tradable under an ATS license in the U.S. or an MTF license in Europe, and there are already dozens of companies that have announced entering this space- OpenFinance Network, tZero, VRBex, Coinzoom, BnkToTheFuture, etc. Unlike traditional exchanges, these marketplaces will be more efficient, cheaper and open 24/7 and will have automated compliance. They also have the potential to eliminate some intermediaries like central depositories, clearing houses or transfer agents. Liquidity is also known to increase the value of an underlying asset.
• Enable more complex investors rights. Smart contracts on security tokens allow to programatically code complex economic and voting rights for investors that previously would have been not feasible.

Securitize’s mission is to be the leading platform for enabling regulatory compliant digital securities issuance, capital formation and liquidity on the blockchain. Over the last 5 months since the Securitize launch, we have been evolving our platform to cater to a variety of our customers’ needs — 17 of them signed, as we write this.

So how do we make make security tokens a reality in a manner that facilitates a dynamic and open participation across all actors in the ecosystem? Our proposal is the DS (Digital Securities) Protocol, Securitize’s Digital Ownership Architecture for the Complete Lifecycle Management of Digital Securities that we are unveiling here.

Securitize is currently implementing a new blockchain protocol and architecture for digitizing ownership. It will be focused on creating infrastructure which supports third-party apps to address all aspects of the digital security lifecycle. We believe that the ability to create independent apps for any existing and future use cases is a more robust, scalable, and open solution, as proven in many other software environments.

To achieve this, we are developing DS Services, the basic infrastructure of our protocol enabling lifecycle management and compliance for digital securities. These services are available to provide basic capabilities to all stakeholders. The smart contracts will include:

• The Trust Service: enabling the authorization of different players (like exchanges) and DS apps to be used for an existing issuance.
• The Registry Service: an on-chain register of investor information, allowing the KYC information about investors to be considered in the different interactions during the digital-security lifecycle.
• The Compliance Service: which implements specific compliance rules applicable to a DS token, enabling compliance in token ownership and trades.
• The Comms Service: to provide communication of relevant events to investors.

The DS Protocol considers the whole lifecycle of a digital security enabling applications (DS Apps) to address relevant events associated with the ownership of tokenized economic rights; considering not just the issuers but also investors and exchanges, and the relationships of trust that may be required among them; and creating an ecosystem in which developers can expand the value that digital securities provide to stakeholders. It also includes additional APIs enabling Exchanges to integrate into the Digital Securities ecosystem in a simple way that also improves the customer experience for investors.

The potential around the market of digital securities is so vast that any approach needs to consider the multiple actors that will need to be involved. That is why, rather than expecting to control a specific network or marketplace, Securitize wants to help build an ecosystem in which issuers, DS Issuance Platforms, investors, DS App developers and exchanges will be able to unlock the full potential of digital securities.

Our approach to solve the problem has been top down. We provide an end-to-end platform that works for a specific issuance and has all the tools the issuer needs- eliminating any worries during fundraising about the technical process. We then build and customize from there. This has allowed to us capture a much larger market share than any other company in this space- specifically those who have taken a bottom-up approach for their technology by trying to build complex, low-level protocols first.

We have moved from funds to companies, from companies to real estate, from equity to revenue share models and even daily dividends and more complex structures like tokenizing equity in multiple companies simultaneously under one token. The breadth of our customer base and our pipeline has allowed us to view many different use cases. Our multiple security token offerings (STOs) have made us understand in detail, the needs of an issuer when undertaking a security token raise.

Recently, Securitize has started to interact with several forthcoming security token exchanges to understand how integration will look. We have already signed a partnership with OpenFinance Network to trade our tokens in their marketplace- the world’s first agreement between a security token issuance platform and a security token exchange. So, we now have a solid understanding and foundation for lifecycle management and managing secondary trading in regulatory compliance across multiple exchanges.

Securitize will make available to anyone a reference implementation of this protocol on our own DS Issuance Platform, which will also be supported with the real-world issuance of tokens for our customer base. In addition, we expect DS App developers to enrich the ecosystem providing new capabilities to extend the value that comes with owning digital securities for all stakeholders.

You can read the full details of our blockchain architecture and protocol in our whitepaper available here. Let’s tokenize the world!!

Introducing DS (Digital Securities) protocol: Securitize’s Digital Ownership Architecture for… was originally published in securitize on Medium, where people are continuing the conversation by highlighting and responding to this story.

And the next slide was about how we though blockchain technologies will solve the problem and provide liquidity and we quote Stephen McKeon who had been very articulated about how liquidity was going to change the concept of ownership in ways we could not even imagine:

After feeling very lonely for months talking about security tokens and the promise of liquidity, the first part of the problem or why security tokens where important started to be solved as regulators stepped in an proclaim that most token sales were in fact securities. But I though that it was a very narrow view, it is not about to turn utility tokens into security tokens but the fact that security tokens have a broad applicability to digitize securities beyond just decentralized protocols and provide a number of advantages like inclusivity, automation and liquidity. Yes, liquidity again. For months, this was a promise. Subsequently I started Securitize to enable people to issue security tokens on the blockchain with the promise to disrupt private placement markets and provide liquidity. But liquidity continued being an elusive word and not a reality.

Today, we have announced that the first US regulated security token exchange to come to market, Open Finance, will list all the tokens enabled by Securitize to provide secondary market trading and liquidity starting with SPiCE VC token.

So the promise is now a reality, all the discussions that a lot of people have had about how digitized securities were going to disrupt the $1.6 trillion private placement market in the US (and much larger worldwide) and provide an alternative to IPOs (that are 16 time smaller) is now becoming a reality thanks to Securitize and its primary issuance platform and Open Finance and its secondary trading platform.

So let’s tokenized the world!!

Liquidity is coming for security tokens was originally published in securitize on Medium, where people are continuing the conversation by highlighting and responding to this story.

The relatively young space that is built on an exciting, new technology platform called blockchain, or decentralized ledger technology (DLT), has enjoyed the attention of invigorated developers and investors. These players are working to define the future of the industry, and one key underlying concept, the token, is a point of focus.

Until just recently the Utility Token and ICOs (Initial Coin Offerings) were the talk of the industry. Utility Tokens comprised the lion’s share of the nearly $7 billion raised in the last 15 months, but it is very likely the industry will see some changes as a direct result of what many might say are the rather confusing positions of various government and regulatory bodies.

On the one hand, it seems as if the SEC has determined that the distinction of a “utility token” has been meaningless in practice and that substantially all past token offerings have been securities subject to securities regulation.

In contrast, a recent bill passed in Wyoming, House Bill 70, seeks to provide clear exemptions from specified securities and money transmission laws to persons who develop, sell, or facilitate the exchange of “utility tokens,” which are referred to in Wyoming House Bill 70 as “open blockchain tokens.”

A developer or seller of an “open blockchain token” would not be considered the issuer of a security if (i) the token has not been marketed as an investment; (ii) the token “is exchangeable for goods or services;” and (iii) the developer or seller has not entered into a repurchase agreement or an agreement to locate buyers for the token.

Behind the confusing messages and general crowdfunding fervor, some issuers began developing and marketing the “security token.” The concept embraces the idea of a “tokenized” security with the goal of improving on how fractional ownership is managed.

The hope is that security tokens that are regulated as “securities” will help quell confusion.

Buyers of security tokens understand what they receive (a security, defined by the SEC) in exchange for their investment. A security token might be a new token issued as equity ownership in a startup (whether it is a blockchain-based company or not) or an asset-backed security token that represents some valuable real-world asset like an amount of gold or land ownership.

As this industry innovates, and security tokens get better engineering and regulatory guidance, they will diverge in form and function from their “utility token” siblings.

If the industry wants to more easily represent the difference between these utility tokens and security tokens, it is probably best to use better nomenclature. We propose a shift to “Digitized Securities” rather than “Security Tokens”.

The name “Digitized Securities” distinguishes it from utility tokens and signals to entrepreneurs and investors that the focus of the new asset is on delivering the benefits of blockchain technology to the investors who purchase them and the entrepreneurs building companies around them through a regulated regime.

Securities that are digitized have the potential for significant advantages over non-digitized traditional securities (such as the fact that they are created on the blockchain and maintain on the decentralized ledger), and with time will come more and more advantages as the technology advances.

Digitized Securities offer the potential for greater inclusivity and deeper market penetration (by generally providing for lower investment minimums and in an offering designed for a broader audience in compliance with applicable law).

As the market matures, the offering of Digitized Securities will likely become more automated which as the capacity to streamline management of cap tables and distribution of proceeds, and the security token exchanges that are being developed should provide a market for liquidity for the tokens.

Overall, it is expected that offering Digital Securities through offerings in compliance with securities laws (but not through an “IPO”) will lower the cost for raising capital (by, for example, eliminating the costs of underwriters) and provide liquidity on a secondary market compared to traditional capital markets alternatives if the security token exchanges are developed.

Ensuring that investors stay informed and that issuers of digitized securities abide by all existing securities regulations is of great significance. Renaming “Security Tokens” is a natural and positive step towards realizing the potential of Digitized Securities — a potential that warrants a clear distinction of why they are unique in the marketplace, without confusing investors.

Whether Utility or Security Tokens, What We’re Really Talking About are Digitized Securities was originally published in securitize on Medium, where people are continuing the conversation by highlighting and responding to this story.

In the world of finance the ICO might be the most polarizing three letters of 2018. In the past three years over US$5B has been raised via ICOs. Some investors got rich while many others did not. With the SEC recently stepping up its pressure on ICO issuers, companies are scrambling to find three new letters to distance themselves from what will probably go down in history as a black eye moment for crypto currencies.

Enter the STO — the Security Token Offering

The term ICO does not distinguish what class of token is being offered. Many ICO issuers decided to issue Utility Tokens, which in theory cleared them from having to go through costly and complicated compliance measures, but in fact almost all utility token ICOs are considered by regulatory bodies to actually be Securities, which means a large number of Utility Token issuers will be heavily scrutinized by regulators like the SEC. In fact, the SEC has gone as far as saying the following:

“I believe every ICO I’ve seen is a security” Securities and Exchange Commission chairman Jay Clayton

On the other hand, Security Tokens, and Security Token Offerings (STOs), are treated as securities from day one. They are digital assets that are subject to federal and global security regulations. It’s an important distinction, and one that has the mainstream media confused about the true value of distributed ledger technology like blockchains vs. the price of Bitcoin.

Security Tokens and STOs are game changers for financial and ownership models, allowing any company to offer equity, debt or dividends. Any fund — be it, venture capital, hedge or private equity — can offer liquidity. Any asset can offer full or partial ownership or revenue shares. Security Tokens are better than all traditional models because they are liquid, secure, virtually incorruptible, and accessible to trade by anyone with an internet connection, including mobile.

If cryptocurrencies like Bitcoin are considered “programmable money” then you can consider Security Tokens a version of “programmable ownership.”

Anthony Pompliano — The Official Guide To Tokenized Securities

As obvious as it is for companies to migrate ownership models into Security Tokens, it’s not as easy as just flipping a switch. Security Tokens by definition are securities, and as such are subject to stringent regulatory oversight. Proper management of an STO requires an in depth and active mastery of global security laws and regulations, not to mention a team of programers to create smart contracts, digital wallets, and a platform for managing the whole process throughout the life-cycle of the token since you need to continue providing compliance post issuance and during secondary market trading.

Enter Securitize, the world’s first turnkey white-label solution for tokenization of securities of real-estate, funds, companies, and other assets. Securitize manages the processing of the solicited investors from login to capital received, as well as the issuance and management of security tokens throughout the lifetime of the asset.

Securitize recently launched a successful STO for SPiCE VC, a tokenized VC fund where token holders are entitled to the full net revenues of future exits.

22X Fund is another early example. The 22X Fund is the brainchild of 30 startup founders from Batch 22 of 500 Startups Accelerator program, and Securitize co-founder Tim Reynders. The 22X Fund token (22X Token) gives the benefits of traditional venture investing e.g. diversifying investment across companies to lower investment risk, while at the same time reducing the carried interest and management fees that eat away at investor returns. In addition, the token also provides liquidity by allowing investors to buy and sell the tokens from each other.

Securitize has successfully announced enabling STOs for a number of additional companies, including Lottery.com, VRBex, Monetizr.io and Realecoin that have either launch or are the in process of doing so. To date STOs targeting over half a billion dollars are already using the Securitize platform, with many more announcements to come.