Hybrid Security Tokens – What are they and What are they not?

NEWS  – Crypto and Security Token Exchange INX to Raise $130 Million in Landmark IPO: INX Limited, a crypto exchange startup, plans to raise up to $129.5 million through an IPO, in the first security token sale registered with the U.S. Securities and Exchange Commission. No, that’s not a typo for “ICO,” the initial coin offerings […]

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ReitBZ leads the way to Wall Street`s new tokenization business

 

Davos

The big pot is in securitizing illiquid conventional assets using blockchain technology.

First area of growth (where the Sharks have smelt blood) is Securitization of real estate.

 

 

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Wall Street will focus on Extracting Value from designing compliant structured products. Asset-backed digital assets will be the first big Shark attack, Real Estate specifically will have a desk on the WS trading floors much like mortgages and mortgaged-backed securities did.

Mark my words from my January talk at CryptomountainRocks Davos during WEF

 

ReitBZ

Reitbz is the first security token (STO) backed by a traditional investment bank.

$10 for one ReitBz token. No US or Brazilian citizens.  You can pay with Eth or USD pegged coined Gemini Dollar.

Banco Pactual (BTG) from Brazil is the first `Shark` that makes my Davos prediction true.  The next generation of structured products, asset-backed by illiquid real estate, is being designed as we speak in the labs of incumbent banks.

I am very excited because this comes from Brazil and not Manhattan or Canary Wharf real estate. Second, because ReitBZ is backed by distressed real estate that BTG Pactual has access to, as they have been a leading investor in Latam real estate for many years. They manage over $2billion and earned the Euromoney award for Best Real Estate investors in 2017 and 2018.

An Emerging Markets leader in real estate investing, issues,backs and manages the STO.

There is a niche focus on three categories:

  • Real estate foreclosures by developers who were denied financing post-construction.
  • Real estate returned by buyers that couldn’t afford a bank loan after construction.
  • Real estate owned by companies that filed for bankruptcy or judicial recovery

ReitBZ is a transparent structure to invest in deal flow that is not accessible easily.

The funds raised will not be held by the BTG but by a smart contract on the Ethereum protocol[1]. The management of the investment process (purchase, management of the assets, sale) will be done through Enforce, and entity that is 10yrs old. Blockchain technology reduces the costs of a traditional real estate investment fund substantially (custody, bookkeeping, fund admin, structuring etc). The exact savings, I guess will be reported once the structure is live. What is unclear to me, is whether these savings are higher than the tax benefits that investors enjoy through traditional REIT structures (which undoubtedly have much higher costs in structuring).

As the devil is always in the details, keep in mind that on the one hand the funds are kept in the smart contract but on the other hand all decisions are made by BTG/Enforce. They are looking to buy assets at a 30% to 40% discount and over an 18month period, they aim to restructure them and sell them. They estimate that the restructuring process involves 10% to 20% costs. Once the property is sold at a profit, the managers will decide to distribute on a prorated basis the profits via dividends, which will take the form of Airdrops.

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You can read the white paper and the one pager on their site ReitBZ.io.

The fee structure for Enforce is in the White paper (p.18)

  • 1% on the funds allocated to buy a given Target Asset
  • 10% on the net collection arising from the sale of Target Assets (i.e. sale value, reduced by all costs related to the real estate, fees and taxes)
  • 30% performance fee on the amount exceeding a 15%/year post-tax hurdle rate of the Target Assets portfolio

An oscillation between centralization and decentralization is normal. Market forces will determine the sweet spot.

Look at the ReitBZ to realize the structure`s positioning. As in the conventional world, you should always read the covenants. I take this opportunity to highlight the Petro structure which is collateralized by Venezuelan oil resources. The question arises as to how the structure protects the investor to actually be able to access the collateral. Same questions arise for the ReitBZ structure. Real Estate in Brazil, of course, valued and traded in Brazilian Real,….

Cost savings for the investor in complex structures that pool illiquid assets are not that obvious. Again this is from experience from the financial engineering conventional world. All the setup costs may be lower for digital assets, but what about the fees of BTG/Pactual (seems to me borrowed from the old world much like the crypto hedge funds have done) and what about building in tax efficiencies? The truth is that we will need a few iterations of STO asset-backed structures to figure out how to optimize them.

Book one hour with Efi – Efi@dailyfintech.com – Ask me anything (AMA) for 0.10BTC

[1] The legal structure is in the Cayman Islands.

Sources: LATIN AMERICA’S BIGGEST INVESTMENT BANK LAUNCHES SECURITY TOKEN, Bicoinst

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Crowdfunding, investing, & listing – DESICO for STOs

Interesting times! I am not referring to politics but financial markets both the traditional stakeholders and the disruptors. From Roubini lashing out on the crypto ecosystem, to Morgan Stanley gearing up to trade crypto derivatives, and Circle buying crowdfunding and broker-dealer Seedinvest.

The narrative around tokens has shifted Q1 2018. Utility tokens are no more darlings, STOs seem “the way to go” but pieces are missing still to satisfy the much-anticipated institutional appetite. #AndTheIronyIs that the ICO frenzy aimed to democratize early stage startup investing. It was supposed to allow retail to fund and participate in the startup tsunami that is building the winners of the 4th industrial revolution. Transparency and no gate-keepers were also promised.

#AndTheIronyIs it became about whales (the new gate-keepers) and now it is about crypto funds (the other new gatekeepers) and the conventional institutional money (e.g. the Ivy League US endowments[1]).

On the regulatory front, Europe seems to be leading with frameworks that try to not choke the blockchain early-stage innovation and at the same time provide some guidelines. The recent support from EU parliament of the Blockchain Resolution[2], is significant for several reasons. Switzerland, Liechtenstein, Malta, France, etc have also made progress on the regulatory front. Lithuania is one of the small Baltic countries which has attracted several Fintechs (even the Revolut unicorn) because it has been offered licensing and therefore EU passporting to these Fintech innovators.

In a September Forbes article[3] the Central Bank of Lithuania is singled out because of a new law allowing to invest in crypto assets through Security Token Offerings (STOs) in Europe. DESICO is referenced as it is taking advantage of this retail STO law and building a token platform for issuing, listing and trading security tokens in a fully compliant way.

DESICO has designed a different business model

desico image

The founders of the DESICO platform are Fintechers, founders of Finbee a P2P online lending platform. They saw a business opportunity to not only legally launch an ICO platform for early-stage startups in which both institutional but retail also can invest; they are also designing it to onboard revenue generating SMEs (not necessarily blockchain businesses) that need to raise capital. As Laimonas Noreika, the CEO of DESICO, said to TechStartups “Desico doesn’t want to focus on tokenizing pension funds, investment funds, or real estate projects.”

DESICO will filter companies for scams and will let the crowd vet projects on the DESICO platform. The costs of the entire ICO process will be cut to one third the current costs, and various service providers will be onboarding on the DESICO platform. Once the token sale is successful, the tokens will be listed on the DESICO exchange and investors will be able to trade (no waiting times, no exorbitant costs). Investors (both retail and institutional) will be legally able to buy the tokens on the DESICO platform. Any kind of security token issued on the DESICO platform will be fully compliant. With the support and backing of the Lithuanian Ministry of Finance, the Ministry of the Economy and the Central Bank of Lithuania, and under the crowdfunding law, any funding under 5million euros following the crowdfunding requirements is a legal security token.

The DESICO platform will be an end-to-end platform (for early startups and SMEs) to crowdfund, to list and trade on an exchange, and to invest. The founders are in the process of acquiring the three required licenses, a crowdfunding license, an e-money licenses, and brokerage licenses.

The DESI token is a security token and the sale starts on November 7. DESI token holders will receive a revenue share of 12.5% of DESICO’s gross income over the next 30 years. Payouts will be quarterly, with no cap on the revenues. It is a 30-year Revenue Participation Note that is callable after 5 years at any time.

DESICO revenues will come from primary and secondary market fees of the tokens issued and traded on the DESICO ecosystem. The primary fees will be paid by the security token issuers in a mix of fiat and project security (STO) tokens. Secondary market fees will come from the exchange activities.

DESICO is as close as it gets to the next generation of a crowdfunding platform with in-house liquidity. It’s design is for the crowd too, not only for institutional. It’s business model borrows elements from Angel list, as its revenues include security tokens issued on the platform. The founders know how to work with regulators and license providers and know how to build an investor base. For details, read thoroughly the white paper.

Disclaimer: I am an advisor to the DESICO platform.

[1] Report: Harvard, Stanford, MIT Endowments All Invest in Crypto Funds, Cointelegraph

[2] In the EU Blockchain Resolution we Trust, DailyFintech

[3] Institutional Investors Bet On Crypto Market With Tokenized Securities, Forbes

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.