Blockchain Infrastructure Technology: Bringing Liquidity to Trillions in Alternative Private Assets
Regulated digital securities on blockchain ledger technology infrastructure are here to stay and growing. The real story is the trillions of dollars in illiquid private alternative assets that will be using this technology to raise money and trade.
By Jeffrey Sweeney, Chairman and CEO at US Capital Global
Why will digital securities make life better?
This is an exciting way to hold and trade valuable assets electronically. Regulated equity securities, using blockchain digital ledger technology (DLT), will provide opportunities for capital market efficiency and liquidity for issuers and investors. As the digital private securities marketplaces develop, there will be increasing opportunities for valuable private assets and securities to be bought and sold by qualified investors.
Are ICOs dead?
Last year saw an Initial Coin Offering (ICO) bubble where “coin” meant cryptocurrency, tradable “utility” token, or unfortunately some mechanism to raise equity or revenue sharing financial instruments. More recently, the news wires have been full of stories of many ICO issuers being subpoenaed, ordered to repay funds raised, and the promoters being fined and prosecuted. The attempt to use blockchain ledger technology via the ICO to avoid securities regulations is over.
In the United States, the majority of ICOs have been unequivocally determined to be a regulated security. Other key ICO venues, such as Singapore and Switzerland, have seen similar tighter regulation of those ICOs deemed as securities. The regulators have come forward and ruled it to be a security and subject to all rules and regulations around securities distribution.
That ICO marketplace and its use of blockchain ledger technology was predominated by speculative early/angel stage ventures, but now we are seeing digital ledger technology, and the offering of digital securities, expanded to a radically larger set of asset classes.
What’s a digital security?
Generally, there are three top level definitions for “digital tokens”:
• Cryptocurrencies a general purpose token to represent the digital function of a currency.
• Utility tokens represent access to a good or service, essentially like a digital “coupon,” e.g. for membership or discounts.
• Digital securities represent the “tokenization” or digitization of underlying securities. Digital securities are securities. They are regulated, unlike “utility tokens” or “coins” that may bypass regulatory securities scrutiny. Technically, securities include shares of ownership, income streams (fractionalized loans or derivatives), etc. and include private and public market offerings, encompassing the full range of alternatives.
Why “digital” and what’s a DLT anyway?
Digital ledger technology (DLT) is a technological infrastructure innovation in this sector at a promising inflection point in the history of private capital market innovation. It is one of the most promising technologies for use in keeping track of and facilitating transactions for alternative investments to come along. It just must be done properly.
Using it with a wider and better class of assets, instead of risky early stage venture equity investments, makes obvious sense.
What other assets can be used by blockchain ledgers?
There are billions and trillions of dollars of other assets that can be kept track of by blockchain.
Bitcoin is a particular digital financial asset that was instrumental in making blockchain ledger technology popularly understood. It was one of the first assets to come on scene using DLT. Bitcoin and other financial transaction coins have been mostly determined to be essentially commodities and not securities. Commodities have a different regulatory framework than securities.
But we are concerned here with alternative assets. This is a multi-trillion-dollar asset class with very narrow public distribution. Few are able to participate in this asset class. Even though the population of qualified investors has quadrupled over the last 20 years, participation in this asset class has barely increased. The early interest in DLT technology has shown improved transactional integrity, security, and ease of secondary sales of electronically registered assets. DLT can unlock the access to this massive asset class and provide a way to hold and trade these assets in an efficient, secure, and compliant manner. The real insider secret is the conversation about trillions of dollars of private investments in alternative assets, and that has almost no internet sizzle at all. Not yet at least.