This week, European investors got their first opportunity to participate in the Max Crowdfund STO. The Max Crowdfund platform seeks to revolutionize the EU real estate sector via an aggressive tokenization strategy. Interestingly, the STO will take place across five phases with the first release already surpassing its soft cap of €500,000.
Max Crowdfund is the tokenization and crowdfunding arm of Max Property Group B.V. (MPG). The platform utilizes blockchain technology to streamline real estate investments in a major way. The platform currently boasts over 75,000 global users. Additionally, Max Crowdfund provides the EU market with much-needed liquidity.
Developers seek to expand upon the platform’ s success. As such, funds raised from the STO will go towards the final development stages of the project. Once the platform is completed, it will become a complete real estate security token ecosystem. This ecosystem will include both native Android and iOS apps.
Also, third-parties will be able to tokenize and crowdfund their own properties via the platform. This means that other real estate firms can enjoy the same benefits without the need to invest directly in blockchain technology. Notably, this strategy has the potential to revolutionize development projects. Basically, any developer can now get pre-funded for their projects if investors feel the ROI is good.
A Global Audience
Max Crowdfund will remove many of the typical barriers surrounding real estate investment. For example, investors can participate in property sales for as little as $100. Aside from making real estate investing a reality for anyone, the platform seeks to provide these opportunities to a global audience.
Currently, Max Crowdfund awaits pending regulatory approval from the Dutch financial authorities (AFM). The company filed for approval back in October 2019 but the AFM has yet to make a decision. Typically, an AFM license approval takes around thirteen weeks to complete.
Max Crowdfund is already a major player in the tokenization sector. The platform is best known for its unique combination of features. Features such as automated KYC/AML reduce the amount of time it takes an investor to enter the market. Also, the platform offers multi-currency investment options. This feature is set for major expansion as the platform prepares for its global launch in the coming months.
Max Property Group B.V.
The Max Property Group B.V. entered the EU real estate sector in 2016. The company quickly gained notoriety for its advantageous market strategy. Currently, Max Property Group B.V. controls over €7,000,000 of property assets. The firm specializes in property funds, management services, and sales. Importantly, Max Property Group B.V. started development on the Max Crowdfund platform in 2017.
It’s no surprise to see Max Crowdfund’s expansion. The EU leads the globe in terms of security token regulatory framework. Many analysts see security tokens as the natural evolution of the crypto sector. A solid regulatory framework does more than just protect investors. It allows firms to invest in R&D without concern about the legal ramifications. In turn, you get more investment capital flowing into innovation.
Max Crowdfund STO
The Max Crowdfund STO is underway currently. Given the reputation and success of the platform to date, you can expect to see further investment into its capabilities as the EU tokenization sector continues to heat up.
Blockchain Capital’s BCAP Token Outperforms Market in Q2, 2020
Today they announced that the net asset value (“NAV”) of each BCAP token as of June 30th, 2020, is $4.47, based on the NAV of the underlying venture capital fund, Blockchain Capital III Digital Liquid Venture Fund, LP. Weekly NAV updates can be found at: http://www.loop.blockchain.capital/
The BCAP NAV finished up 25.6% for the second quarter of 2020. The Q2 increase was driven by the liquid/token portion of the fund’s portfolio. The NAV is up 22.8% year-to-date.
The BCAP portfolio is up 347.0% since inception, post-STO from April 2017, and has a Net IRR of 59.0%. Performance figures are net of all fees and estimated carry.
The composition of the portfolio as of June 30th, 2020 is as follows:
While there are plenty of traditional cryptocurrencies in the portfolio, some special companies to note are Securitize and Harbor which are heavily involved in the digital securities and security tokens space.
About Blockchain Capital
Blockchain Capital was founded in 2013 with the mission of helping entrepreneurs build world-class companies and projects based on blockchain technology – providing founders with the tools they need to succeed: capital, domain expertise, partnerships, recruiting and strategy.
Blockchain Capital is one of the earliest and most active venture investors in the blockchain industry and has financed 90+ companies and projects since its inception. The company invests in both equity and tokens and is a multi-stage investor. Blockchain Capital also pioneered the world’s first ever tokenized investment fund and by extension the blockchain industry’s very first security token, the BCAP, which the company sold through a security token offering in April of 2017.
The company’s view is that blockchain technology holds the promise to disrupt legacy businesses and create whole new markets and business models. Blockchain Capital believes its network of entrepreneurs, investors and advisors brings unrivaled resources to founders who want to leverage blockchain technology to change the world in profound ways.
Real-World Assets as Collateral for DeFi, Made Possible with MakerDAO
The cryptocurrency space was borne out of a desire to bring about a better financial system and infrastructure that is inclusive for anyone, anywhere.
The crypto industry has matured significantly since 2010 when Bitcoin kicked off a new wave that today spawned a whole new industry. The crypto community continually progressed with new tools and capabilities being gradually built up.
Nonetheless these capabilities that promise quicker settlement times, trustless global accessibility and granular asset control have mostly remained gated within the crypto realm.
Bringing Together Real-World and Crypto Assets
Now, the ambition is to bridge the gap between real-world assets and cryptocurrencies. Specifically in the DeFi space, that aims to provide a borderless financing infrastructure, the first steps are being made to bring real-world assets as collateral for loan issuance.
The community of MakerDAO, that is behind the DAI stablecoin, arguably one of the most popular DeFi projects, has confirmed the vote on whether to allow real-world assets to be included as collateral options.
This comes following the effort led by the startup Centrifuge, that developed a protocol that lets users turn real assets into securities against which ERC20 tokens can be issued. This enables real world asset securitization as these tokens are interest-bearing and will be issued as NFTs (Non-Fungible Tokens).
DeFi applications built mostly on top of the Ethereum blockchain promise to give more people access to borrowing, lending, and other services because they eliminate the need to go and transact through a financial institution.
In the case of MakerDAO, the system built with Maker (MKR) and DAI lets users deposit cryptocurrency-denominated collateral to take out loans denominated in the U.S. dollar-pegged stablecoin DAI.
While recently the DeFi space celebrated a huge milestone with $1 billion locked in various applications across the board, participation in DeFi today is limited because it requires that users have purely crypto-native assets.
Getting real-world assets involved in the DeFi industry is what Centrifuge is pursuing with its Ethereum Dapp called Tinlake. The app allows for the securitization of real-world assets and have these represented on the blockchain as tokens, which can in turn be used to gain access to DeFi services.
What is Asset Tokentization?
Asset tokenization refers to the act of turning the ownership of a real-world asset into a digital token. This can be done in various ways, but all result in the legally-upheld bridge between the physical asset and its representative token.
Deeds, titles, and certificates are all traditional versions of a token. A deed to a house represents ownership of that house. The token refers to the digitally native asset which represents the real-world asset itself.
The first two types of assets that are available for tokenization are music streaming royalties enabled by PaperChain and ConsolFreight’s freight shipping invoices.
With the positive vote from the MakerDAO community, now anyone – be it individuals or companies – is able to utilize future cash flows from music streaming royalties or shipping invoices as collateral to take out loans for example.
Centrifuge’s Lucas Vogelsang notes the partnership could be the world’s first application of DeFi to a real-world business issue. Particularly, the solution helps ensure quick liquidity for artists and supply chain firms, without the hassles of going through traditional ways of financing.
MakerDAO’s Rune Christensen has also shared a highly optimistic vision as the two proposals represent the first step towards the expansion of DeFi’s field of application:
“These should be seen as the first two [RWAs] in the greatest portfolio of assets that’s ever been built. It’s just the first step. Thousands and thousands of assets will exist alongside them.”
There are still issues and restrictions when it comes to securitization of real-world assets and introduces new risks to the DeFi space.
For instance, Centrifuge’s tokenization process through its app still falls under the securities law. Since both Paperchain and ConsolFreight are based in the U.S. only accredited investors will have access to these assets.
Another compromise that was made in order to bring real-world assets to DeFi is Centrifuge setting up a special purpose vehicle (SPV) that will have the assets associated with, from a legal touchpoint. Lenders, in the event of default, would have to rely on the legal system to enforce their rights to the collateral, rather than an automated smart contract that can do so with on-chain assets.
While this is necessary to have a claim for the tokenized real-world assets, it represents a single-point of failure. But this is a trade-off that Centrifuge’s Lucas Vogelsang says is necessary in order to bring real world assets on-chain.
Solving the Liquidity Puzzle for Security Tokens – Thought Leaders
There is a wide consensus in the financial industry that blockchain technology is going to disrupt the securities market. However, despite the claims, there is no double-digit annual growth of securities on blockchain, which would be expected from a disruptive technology. The reason for that are regulatory roadblocks that don’t allow delivering the biggest promise of digital securities – liquidity for previously illiquid securities. In this article we break down this problem and present a solution.
What are security tokens/digital securities?
From a legal perspective, security tokens are common securities and are subject to the same regulations. The difference is that records about securities ownership are stored on blockchain instead of paper-based or other forms of records. That’s why they are often called digital securities.
Innovative technology significantly improves operations with securities, making them digital and automated. In particular, transfer of digital securities is much easier and may happen in minutes or seconds instead of weeks, spent on signing physical contracts, doing compliance checks and updating government registers.
Why liquidity is so important for security tokens
Liquidity of an asset defines how easy it can be sold. For example, publicly listed securities are highly liquid, while real estate and startup equity are highly illiquid. Although security tokens have multiple advantages, greater liquidity is a principal one. For this reason, they often represent ownership in traditionally illiquid assets.
Mass adoption of security tokens first and foremost requires interest from investors, which will create incentives for businesses to issue digital securities instead of traditional ones. For investors, lack of liquidity is the biggest problem of securities that are not listed on exchanges as it makes investments in them riskier and makes investors wait for decades until they pay off. Therefore, unlocking liquidity of security tokens is crucial for their mass adoption.
Why is liquidity in the conventional meaning of the word is out of reach for security tokens
In the narrow sense of the world, securities are considered liquid if they are traded on a stock exchange. For this reason, lack of regulated secondary markets is considered the main limitation. However, this ignores the fact that there are already operating exchanges for security tokens: tZERO, Open Finance, MERJ, GSX – but very few tokens are listed there. Furthermore, Open Finance is on the edge of delisting all security tokens because their trading does not generate enough fees to support operations.
Therefore, the problem is not in the lack of marketplaces. It is in fact that listing on an exchange is overly complicated. It requires registering the offering at competent authorities, having minimum trading volume, minimum market cap, being under increased reporting requirements, which often include annual audit. Basically, it requires becoming a public company. These requirements will arise not only in the case of listing on a classical exchange but any kind of regulated market. This means that listing on a regulated trading venue is not feasible for most security token issuers.
Such a flawed understanding of the problem stems from crypto origins of security tokens. They were seen as a regulated continuation of utility tokens and cryptocurrencies, for which listing on exchange is much easier, so it became a synonym for liquidity. This myth should be debunked in order for the market to move to more realistic sources of liquidity.
How is liquidity for security tokens possible?
To answer this question, we need to go back to an original definition of liquidity, which is the ability to quickly sell assets at any moment. It has two main components: complexity of conducting the transaction and how easy it is to find a counterparty.
The former problem is solved by blockchain technology. Its main benefit for private securities is that it vastly simplifies conducting the securities transaction, making it possible to do everything online in a few minutes. Conventionally, transfer of securities would require signing physical agreements, reporting changes to the government register, settling a transaction via a wire transfer, and doing manual compliance checks on individuals engaged into the transaction.
Complexity of the transfer also impacts the number of potential counterparties. When the transfer is complicated and expensive, it becomes not feasible to transact small amounts. This cuts off smaller traders and investors from the market, making it even harder to find a counterparty.
The problem of finding a counterparty is traditionally solved by an order matching mechanism of exchanges, which for security tokens is not feasible. Therefore, the key to unlocking liquidity is in creating an efficient way to find counterparties for transactions that would not be considered a regulated market.
This way is already known. It is a bulletin board for P2P transactions. As these transactions are private and do not involve an intermediary, they don’t require regulation. However, there are a number of nuances and requirements for such a venue not to be regulated, which will be covered in a separate article.
To the author’s knowledge, at the time of writing there is no venue that enables legally compliant and efficient P2P liquidity for security tokens.
What impact unlocking the liquidity of security tokens will have on capital markets?
Currently, venture investors may sell their shares only if businesses they invest into go public or are acquired. This has two implications, which both lead to money being used inefficiently and slow down the economic growth.
Firstly, it means that only businesses with the potential for IPO are worth investing. Businesses that can offer a solid yield but don’t offer “disruption” and outsized returns are deprived of funding. These are often businesses with a need for high capital investments – manufacturing, agriculture, physical infrastructure etc. The problem with a lack of capital investment is covered in a widely discussed article in Andreessen Horowitz blog “It’s time to build”.
Secondly, illiquidity makes VCs prioritize growth over profitability because when most investments don’t pay off even a 10x exit from successful ones may be not enough. It creates incentives to scale even when the business model is not tested enough, leading to extremely large companies, such as WeWork or Uber, struggling to deliver a profit.
The plague of private markets has impacts on public markets as well. It leads to the emergence of the IPO bubble, when more than 80% of newly public companies are not profitable. It is problematic because public securities are considered less risky, and thus fit into portfolios of retail funds and pension schemes, harming them by being overpriced.
Thus, solving the liquidity problem will have a drastic impact not only on the VC industry but on the entire economy.