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Red Swan Partners With Polymath on $2.2B Tokenization

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Red Swan Partners with Polymath

The New York City-based commercial real estate firm, Red Swan just raised the ante in the race to integrate tokenization into the market. This week, the firm announced a new partnership with the popular tokenization platform, Polymath. The partnership allowed the firm to tokenize $2.2 billion in properties across the US. The news demonstrates further maturing of the real estate tokenization sector, as well as, one of the largest and most ambitious tokenization projects to date.

Discussing the maneuver, Graeme Moore, head of tokenization at Polymath took a moment to speak on some of the previous tokenization efforts made by competitors. He explained that these projects lacked true experience in the real estate sector. Consequently, these tech firms were never able to create a real solution to service the private real estate sector in a manner that was conducive to growth.

Market Experience Counts

Specifically, Moore cited attempts by Harbor in which the company was forced to abandoned the strategy after paperwork issues began to plague the project. Also, he pointed to two other major tokenization failures from the last two years, the Fluidity and Propellr projects. Both of these ambitious projects sought to tokenize real estate funds in the millions. Unfortunately, both were quietly retired after complications made the concepts unworkable.

According to company documents, Red Swan will make $780 million worth of shares available to accredited investors via a pre-sale. Once complete, the firm will continue with an additional $4 billion in real estate that is currently sitting in its tokenization pipeline. Importantly, the $2.2 billion represents shares in 16 different Class A commercial properties. These properties are located throughout the US. Specifically, Austin and Houston, Texas, Brooklyn, N.Y., Oakland, California, and Ontario, Canada.

Red Swan – Succeed Where Others Have Failed

Red Swan believes that it has what it takes to pull through where the competition failed. For one, executives pointed out that the company is a commercial real estate firm and not another tech group. Secondly, the company has the positioning to ensure its concept makes it to the market in a timely manner.

Red Swan Ventures via Homepage

Red Swan Ventures via Homepage

Importantly, Red Swan intends to hold investors’ funds in escrow until the distribution date in mid-April. By this time, the firm hopes to receive approval from the U.S. Securities and Exchange Commission as a registered investment adviser. This licensing would allow the company to manage assets for accredited investors moving forward.

Polymath – An Industry Leader

For its part, Polymath provided all the technical aspects of the tokenization. These steps included tokenizing the properties, programming smart contracts, and maintaining the integrity of the platform. Polymath is recognized as a leader in the tokenization sector. Consequently, Red Swan made a powerful alley when it decided to partner with the firm. According to reports, Polymath tokenized the real estate using its native ST-20 protocol. These ST-20 tokens will sit in a digital wallet custodied by Prime Trust until their distribution date. Additionally, these funds are insured up to $1 billion.

RedSwan via Twitter

RedSwan via Twitter

Importantly, executives stated that the firm intends to issue tokens on an exclusive enterprise blockchain platform in the very near future. This news highlights growing concerns surrounding the use of public blockchains within the STO market. Recently, multiple platforms, including Polymath, switched their tokens from Ethereum, over to proprietary blockchains, citing concerns ranging from scalability, all the way to, miners in sanctioned countries approving transactions.

Nwokedi also spoke on the desire to help service investors with funding levels between $500,000 and $10 million. He stated that currently, these investors must deal with riskier, lower class-level projects. He believes that Red Swan’s approach can bring these investors access to major high-end properties in a way that was previously unimaginable.

Red Swan’s Role

As part of its role in the tokenization project, Red Swan will handle all the property related dealings. These actions include appraising properties, evaluating markets and selling properties when the time arrives. Considering the huge amount of direct market experience the company possesses, these tasks shouldn’t be too difficult. Currently, Red Swan has over 30,000 accredited investors on its platform.  According to company documents, the platform takes a small percentage of the equity that’s issued. If just a small percentage of these users take advantage of the firm’s new offerings, the company is set to make hefty earnings.

More Liquidity in the space

Another important aspect to consider regarding the Red Swan tokenization project is the fact that the company unlocks previously unreachable liquidity in the market. For example, Red Swan allows property owners to tokenize 90% of the net equity underlying a property. Comparingly, your local bank will only allow you to utilize 50% of a property’s equity.

Tokenization in the Real Estate Market – Inevitable

The tokenization of the global real estate sector provides the market with a host of major benefits over the traditional market practices currently in place. For one, tokenized properties can be sold to a global audience. Security tokens are much easier to purchase and transfer compared to direct real estate investments.

Additionally, tokenization lowers the entry-level for investors seeking to participate in the market. In some instances, investors can participate in a tokenized real estate STO for as little as $100. As such, tokenization brings new capital directly into the market. Red Swan takes this concept a step further because the group possesses a huge network of real estate entrepreneurs. The firm’s impressive list of accredited investors is sure to boost these new market opportunities to the next level.

Red Swan – The Game Has Changed

Red Swan has taken the global real estate market forward with this maneuver. The company’s next moves will dictate much of the tempo of the market over the coming months. You can expect to see a host of other large real estate firms join in on the action after Red Swan begins to reveal its earnings. For now, the real estate market just got a major upgrade.

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David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com

Blockchains

Real-World Assets as Collateral for DeFi, Made Possible with MakerDAO

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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.

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Solving the Liquidity Puzzle for Security Tokens – Thought Leaders

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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.

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LDCC Holders Receive First Royalty Payout

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LDCC Holders Receive First Royalty Payout

Royalty Payout

A pair of companies has just announced the successful disbursement of royalties from a digital security; This would be Securitize and Lottery.com.

This royalty payout is a prime example of the potential behind digital securities.  Due to lock-up periods, and simply establishing the building blocks of the industry, we are now seeing this potential come to fruition.  This royalty payout is proof of what industry players have been touting as the future of investing – a more efficient and flexible environment, underpinned by blockchain based technologies.

Securitize notes that holders of the Lottery.com token, LDCC, are able to retrieve their earnings by simply clicking on a link, and choosing their method of payout (USD, USDC, etc.).

Markets

For those interested, and eligible, to trade LDCC tokens, look no further than Open Finance Network.  Here, the tokens have a home in which investors have access to greater liquidity surrounding the asset through OFN’s secondary markets.

While various companies have been working to establish themselves within the digital securities sector, one area lacking, to date, is the presence of active exchanges.  While this may have been, simply, due to a lack of tradable assets, times are changing.  Beyond Open Finance Network, we have seen companies like MERJ, and most recently, Tokenised Stock Exchange, join the fray.

Tokenise Stock Exchange Goes Live

Commentary

Upon announcing the dividend payout, representatives from each, Securitize and Lottery.com, took the time to comment.

Carlos Domingo, CEO of Securitize, stated,

“We couldn’t be more excited and proud to execute our first royalty payment for Lottery.com, a company that has been a big proponent of digital securities from the beginning…This first payment is significant for all of us in the industry. It’s another great step in modernizing capital markets by enabling digital securities. We firmly believe the future of all assets is digital.”

Matt Clemenson, CCO of Lottery.com, stated,

“Leveraging Securitize’s infrastructure for distribution of the royalty was a no brainer for us. They make it so easy to pay all of our token holders in the way that they want to be paid.”

Stablecoins

Of note in their announcement, is the usage rate of stablecoins.  Securitize indicates that of those receiving royalty payouts, roughly 50% chose to receive this in the form of USDC.

This choice is a positive, yet unsurprising, development.  We, along with many others, have noted the bright future of stablecoins.  Furthermore, any investors utilizing digital securities, are undoubtedly going to be aware of the benefits which stablecoins can afford.  Between this knowledge, and potential within the product itself, it wouldn’t be a stretch to see that 50% continue trending upwards.

Lottery.com

Founded in 2015, Lottery.com maintains headquarters in Austin, Texas.  Above all, Lottery.com operates to bring positive social impact.  This is achieved through ‘gamifying’ lotteries, sweepstakes, and more.  The company was notably one of the earliest adopters of blockchain, and digital securities.

CEO, Tony DiMatteo, currently oversees company operations.

Securitize

Founded in 2017, Securitize is based in the United States.  Since launch, the team behind Securitize continues to develop a comprehensive suite of services meant to grow the digital securities sector.

CEO, Carlos Domingo, currently oversees company operations.

In Other News

In recent months, Securitize has been on a roll.  During this time, we have reported on various new features and services developed by the company, as they look to continue growing the digital securities sector.  The following articles touch on a couple of these developments, as Securitize addresses both, trading and compliance, measures.

Securitize iD to Bring new Efficiency to KYC Practices

Securitize Utilizes ‘Atomic Swaps’ to Facilitate P2P Trading of Digital Securities

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