Technology

Institutionalizing The “Token Capital Market”

One of the more significant developments spurred by the rise of blockchain and cryptocurrencies is tokenization – which essentially uses the blockchain to track ownership. With some very simple code, a token elegantly does much of the work of an entire financial ecosystem of stock exchanges, prime brokers, transfer agents, custodians and clearing houses.

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token capital market
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Often, tokenized securities refer to compliantly placed digital assets backed by real assets such as equity, ownership shares, revenue streams or even property. Protocol tokens, the fuel for blockchains and other networks, are probably also tokenized securities. Many of the tokens currently in existence should be regarded as securities for regulatory purposes, and should provide equity-like rights for issuers and investors. Some day – and probably very soon, given the pace of innovation in the cryptocurrency space – many types of financial assets stand to benefit from tokenization, including certain types of equity, debt, convertible instruments, real estate holdings and more.

At RenGen Labs, we believe the result of greater tokenization of securities will be the creation of a truly global, institutional-quality “token capital market”, offering significant advantages to both issuers and investors. However, to unlock the vast potential of this token capital market, it will be necessary to marry the innovation of the present cryptofinance platforms with some of the expertise and discipline of traditional investment banking functions.

Merging Cryptofinance and Traditional I-Banking

I speak from personal experience, as I recently joined RenGen Labs after a career in corporate finance at a traditional global bulge bracket investment bank. While my view is shaped by this experience, it nonetheless seems reasonable to think that a blend of cryptofinance entrepreneurship and “old school” I-banking know-how will be required to establish a robust token capital market deserving of the trust and confidence of issuers and investors worldwide.

Certainly, the benefits of tokenized offerings are abundantly clear. Equity or protocol tokens allow issuers to access a significantly larger investor base than a traditionally underwritten equity offering. Because token offerings generally do not involve the help of investment bankers, the process may be accelerated and fees should be considerably reduced. For investors, token securities provide an ability to participate in private transactions that would normally be closed to all but the largest and most traditional institutions. And, tokens for private companies are quite liquid, as compared to conventional private placements that have trading restrictions or venture capital arrangements that restrict withdrawals.

Bringing some traditional I-banking skill-sets to the security token market will help deliver those benefits at a faster pace. For example, investment banks take a rigorous approach to regulatory compliance and risk management, and favor a high degree of transparency in the disclosures surrounding transactions. These attributes would go a long way toward building confidence in security token markets that have until now invited a great deal of “caveat investor” skepticism. Investment banking also is underpinned by a solid valuation discipline, which would be most welcome in the security token markets. Bringing trained I-bankers into the tokenized security world would help to ensure that fundamental measures, such as identifiable revenue streams or projected EBITDA, can supplant “hype” in valuing token offerings.

Expanding the Security Token Product Portfolio

Additionally, I-bankers are well-versed in the full range of securities products that have long been available. Their expertise would accelerate the development of a more diverse portfolio of token capital market products, including debt, convertible bonds, and even the tokenization of revenue or earnings streams. Different classes of tokens could distinguish between levels of voting rights in ownership. And, if seasoned M&A bankers make the transition to token platforms, can equity or protocol token mergers and acquisitions be far behind?

Of course, simply adding traditional I-bankers to a team of security token entrepreneurs, by itself, is not sufficient to create a true institutional token capital market. That will also require a clearer regulatory framework for all cryptofinance products, as well as the creation of a meaningful token exchange infrastructure. Over time, as a broader base of institutional investors is attracted to the token capital market, they will demand higher standards of disclosure and compliance. That said, bringing talented individuals with experience as I-bankers, analysts and other traditional finance roles will help advance the evolution of cryptofinance into a true global token capital market.

Article By Emre Okay, Head of Deal Origination, RenGen Labs

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