Tokenization of Venture Capital Funds, the Secondary Market, and Future Trends
Traditional Venture Capital firms. These are private equities which invest into early-stage companies that have a high growth potential. Often however, these funds are made up of the top elite, which bars out a lot of potential investors who would want to participate as well. As technology has evolved and the concept of “Bitcoin” was introduced, specialized firms that invest solely into these cryptocurrencies or companies developing blockchain projects are known as Token Funds. These funds allow for a greater reach of investors due to being able to commit a fraction of the investment value, and also being able to accommodate more than 10–20 Limited Partners. They are a very popular investment vehicle and there are more than 500 crypto funds based on the Autonomous Next database. There are also many new emerging fund types in the secondary market, such as Fund Indexes for cryptocurrencies and ETF. The current market cap as of press is $122 Billion on CoinMarketCap. A new and emerging type is the security token offering. For this article, we will go over the concept of tokenization of these different funds using companies that are currently utilizing these new strategies.
Tokenization of VC Funds
To continue off of this new concept of being a fully tokenized VC fund, lets first take a look at the first company to start this revolution. SPiCE VC was the first in the end of March 2018 to Tokenize their funds which is quickly being known as Security Token Offering. With quality, value, and most importantly, regulatory compliance, we can see that this new concept of Tokenization is beginning to become adopted in the figures of billions.
Blockchain Capital is another VC firm that was founded in 2013, though different from SPiCE VC in that it invests in both equity and crypto assets. The BCAP token is currently aiming to work with Securitize in order to become fully compliant with applicable securities laws and regulations. The question is, why Tokenize? Generally to allow for a larger participation of investors in the fund. Another problem that can be addressed is the liquidity issue which normally is 10–12 years.
The Tokenization of Secondary Market
Huobi is a cryptocurrency exchange that became publicly listed as a Hong Kong company in August 2018. What is interesting to note is that they have a type of strategy to measure their exchange-traded fund (ETF). At the time of writing, Huobi, which has their own index called Huobi10 or H10 $ 251.22, is updated on a quarterly basis to form a sample pool of tokens. The ETF works simply by taking the top 10 the average daily turnover of all USDT pairs from the previous quarter to calculate the index.
As we move further down the timeline, regulated exchanges such as SIX SWISS Exchange, recently launched the world first crypto exchange-traded product (ETP). This product named, Amun Crypto Basket Index, contains Bitcoin, Ethereum, XRP and Litecoin. The U.S. Securities Exchange Commissions have also been reviewing public comments for nine different ETFs due for a decision date this December 29th of 2018.
ICONOMI is a platform started by Tim M. Zagar, which allows users to create or invest in digital asset arrays (DAA) or otherwise known as the first cryptocurrency index funds. Funds since inception hovered around $10Mn. One of the key points separating itself from other cryptocurrency index/ETF funds are no barrier to entry for the platform’s assets. Non-accredited investors can have complete access to all the platform DAAs, opening the old economy to the new. ICONOMI’s equivalent of the Dow Jones is the Blockchain Index (BLX) which includes 33 assets including Bitcoin, Ethereum, Dash, Monero, Icon, Qtum, and Lisk. Another called the Delta Summit Index (DSI) was co-created by enthusiasts who attended the Delta Summit in 2018, supported by the Maltese government. The DAAs are managed by selected ICONOMI managers whom collect fees by attracting users to DAA and/or managing other user funds, with success rate system to determine the reputation of the manager. The problem here would be the same as unsystematic risk where should similar DAAs have similar investments, the industry would drop in price.
Coinbase was founded back in June 2012 and headquartered in San Francisco. It offers numerous services to investors in cryptocurrency especially in bitcoin, though for the purpose of this article, we will focus on its trading platform.
With over 10 different languages and operating in 30 different countries, Coinbase works closely with regulatory authorities in the world and is licensed in almost all states in the USA. This makes this exchange very attractive for the upcoming STO market as Coinbase already operates within regulatory jurisdictions.
In order to satisfy the anticipated demand for the Security Token Offering (STO) market, Hashgard has launched the Trusted Asset Management Token (TAMT) protocol standard. TAMT is a token issued on the basis of Hashgard’s trusted asset management protocol, representing the holder’s rights and ownership of digital financial assets. The standard is backward compatible with ERC20, and is open source, easy to expand, and has no need to trust the counter-parties with the atom exchange function. The goal of this standard is to help other token funds raise their own capital by going STO.
Compared with traditional asset management, TAMT aims to improve the governance of token funds for both issuers and holders (as holders are limited partners) not only realizes the right of financial assets owned by investors, but also the asset management process of financial assets itself is stored in the chain. Historical transaction records cannot be tampered with and the performance of financial products is reliable, authentic and credible; TAMT also has a good privacy protection for the strategy of financial asset management itself.
TAMT is currently in the drafting stage, and will be implemented on the Ethereum network first and will be migrated to the Hashgard public chain in the future.
- Compatible with ERC20
- Transaction limit module (KYC/AML, token lock up, account freeze, etc.)
- Contract level atomic switching function
- Asset pool (inquiry, capital contribution, etc.)
- Advanced Token Insurance Module (supports the collection of multiple digital assets)
- Dividend management
TAMT, as an important protocol based on the Hashgard digital finance public chain, will provide underlying support for credible asset management which is simple, easy to regulate and functional.
In the year 2017, the total value of security tokens totalled about $100Mn, with other total market value of functional tokens hovering around $200Bn. With the many different asset classes that can be tokenized, such as the global $70Tn stock market, $100Tn bond market, and $230Tn real estate market, we can expect the security token industry to break $1Tn and beyond. The security token industry currently has four types of entities, as analyzed by Hashgard Labs, 2018 Global STO Market Report. There will be four different categories of businesses ranging from Projects, tech-solution providers, exchanges, and peripheral service providers. The biggest hurdle that these businesses would need to overcome is regulation. Exchanges currently have the highest policy entry threshold as they are required to obtain a license issued by government regulatory agencies to offer security token services. An exchange mentioned before known as tZero was the first to obtain a license in the U.S. to operate an ATS.