2018 was a wild ride. I'm getting washed out of the system. And there were positives of unprecedented FinTech innovation, the arrival of institutional players, the SEC (and FinCEN) beginning to provide clarity and taking action.
And in 2019? A few of my thoughts and predictions on the major trends we'll see include …
The tokenization of … everything.
1. STO's (Securities Token Offerings) are currently the hot item that everyone is talking about. And yes, businesses will raise money and issue tokens instead of stock / bond certificates, and we will see new types of exchanges rise up to trade these securities. This trend will be accelerated, especially given the path to liquidity for investors (see # 5 below).
But this is just the tip of the iceberg.
2. Currency will be (and is already being) tokenized. Numerous stablecoins are issued against USD held in trust. This will also include EUR, GBP, YEN, SGD and other currencies. Fee payment method as well as a general store of digital value, which will be used as a general rule of digital value. .
3. Lending will be tokenized. This is, I think, perhaps the largest and most disruptive use of blockchain technology. It's also the one that our current US regulatory regime is least equipped to foster, nurture and oversee. Is the process for making loans and then packaging, securitizing and trading them is horribly kludgy and antiquated. This is also true for distributions of interest, principals, rents, revenue shares, dividends and other remittances to lenders and investors, which will use new, highly efficient, blockchain-driven processes.
4. Real estate, automobiles, gold, diamonds, art and every asset imaginable will become tokenized such that it is liquid and easy to finance, borrow against or invest in. In 2018 we saw Harbor tokenize to 260-apartment student housing project at the Univ of South Carolina, and Indigogo tokenize by offering the St Regis Aspen hotel, which is the start of what will be a mega-trend in 2019, especially as these tokens start to trade (see next paragraph).
5. Stocks and bonds will be tokenized. How can people buy shares in private markets? How can people in Africa buy shares of USD-priced stocks on NASDAQ? How to buy in the US or in currencies native to those countries? The answer will be the tokenization of those securities and listing them on digital exchanges globally. tZero is the first exchange to announce the listing and trading of tokenized private securities in compliance with US securities regulations. This will be a major, game-changing trend.
6. There will be fraud in asset tokenization.
The storm clouds are already forming, and it's exasperatingly unnecessary. "Hey buddy, wanna buy some tokens backed by the Brooklyn Bridge?"- some people are issuing tokens purportedly backed by USD, by real estate, by stocks and bonds, and by other assets without depositing the title to those assets with a regulated, audited, qualified third party trustee.
Would you like to make a home or auto loan without holding the title to the asset? Of course not. Would a pawn shop make a loan to someone without holding the jewelry in its safe? Of course not. "That's exactly what some people are doing in the early stages of this space,"give me money for tokens backed by this asset, which I'm holding … trust me. "
And trust in the markets. It has been used for ADR's and securitization of real estate loans. But sadly, I think it can be well-publicized losses to the wake of the regulators (and lawyers, accountants, broker-dealers, advisors and exchanges) up to the fact that if the assets are not held by a qualified trustee, then the potential for fraud is an unmanageable risk.
7. The SEC and FinCEN will step up their investigations and enforcement actions in the space.
I'm amazed that I'm amazed that I'm amazed that I'm amazed that I'm amazed at US rules and regulations. Pain, breaking the rules is painful. I agree that there is a bit of gray that is to be clarified, and that's what gives entrepreneurs a chance to build unicorns in a formative industry when the major financial firms are too afraid to participate, but some people just continue to do dumb things which are blatant violations of various regulations.
8. Global exchanges and intermediaries will legally poach business from their US counterparts.
International exchanges and platforms have gathered millions of customers who use their services daily. This forms a powerful base to start funding US asset-backed loans and business capitalization from offshore investors. This is fantastic for investors, globally, everywhere except the US. Some examples of how this may play out include;
A US business (of any size) wants to raise some capital. It does so using "Reg S", which allows you to raise money from non-US investors with very few restrictions. Money flows into the company from offshore investors, which is a good thing. These companies are "accredited" or not. The company does not have to do any regulatory filings. And those offshore investors can list their "stocks" or "bonds" (in the form of tokens) on a non-US exchange and start trading them immediately. Those non-US traders can even publish investor research reports on the tokens they trade!
A US person wants to buy a house or a car. They can be borrowed from an offshore lending platform. The offshore lender then tokenizes that real estate (or automobile) loan and sells it on non-US exchanges. And if that's two murky to US lending regulations? Okay fine, then the offshore lender might buy the home and enter into a contract where the homeowner rents it and buys en little by little (similar to the model used by Islamic banks). Results is the same, the profits are made by investors globally … everywhere except the US.
The rise of infrastructure businesses.
Much ado has been made about custos, and rightly so. Assets need to be held by a regulated trustee. There is a huge need for fiat on-and-offramps. And many investors will want to have their stocks, bonds and mutual funds. But other trust companies and banks, there are other unicorns in the making …
Tokenization of assets requires help with creating smart contracts, and with managing them. It requires innovative blockchains that provide faster settlement of transactions, good KYC / AML, and tools to handle / reverse criminal acts. It requires front-end servicers to originate a flow of funds by connecting people who need funds with people who have money. It requires settlement mechanisms. It requires secondary trading exchanges, intermediaries and research. It requires debt (and fractionalized ownership) servicing firms. It requires a new breed of legal and accounting representation. And it requires new types of businesses to handle / create / manage things which we can not yet imagine.
Many of these businesses are already in play. Some are pivoting their well-established business models to address this market, including StartEngine, Republic, Overstock, Cohen & Co, PwC, and of course Prime Trust. Others are new companies that have been purpose-built for this new era, including HBUS, TrustToken, tZero, OKEX, KOI, CoinList, Polymath, Harbor, TokenSoft, OTCXN, AlphaPoint, Daollar, BHEX, Bitrue, Carbon, Stably, AnchorCoin, Stronghold, Consensys, and countless others across all types of service providers.
2019 is going to be exciting. I think it's the beginning of the vaporware that accumulated in the prior years, which I chalk up as proof-of-concept for blockchain. I can not wait for the new year.
And what about Prime Trust?
2018 was a phenomenal year for the company, with record revenues, new clients, new offices, dozens of new employees, and game-changing products. It was also a year in transition as we committed to serving the blockchain industry. Doing this has meant spending millions of dollars on new staff, new technology, new processes, and new operations. We are deftly disrupting traditional trust services in order to create a solid financial institution. We have an array of new technology, new customers and new services that are teed up for 2019 (and 2020). It's going to be fun. We realize we can not have the support of our community, partners and clients. For this, we truly thank you!
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