2020 Year in Review: the Year Digital Securities Became Mainstream

  • DSO backed by the St. Regis Aspen Resort, Colorado
  • Reg D 506 © on Tezos blockchain
  • 21 individual property deals valued at $50K to $600K each
  • ERC-20 Tokens trading via Uniswap
  • The largest listing and market capitalization (now $222m) of a DSO by this innovative digital retailer
  • ERC-20 Tokens listed on TZero (Dinosaur) regularly generating highest trading volumes
  1. The custody bottleneck needs to unlock: In many markets there are zero or just one licensed digital asset custodian. Even where custodians exist, they are often mostly focused on crypto-assets, which results in expensive solutions not fit-for-purpose for digital securities. In addition, institutional investors will have an inherent caution in entrusting the custody of their digital assets with new startups — creating a barrier to adoption. Watch for an increasing number of credible licensed banks to enter the market that will drive institutional interest. HSBC and DBS have already announced these services, while other banks are creating units focused on digital assets (including crypto-currencies) which provides the vehicle to provide DSO services in the future.
  2. Central Bank Digital Currencies (CBDC) introduction: Most primary and secondary DSO transactions still involve a lengthy and cumbersome cash settlement process. This adds inconvenience, time, and risk into the purchase of digital securities by investors — compounded by the fact that many digital securities players still find it difficult to even get banking relationships. Digital currencies are the unique solution by enabling simultaneous settlement of digital assets versus value on blockchain. The existence of USDT and USDC stablecoins, which approximate US dollars, is one reason cryptocurrencies regularly have more than $50 Billion of daily digital asset to digital asset settlement volume. However, using stablecoins like USDT is not an option for many regulated firms. Watch for CBDCs to be introduced, solving many of the settlement challenges and creating a truly modern market with real-time DSO/CBDC settlement.
  3. Further integrating the DSO ecosystem: While the efforts of Securitize, INX, CSE and others have started to string together a more end-to-end solution, clients and broker-dealers still need to solve too much of the ecosystem themselves. Reducing the friction of accessing the market is key to accelerating growth, particularly in the settlement and custody parts of the end-to-end chains. Watch for more partnership, acquisitions, and true end-to-end solutions provided by new industry players.
  4. Increased Investor interest: Our view is that DSO issuance potential greatly exceeds demand. However, despite the improved attractiveness of offerings, investors have yet to see the compelling case for DSOs versus other investment opportunities, even though investors are flush with cash and in search of new yielding opportunities. They may be intimidated by the blockchain technology and required digital wallets, or annoyed that they need to set up multiple accounts in order to get access to deals. Broker-dealers and exchanges need to reduce the onboarding burden and distribute offerings more widely amongst each other to increase choice for investors. The biggest trend to watch is a step-function increase by individual and institutional investors participation, indicating the industry has dramatically improved its attractiveness.

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