Pendragon

The third wave of the Financial Internet: Securitized Token Offerings


Blockchain is a digital ledger that is great at determining what statements in the world are true. Blockchain is also great at eliminating the trusted third party, that most transactions required in the old analogue world. By reducing transaction costs, increasing liquidity, changing the dynamics of how capital is raised, increasing transparency and reducing compliance and accounting costs, the global economy has entered into what we call the third wave of the Financial Internet.

 

The first wave was initiated by Satoshi Nakamoto’s white paper that introduced Blockchain (and its first use case, Bitcoin) to the world. The solution of the double-spend problem allows the Internet to begin to evolve from the Internet of Information to the Internet of Value. Bitcoin, Blockchain’s first use case, is seen by many as digital gold and possibly a medium of exchange. This symbolizes the first wave of the Financial Internet.

 

The second wave of the Financial Internet is symbolized by the Initial Coin Offering or “ICO”. The holy grail of the financial industry is enabling access to capital. In the past, in the old analogue world, venture capitalists and banks were the sources of capital. In this new world, capital is given to only a very small portion of companies that are looking for it. In 2012, the Jumpstart Our Business Startups Act (“JOBS”) was passed in the United States. More commonly known as the JOBS Act, this Act modernized the raising of capital with three amendments to the Securities Act of 1933, enabling companies to raise capital directly from main street investors. Today, this is known as “crowdfunding”. Entrepreneurs can now by-pass the traditional capital formation entities combining Blockchain with the JOBS Act. Initial Coin Offerings exploded onto the scene, bringing the Financial Internet into its second wave. The ICO’s trade on unregulated exchanges and if determined to be a security by the regulators, ICO’s may have violated the rules that need to be followed and exist in traditional securities law.

The three waves of the Financial Internet

This brings us to the third wave of the Financial Internet - the Securitized Token Offering. Securitization is an important legal concept. In this wave, traditional securities rules and laws are followed, and the tokens trade on a regulated exchange. All the benefits of the Blockchain innovation are realized but in a regulated environment. Approximately, $73 trillion USD in equities, $215 trillion USD of fixed income securities, as well as $217 trillion USD in real estate assets can be digitized. That is half a quadrillion USD in possible assets that will need to be digitized over time. Bringing liquidity and transparency to the private equity space is also an asset class that can be digitized. Allowing fractional ownership and providing liquidity and transparency in the private equity space will increase its total addressable market and increase valuations. The third wave is just starting, and it is just the next phase of the natural evolution of our markets and society. Our society is slowly evolving from analogue to digital, with respect to the Internet of Value or the Financial Internet, the evolutionary phase is just starting.

 

Dr. James E. Thorne
Chief Capital Market Strategist & Senior Portfolio Manager

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