Digital assets: tokenised securities aim to erase the ICO taint

Tokenised financings, once backed by nothing more than an A4 spec sheet and Twitter account, are moving up in the world. One of the latest comes from Switzerland. It is underpinned by unquoted shares in a sports resort business and backed by Credit Suisse, a traditional institution with a taste for bracing new financing techniques.

The bank is placing equity security tokens, as they are called, in Alaïa, whose businesses include an Alpine sports centre. Investors will be able to trade these on the Taurus Digital Exchange, a platform operated by a cryptocurrency services company.

Promoters of security tokens like to distinguish their issues from the initial coin offerings (ICOs) that flourished a few years ago. These were frequently fraudulent and imploded in 2017.

Tokenised securities can represent shares, bonds, real estate and intellectual property rights. Security token offerings (STOs) may have the blessing of local regulators, giving investors a legal claim over the underlying asset. In the case of putative investors in Alaïa that means the group’s ethereum-based shares have a claim on earnings and a traditional — though low — ranking for recompense in the event of a liquidation.

The tokens have obvious appeal to start-ups and other small businesses. Issuance costs may be as little as a fifth of those for a traditional public equity offering, says Ulrik K Lykke co-founder of crypto hedge fund ARK36.

Issuers have raised some $500m from 55 deals globally in 2019, according to Blockstate, a token specialist. Three-quarters of transactions so far are for equity and almost all are based on the ethereum cryptocurrency. Traded STO market capitalisation almost doubled to $1.1bn in August compared with March this year.

Tokenised securities create intriguing jeopardy for banks such as Credit Suisse. Placing big issues of stocks and bonds is an important business for them. So far, technology has assisted traditional bookbuilding rather than replacing it. That may be about to change, pushing down fees and upending old hierarchies. The only thing more dangerous to incumbents than disruption itself may be a failure to participate in it.

This is the fifth in this week’s series of Lex notes on digital assets. We have also covered bitcoin prices, investment research, bitcoin ETFs and bank margins.

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