The Tokenization of Real Asset Investing

In this guided conversation, the following questions are answered:

• What’s the difference between a digital security and a cryptocurrency (i.e. bitcoin)?
• What does it mean that loans and securities are published to the blockchain?
• What is the advantage of digitizing a private asset and enabling secondary market liquidity?
• What does customization of digital securities security actually mean? How is that different from traditional equity?

Introductions

Aaron Lohmann, current CEO and Founder of Earn.re, started the conversation with a brief background on his firm: “We’re an enterprise software application that enables originators and issuers of asset-backed, specifically commercial real estate securities and debt instruments, to the blockchain, which enables them to have an unparalleled level of control, transparency and an enhanced level of security.” By working with partners, like tZERO, Earn.re is able to offer a compliant solution for secondary market liquidity on the assets that they publish. By utilizing such software and the back end blockchain, Earn.re is able to provide authenticity, protections and risk controls unlike any other source in the industry.”

Solomon Tesfaye and Ryan Zega then introduced their firm, tZERO as “a private asset, secondary market platform that enables private assets, real estate or any other companies to be able to trade in a continuous public life manner.” Think of them as the NASDAQ of private markets; they’re not conducting primary issuance but are facilitating ongoing secondary trading for existing investors.

Let’s Define Some Terms

Token/Digital Asset: Digital representation of an equity ownership, typically recorded onto a distributed ledger that’s hosted by a network of independent computers, utilizing the power of cryptography to ensure that the digital asset is unique and can’t spent or used inappropriately

Secondary Liquidity Marketplace: Once assets are digitized or tokenized, ongoing trading and actual liquidity needs to be facilitated in the marketplace

Digital Securities vs. Cryptocurrencies

In order to understand the difference between digital securities and cryptocurrencies, it’s important to have a clear definition of each. Lohmann’s definition of a cryptocurrency is “a digital/virtual currency that’s secured by that cryptography, making it impossible to counterfeit or double-spend.” Cryptocurrencies are essentially designed to work as a medium of exchange and are recorded to that distributed ledger, being the blockchain network.

Comparing the two:

Crypto–

• Not issued by a central authority (bank or government)
• Typically immune to government interference or manipulation

Digital Security–

• Represents a real world asset
• Performs according to the terms of the underlying security instrument that it represents

When you publish a digital security to the blockchain, you gain a bit of efficiency, as the issuer, and as the investor you gain control. The blockchain acts as a registry of ownership for whoever owns the instrument, acts as the custodian for either the loan or the equity security, and acts as a record of all transactions, transfers and distributions that take place for that digital security.

Pivoting to Tesfaye and Zega, they discussed how this intertwines with the secondary market liquidity that their platform offers. “There’s multiple advantages to digitizing or tokenizing real estate, or any other private asset for that matter.

Many are just quite intuitive but maybe weighted differently depending on the asset and type of owner, but here are some key advantages:

1. (Naturally) Liquidity
2. Access to a broader set of global investors
3. Reduction in costs of entry into these assets
4. Automated compliance and governance.”

Who’s adopting this type of technology?

tZero is seeing a wide variety of deals, with about 150 issuers, both domestic and international, in various stages of onboarding onto their platform. Some of these groups have identified an asset or company that tZERO is currently diligencing, while others are out raising capital. Looking at issuer types, real estate remains dominant for their firm, with roughly 30 percent of the pipeline and closely followed by a variety of funds (manufacturing, healthcare, industrials technology). They also speak to a number of NASDAQ OTC-listed companies who are potentially looking to come onto their venue, given their streamlined investor onboarding process.

On Earn.re’s side, Lohmann is seeing similar usage, a few examples being:

• Fund managers and investment managers digitizing their funds and the subscription process utilizing the blockchain
• Single asset issuances, where a sponsor of a commercial real estate project would raise equity or debt capital for a project using their platform
• Originators of debt where they’re digitizing those loans and enabling a much more streamlined process, and then ultimately transferring those loans to other qualified purchasers after being originated on the blockchain

An Avenue Leading to Ultimate Liquidity

The panelists agree that the tokenization of real assets will provide ultimate liquidity for a traditionally illiquid asset class.

“There’s a huge delta between being private and public, and since 1996, IPOs have gone down almost 50 percent. You see this recent uptick with SPACs, which often come and go, but setting those aside, this is a great way for 1) a broader set of assets to be able to trade on a continuous basis and 2) broadening the pool and democratizing access to a broader set of investors.”

Zega jumped in to discuss the “frictionless” aspect, saying “We’re speaking to a lot of real estate owner operators, both private and large institutional groups, where they see this as an excellent solution for capital structures where they have a portion of the LPs that want to go out and sell an asset, close a fund, or whatever it may be. You also have those that want to stay in this asset and continue the value creation. This is a way where you can really appease both sets of LPs.”

What does the future look like?

The opportunity to digitize is an exciting shift for the world of real assets; one that will allow for the creation of an extremely efficient financial system, unlike anything the industry has seen before.

“We foresee that tokenization could make the financial industry more accessible, cheaper, faster and easier, thereby possibly unlocking trillions of euros in currently illiquid assets, and vastly increasing the volumes of trades,” -Deloitte