1/ What are security tokens and why should you care?
2/ Tokenized securities are just securities with an electronic wrapper around them.
3/ The value of this wrapper is that it makes them easier to trade in a compliant way. There isn't much upside to tokenizing public equities because they are already so liquid.
4/ However, there is currently a large amount of capital that would like to invest in illiquid securities like small REITs or small businesses but in order to do that they have to lock up their capital for a long time.
5/ Tokenized securities allow for businesses to lock in funds without locking investors in because the tokens are tradable on a secondary market.
6/ Take the example of a small private American REIT: There are restrictions both at the fund level and regulatory level (e.g. less than 50% of shares can be owned by non-Americans and you must have more than 100 investors to get favorable tax treatment but less than...
7/ ...2000 or you have to go public)
8/ In effect, this means that if anyone wants to trade their shares they have to go through the fund manager
9/ You also have an illiquidity discount which the academic literature places at 20-30% (but can obviously be even higher if you are a forced seller).
10/ With a token, you could code restrictions into the token enabling buyers and sellers to trade in a secondary market as long as the trade wouldn’t violate the hardcoded restrictions.
11/ Securitizing equity in startups probably isnt that valuable at least today because most startups are overfunded rather than capital constrained
12/ One promising early use case is a local business or franchise that has maybe five locations and needs capital to expand.
13/ Their funding options are limited and having a more liquid token would let them get better terms, potentially removing a large chunk of the 20-30% liquidity discount and reducing their cost of capital.
14/ Broadly, you can think about security tokens as “compliance as a service” - by coding in compliance at the token level, you allow for more efficient markets with fewer rent-seeking intermediaries
15/ Via @sbmckeon @zjrobins @harbor @brucefenton and @claycollins on part 1 of Tokenize The World: A Tokenized Securities Documentary - blog.nomics.com/flippening/sec…
