Security tokens have recently become the proverbial Belle of the Blockchain ball, with some saying that asset tokenization is the most important evolution in Blockchain since Bitcoin. Security tokens show immediate promise in the area of private capital raising, such as start-up capital, crowdfunding, and real estate investment. Modern regulations like the Jobs Act have brought private capital raising into the technology age and put previously inaccessible opportunities within reach for millions. Security tokens meet this kind of tech-enabled capital raising head-on.
Cadre is an investment platform that provides investors access to a curated set of institutional quality commercial real estate opportunities. Could we use security tokens on our platform? Sure we could — we are a target customer for this product. But should a firm like ours use security tokens on our platform? That is what I intended to find out at the Security Token Summit. As Cadre’s General Counsel, I was looking to be “wowed” not by style, but by substance. After all, Cadre is a FINRA-registered broker-dealer and SEC-registered investment adviser, so our clients expect us to extensively diligence any new product before introducing it to them.
And now for my takeaways — Enjoy!
The panels and discussions reflected the corporate atmosphere. Outside of a few moments, the entire event was about traditional non-tech topics such as legal, compliance, operations, cybersecurity, identity verification, and the overall regulatory environment. Only cursory homage was paid to the counterculture “cypherpunk” origins of blockchain and there was no discussion whatsoever about the technology behind blockchain or security tokens.
Turned out that FINRA and the SEC were the real stars of the Summit. Panelists were consistently trying to one-up each other on how closely they work with regulators. As a lawyer and compliance professional, I view this focus as a really positive development. But I also believe that corporate guys like me would benefit greatly by hearing some more about the underlying technology and its full capabilities (and any shortcomings).
Because of the potential size of this opportunity, this relatively nascent industry already feels pretty crowded (one person I spoke with called it a “Cambrian explosion”). The various platforms and protocols all seem to be vying (sometimes as panelists sitting uncomfortably on the same panel as their competitors) for the coveted space at the top of what I call the “interoperability food chain”.
What is the “interoperability food chain”? Tokenization allows for interoperability, whereby assets can be traded for each other across platforms and asset types. So imagine your wallet held a tokenized share in a hedge fund, but you wanted to exit that position and buy some tokenized real estate. In an interoperable system, you don’t need to exit the system by “selling” the hedge fund shares (taking out cash) and “buying” the real estate position (wiring cash). Your security token wallet can do that all for you through tokenized trading. Interoperability is theoretically really powerful. And the top of the “interoperability food chain” is a lucrative place to be because interoperable networks such as these tend to end up with just one or two very big winners.
However, conference attendees without a real estate background might have left with some misconceptions about the asset class. One example was when a panelist described the risk / reward ratio of real estate backed tokens versus utility tokens and said “Utility tokens can become worthless, but real estate can’t go down to zero.” I thought this was a little confusing because most real estate deals involve significant debt leverage, meaning that the equity (or tokenized) portion of any real estate deal is most certainly at risk of being completely wiped out (happens all the time when a downturn hits).
I know how hard it is to find great real estate deals. Cadre’s investments team (over 20 investment professionals) reviews hundreds of deals a year and only about 1–2% make it through diligence, underwriting, and investment committee review and onto our platform. A bad real estate deal in token form is still just a bad real estate deal — even though trading the bad deal is operationally simpler and you’ve opened greater access to it.
My feeling is that the time horizon will be a bit longer, and the road a bit bumpier, than those predictions made at the Summit. Maybe I know too much. I know how hard it is to digitize assets (we do this at Cadre). I know how hard it is to meet broker-dealer obligations when running an ATS (again, we do this at Cadre). I know how hard it is to find great assets, with the right operations team and business plan, at the right price (yes, we do this too).
I left the Summit hopeful and excited about the direction and long term potential of the security token industry. As a potential user, Cadre and I will closely monitor the industry’s progress and would be delighted to participate in the ongoing substantive conversations to ensure the business hype is met with legal and regulatory clarity and certainty.
Important Disclaimer
The views expressed above are presented only for informational and educational purposes and are not necessarily the views of Cadre or any of its affiliates. Cadre makes no representations, express or implied, regarding the accuracy or completeness of this information, and the reader accepts all risks in relying on the above information for any purpose whatsoever. This post is not intended to provide, and should not be relied upon for investment, accounting, legal or tax advice. Additionally, this post is not an offer to sell or the solicitation of an offer to buy any securities or other instruments.
