The Scoop
Here’s how financial giants like KKR and Hamilton lane are diving into crypto
Tue Jul 11 2023Description
The episode covers various topics including market updates, regulatory considerations, special purpose broker dealer designation, tokenization of real-world assets, and platform features. It explores the SEC's actions against Binance and Coinbase, institutional players exiting the market, BlackRock's impact in the crypto world, and debates around token classification. The regulatory challenges of obtaining licenses and trading tokenized assets are discussed. The special purpose broker dealer designation allows custody but not trading of digital assets. Tokenization of real-world assets is seen as a way to increase accessibility and liquidity. The platform abstracts away blockchain complexity and aims to reduce inefficiencies in asset management. Excitement about future developments in the market is expressed.
Insights
Regulatory Challenges
Obtaining licenses for transfer agents, broker dealers, and ATSs comes with different complexities and considerations.
Token Classification Debate
There is ongoing debate about which tokens should be considered securities and the level of decentralization required.
Special Purpose Broker Dealer Designation
The special purpose designation allows custody of digital assets but not trading, creating challenges for future classification changes.
Tokenization of Real-World Assets
Tokenizing real-world assets in private capital markets has gained interest due to improved regulatory clarity and benefits in accessibility and liquidity.
Platform Features
The platform abstracts away blockchain complexity, provides a user-friendly experience, and aims to reduce inefficiencies in asset management.
Chapters
- Market Update
- Regulatory Considerations
- Special Purpose Broker Dealer Designation
- Tokenization of Real-World Assets
- Platform Features and Future Developments
Market Update
00:16 - 07:34
- The SEC has taken actions against Binance and Coinbase.
- Institutional players like Fidelity and Bakkt have exited the market.
- BlackRock is making an impact in the crypto world.
- Securitize focuses on digital asset securities using public blockchains.
- There is ongoing debate about which tokens are considered securities.
- The SEC views tokenized assets as securities, but there is discussion around this topic.
Regulatory Considerations
07:17 - 14:07
- Tokenization is seen positively by regulators as the future of asset management.
- Obtaining transfer agent licenses is relatively straightforward, but operating them comes with challenges.
- Acquiring broker dealer and ATS licenses is more complex due to investor protection regulations and interactions with FINRA.
- Coinbase's acquisition of Keystone raises questions about their ability to trade securities.
- Trading tokenized assets on an ATS presents challenges in cap table management, asset servicing, and disclosure requirements.
- The special purpose broker dealer designation provides exemptions for certain digital assets.
- The registration process for crypto assets may not be suitable for trading on an ATS due to the decentralized nature of some cryptocurrencies.
Special Purpose Broker Dealer Designation
13:40 - 20:29
- The special purpose broker dealer designation was created in December 2020.
- Firms have been trying to apply for this designation, but none have been successful so far.
- The special purpose designation allows broker dealers to custody digital assets.
- However, it does not allow for trading of these assets.
- If a digital asset later becomes classified as a security, there would need to be a decision process and transfer restrictions put in place.
- Ownership of the securities would need to be validated and controlled through blockchain technology.
- Moving tokens between different trading venues and broker dealers should be more efficient with the use of tokens on a secure ledger.
- To trade a token classified as a security on an ATS, users would need to create an account with the broker dealer, go through KYC/AML processes, and connect their wallet.
- All movements of these tokens are controlled by smart contracts on the chain to ensure compliance with legal restrictions on trading securities.
- Tokens like Filecoin and Compound were not initially issued as registered securities, so tracking ownership presents challenges.
- The implications for funds built on top of tokens deemed securities are still unclear.
Tokenization of Real-World Assets
20:02 - 27:18
- Tokens will need to be registered and traded on marketplaces for them to be usable in transactions.
- L1 blockchains require token purchase to use the platform, making security compliance more challenging.
- Tokenizing real-world assets in private capital markets increases accessibility, liquidity, and ease of trading.
- Real estate tokenization has gained interest from financial institutions and asset managers due to improved regulatory clarity.
- Assets that benefit from democratization and have complex servicing needs are well-suited for tokenization.
- The user experience for LPs is similar to an LP portal rather than a MetaMask wallet.
- KYC and AML processes are required before participating in security token offerings.
Platform Features and Future Developments
26:49 - 33:08
- The platform abstracts away the complexity of blockchain for users.
- Users need to do KYC and create an account with the platform before participating in buying LP positions on Hamilton Lane funds.
- The platform shows all purchased securities, their performance, and current prices.
- Tokens sit in the user's wallet, but they won't be visible unless MetaMask picks up the price from somewhere.
- There is a strong pipeline with large asset managers interested in tokenization.
- KKR was one of the first large asset managers to enter into a deal with the platform after being introduced by Coinbase.
- The platform aims to reduce inefficiencies in asset management and investor experience.
- Inefficiencies include reconciliation errors, issues with managing securities on the back end, high minimum thresholds for wirehouses, delays in transactions, and dividend payments.
- The technology introduces new features like second-time market liquidity and ability to borrow against assets.
- DeFi has solved lending through smart contracts that allow collateralization of assets.
- Token models solve problems related to provenance, double borrowing, seizing assets, and liquidation.
- Excitement about future developments in the market.