Tuesday 1 December 2020 1:23 pm

From Crypto to Tokens. The Great Migration

My journey to crypto was not direct. I’d spent 20 years working for traditional banking houses, trading foreign exchange for Morgan Stanley, Merrill Lynch and others.

The high points in my career came during the most chaotic times, managing trading books through devaluations in Asia, Latin America and Iceland.  I spent my first career studying currency regimes, and figuring out what finance ministers were not saying. That’s because once you’ve figured out what they are avoiding saying, then you know the direction of the trade.

In the FX market we always talked about ‘dirty shirts.’ The US Dollar was commonly referred to as the ‘least dirty shirt,’ leading to its inevitable strength during times of global stress. But there comes a time in history when you suddenly realize that the ‘least dirty shirt’ is absolutely filthy.

I certainly wasn’t the first to come to this realization, to wake up one morning with this truth. Rather, that lightning strike belongs to Satoshi Nakamoto. The financial crisis of 2008 was perhaps the first time in my career where I watched central bankers take on the work of elected officials. When raising taxes and austerity proved to be unpopular options, Congress sat on its hands. It was up to the US Federal Reserve to save the day and they did so through significant money printing. Since then, COVID has reasserted economic fragility, and the money printing has begun again, unchecked by elevated officials, and aided by global zero to negative interest rates.

The concept of compounding interest died, and the rush of printed money to fill economic potholes grew significantly. The cleanest shirt was no longer clean. It was filthy. And that is when Bitcoin became the only option. A life preserver for your hard-earned capital. In a world drowning in printed money, only Bitcoin offered sensibility and absolute financial constraint.

With Bitcoin came our realization that the blockchain offered further benefits, in fact a way to transform industries with excessive third party inefficiencies. One of which is the securities industry. This is an industry that has seen little change since the 1930’s. One with layers of middlemen between the issuer and the investor. The blockchain solves this, and when adapted in a regulatory manner, leaps forward securities markets to the present day.

In 2017, when Shy Datika, our Founder, looked at digital securities, they were a sleepy backwater, limited to accredited investors and very few of them at that. Their future looked dismal. However, the ICO frenzy showed him there was promise. If the ICO could be regulated, then digital securities could be opened to the world. They would no longer be restricted to accredited investors in sleepy backwaters, but would be reborn as the catalyst for digital change.

INX spent more than 950 days working with the SEC to create the first ever security token available to all investors, including retail, with no lock up, and no limits to the capital raise. In essence, the birth of this new product created a new asset class, allowing all assets to move onto the blockchain.

We are convinced that the efficiencies that come with blockchain technology will transform capital markets over the next 5 years. There is no reason for equities to have opening and closing times. 24/7 trading is inevitable, and their investors will demand it. Issuers can see their cap table at any point in time, and show provenance for their digital shares over history. Issuers will be able to pay distributions directly to their investors without the need for middlemen, and ultimately because all transactions are recorded on the blockchain, transfer agents will slowly disappear.

There is a boon for regulators too. For with digital securities, and their autonomous smart contracts, KYC and AML restrictions become absolute. Each owner of a security is known, and securities can only be transferred to whitelisted wallets. Gone are the days when securities could be transferred from one individual to another for purposes of money laundering.

Over the next 12 months, we at INX look to transform security token trading in a number of ways. We created the first IPO on the blockchain, allowing retail to trade security tokens without lockup periods. We will now begin educating the market on the endless possibilities this represents. We will do this by listing a diverse range of security tokens over the course of the year. Each one showcasing the ability for security tokens on multiple blockchains to unlock dead capital, realize new investment possibilities, and highlight new efficiencies.

By 2022 we expect to see the stirring of The Great Migration. Issuers will transform their listings from legacy to digital in order to capture efficiencies, to keep their investors, and to diversify their investor base. Did you know, for example, that by going digital issuers will be able to fractionalize their equity, opening up affordability to the third world? This Great Migration will begin with a drip and end in a torrent. Much in the same way that Bitcoin adoption has.

First a few macro traders got involved (I’m talking about you Mike Novogratz!), then a corporate or two started dipping their toes (thanks Michael Saylor at MicroStrategy), then larger institutional investors began accumulating (Guggenheim Partners). The trickle becomes a flood. Cryptocurrencies are exciting today, and they aid digital securities markets tomorrow, by educating the world about ‘digital wallets’ and the blockchain. Cryptocurrencies are exciting, but we expect that digital securities could dwarf their relevance over time. Digital securities, digital currencies, digital fixed income, digital commodities… As SEC Chairman Jay Clayton recently stated at a Digital Chamber of Commerce event, “It may very well be the case that those all become tokenized.”

We at INX believe the future is digital, and we seek to give investors in our IPO a front row seat to The Great Migration. The future is now. It’s time to clean these dirty shirts.

Douglas Borthwick is Chief Marketing and Business Development Officer of INX Services. Douglas has over 25 years of experience in the finance industry, most recently founding and building the Chapdelaine FX electronic and voice trading business for inter-dealer broker TP-ICAP from 2012 to September 2018. He held various roles with Morgan Stanley from 1996 through 2005; managing foreign exchange derivatives trading groups in New York and London, with a strong focus on emerging markets. He then ran the strategic trading desk at Merrill Lynch from 2005 to 2006, and the Latin American FX trading business at Standard Chartered from 2006 to 2009. In 2010, he managed trading and research areas for startup foreign exchange agency, Faros Trading, a company that was later sold to FXCM in 2013. Douglas holds a bachelors of science in Economics from Carnegie Mellon University and an MBA from Yale University’s School of Management.

LinkedIn http://linkedin.com/in/douglas-borthwick-a20495

Twitter @DCBorthwick

For further information visit https://inx.co