A student tower block near the University of South Carolina’s campus in Columbia makes for an unlikely monument to the confidence some still harbour that digital currencies will eventually loosen Wall Street’s grip on financial services.
Boasting 800 beds, a rooftop pool deck and a 20ft outdoor television, the site’s owner is turning it into a private real estate investment trust. Half of the property will then be sold via 955 tokens, priced at $21,000 each, and their ownership recorded as digital securities on a blockchain.
What makes the deal notable is that the tokens are being sold by the real estate investment arm of DRW, one of the biggest proprietary traders in the US and an enthusiastic trader of bitcoin last year as cryptocurrency mania exploded alongside enthusiasm for the blockchain technology underpinning them.
Nor was DRW the only representative from mainstream finance to try to ride the crypto and blockchain bandwagon. CME Group and Cboe Global Markets rapidly introduced bitcoin futures. Their controversial launch came just weeks before the price of bitcoin peaked in late December, ushering in a 75 per cent crash that burnt many.
But Don Wilson, the founder and chief executive of DRW, and long-term investor in cryptocurrency infrastructure, is undeterred. The move by Convexity Properties, the real estate arm of DRW, is, he says, a small step towards a world that brings together cryptotrading and blockchain in the form of security tokens — a digital share backed by a tangible, real-world asset.
“For someone who wants to invest [in property] it can be very hard to do. From our perspective it’s cumbersome to sell part of a building,” says Mr Wilson. “Any physical tangible thing you can look at tokenising. You can tokenise gold or oil.”
Even as cryptocurrencies collapse, DRW is not the only company persevering with experiments in both digital currencies, tokens and blockchain. In October, Fidelity, one of the world’s biggest asset managers, started a business to facilitate cryptocurrency trading for investors including hedge funds and family offices. The Nasdaq exchange is reportedly sticking with a plan to list bitcoin futures.
For some, the ultimate ambition is a world in which ownership of digital securities can bypass the infrastructure of modern finance. Selling a fraction of the value of an asset that can be freely traded with ownership recorded on a ledger should, supporters claim, make it more liquid and cheaper.
As cryptocurrencies raced higher last December, regulators became increasingly concerned. A year on, lawyers say the ambiguity over the regulation of digital currencies and tokens remains a risk for investors.
The Securities and Exchange Commission ruled that initial coin offerings (ICOs) — backed by tokens that raise capital from investors— could be considered securities offerings, while the UK’s Financial Conduct Authority is currently assessing possible regulation of cryptocurrencies.
Claire Cummings, a lawyer at Cummings in London, said the uncertainty over the regulation would deter some retail investors, for whom $10,000 was still a lot of money. Without it, they would be reliant on the technology not being corrupted or hacked, she said.
It is a view echoed by Axel Pierron, an analyst at Opimas Consulting. Creating digital tokens based on traditional securities such as bonds “will certainly address investors’ quality concerns, but it is riding — at no expense — on the quality assurances provided by the traditional capital markets and the regulation surrounding it”.
None of which has so far been enough to sap the enthusiasm of some. Crypto exchanges such as Coinbase, Goldman Sachs-backed Circle and UK-based Archax are all planning to trade security tokens, as are existing exchanges such as Six, the Swiss Exchange, and Bakkt, a venture of Intercontinental Exchange.
“This technology is developing a lot like the way derivatives were in the 1990s — on the fringes and understood by the few,” said Tom Zeeb, head of securities and exchanges at Six. “Twenty-five years later and it’s part of a fund manager’s toolkit. It’s a 5- to 10-year process.”
That is certainly the bet from DRW, which is separately contesting civil charges from the Commodities Futures Trading Commission over alleged interest rate market manipulation. The Convexity tokens will be handled by Harbor, a US start-up compliance platform backed by ventura capital firm Andreessen Horowitz and Pantera Capital.
Josh Stein, chief executive of Harbor, acknowledges that the public markets for securities such as shares will remain highly liquid, but insists that digital tokens can make help make other assets more liquid and open them up to a wider audience.
“People raise more money privately than publicly these days but there’s no liquidity in those investments. They’ll never be as liquid as public markets but they can be more liquid than they are now,” he says.
Those with ambitions for blockchain and digital currencies have often collided with reality over the last year, but not everyone has given up.