It looks like Coinbase is preparing to add a lot more cryptocurrencies

Coinbase aspires to be the New York Stock Exchange of crypto, and it is taking a small — but not insignificant – step to offering a lot more cryptocurrencies after it revamped the process of listing new digital assets.

The exchange currently only supports just five cryptocurrencies — Ethereum, Bitcoin, Bitcoin Cash, Ethereum Classic and Litecoin — and the process of adding each one has been gradual. The company would announce plans, and then later announce when listing the asset. The idea being to reduce the potential to send the value of a token skyrocketing. (Since support from Coinbase potentially adds a lot more trading volume.)

That clearly isn’t a sustainable process if Coinbase is to add “hundreds” of tokens, as CEO Brian Amstrong told an audience at TechCrunch Disrupt it eventually plans to.

Regulatory concern is high on the scale when evaluating support for new cryptocurrencies, so now Coinbase is speeding up the process by limiting trading of some tokens to specific locations where necessary.

“Today we’re announcing a new process that will allow us to rapidly list most digital assets that are compliant with local law, by satisfying listing requests in a jurisdiction-by-jurisdiction manner. In practice, this means some new assets listed on our platform may only be available to customers in select jurisdictions for a period of time,” the company said in a blog post.

That’ll mean an end to the double announcement — ‘token X is coming soon’ and ‘token X is now supported’ — and instead a single reveal. That indicates that a large number of new assets may be incoming — for an idea of which ones, Coinbase recently said it is looking over a number of cryptocurrencies.

Interestingly, the company also noted that it may introduce a listing fee — this is common with many other exchanges — in the future in order to cover costs around adding some projects.

“Initially there will be no application fee. Depending on the volume of submissions, we reserve the right to impose an application fee in the future to defray the legal and operational costs associated with evaluating and listing new assets,” it explained.

The company has opened a listing proposal link, here. If similar features from other exchanges are anything to go by, Coinbase’s will be flooded by naive token holders who think they have a shot at getting listed on Coinbase, which will take them to the moon. Good luck maintaining that list, guys.

Note: The author owns a small amount of cryptocurrency. Enough to gain an understanding, not enough to change a life.

VCs say Silicon Valley isn’t the gold mine it used to be

In the days leading up to TechCrunch Disrupt SF 2018, The Economist published the cover story, ‘Why Startups Are Leaving Silicon Valley.’

The author outlined reasons why the Valley has “peaked.” Venture capital investors are deploying capital outside the Bay Area more than ever before. High-profile entrepreneurs and investors, Peter Thiel, for example, have left. Rising rents are making it impossible for new blood to make a living, let alone build businesses. And according to a recent survey, 46 percent of Bay Area residents want to get the hell out, an increase from 34 percent two years ago.

Needless to say, the future of Silicon Valley was top of mind on stage at Disrupt.

“It’s hard to make a difference in San Francisco as a single entrepreneur,” said J.D. Vance, the author of ‘Hillbilly Elegy’ and a managing partner at Revolution’s Rise of the Rest Fund, which backs seed-stage companies based outside Silicon Valley. “It’s not as a hard to make a difference as a successful entrepreneur in Columbus, Ohio.”

In conversation with Vance, Revolution CEO Steve Case said he’s noticed a “mega-trend” emerging. Founders from cities like Pittsburgh, Detroit or Portland are opting to stay in their hometowns instead of moving to U.S. innovation hubs like San Francisco.

“The sense that you have to be here or you can’t play is going to start diminishing.”

“We are seeing the beginnings of a slowing of what has been a brain drain the last 20 years,” Case said. “It’s not just watching where the capital flows, it’s watching where the talent flows. And the sense that you have to be here or you can’t play is going to start diminishing.”

Farewell, San Francisco

“It’s too expensive to live here,” said Aileen Lee, the founder of seed-stage VC firm Cowboy Ventures, amid a conversation with leading venture capitalists Spark Capital general partner Megan Quinn and Benchmark general partner Sarah Tavel .

“I know that there are a lot of people in the Bay Area that are trying to work on that problem and I hope that they are successful,” Lee added. “It’s an amazing place to live and we’ve made it really challenging for people to live here and not worry about making ends meet.”

One of Cowboy’s portfolio companies opted to relocate from Silicon Valley to Colorado when it came time to scale their business. That kind of move would’ve historically been seen as a failure. Today, it may be a sign of strong business acumen.

Quinn said that of all 28 of Spark’s growth-stage portfolio companies, Raleigh, North Carolina-based Pendo has the easiest time recruiting folks locally and from the Bay Area.

She advises her Bay Area-based late-stage companies to open a second office outside of the Valley where lower-cost talent is available.

“We often say go to [flySFO.com], draw a three-hour circle around San Francisco where they have direct flights, find a city that has a university and open up a second office as quickly as possible,” Quinn said.

Still, all three firms invest in a lot of companies based in San Francisco. Of Benchmark’s 10 most recent investments, for example, eight were based in SF, according to Crunchbase.

“I used to believe really strongly if you wanted to build a multi-billion dollar company you had to be based here,” Tavel said. “I’ve stopped giving that soap speech.”

Underestimated talent

A lot of Bay Area VCs have been blind to the droves of tech talent located outside the region. Believe it or not, there are great engineers in America’s small- and medium-sized markets too.

At Disrupt, Backstage Capital founder Arlan Hamilton announced the firm would launch an accelerator to further amplify companies led by underestimated founders. The program will have cohorts based in four cities; San Francisco was noticeably absent from that list.

Instead, the firm, which invests in underrepresented founders and recently raised a $36 million fund, will work with companies in Philadelphia, Los Angeles, London and one more city, which will be determined by a public vote. Aniyia Williams, the founder of Tinsel and Black & Brown Founders, will spearhead the Philadelphia effort.

“For us, it’s about closing that wealth gap to address inequity in tech,” Williams said. “There needs to be more active participation from everyone.”

Hamilton added that for her, the tech talent in LA and London is undeniable.

“There is a lot of money and a lot of investors … it reminds me of three years ago in Silicon Valley,” Hamilton said.

Silicon Valley vs. China

Silicon Valley’s demise may not be just as a result of increased costs of living or investors overlooking talent in other geographies. It may be because of heightened competition abroad.

Doug Leone, an early- and growth-stage investor at Sequoia Capital, said at Disrupt that he’s noticed a very different work ethic in China.

Chinese entrepreneurs, he explained, are more ruthless than their American counterparts and they’re putting in a whole lot more hours.

“I’ve had dinner in China until after 10 p.m. and people go to work after 10 p.m.,” Leone recalled.

“We don’t see that in the U.S. I’m not saying the U.S. founders oughta do that but those are the differences. They are similar in character. They are similar in dreams. They are similar in how they want to change the world. They are ultra-driven … The Chinese founders have a half other gear because I think they are a little more desperate.”

Much of this, however, has been said before and still, somehow, Silicon Valley remained the place to be for investors and startup entrepreneurs.

The reality is, those engaged in tech culture are always anxiously awaiting for the bubble to pop, the market to crash and for “peak Valley” to finally arrive.

Maybe, just maybe, Silicon Valley is forever.

Here’s more of our coverage of Disrupt 2018.

Eight Roads Ventures targets Southeast Asia deals

Eight Roads Ventures, the investment arm of financial giant Fidelity International, is moving into Southeast Asia where it sees the potential to plug the later stage investment gap.

The firm has funds across the world including the U.S, China and Europe, and it has invested nearly $6 billion in deals over the past decade. The firm has been active lately — it launched a new $375 million fund for Europe and Israeli earlier this year — and now it has opened an office in Singapore, where its managing partner for Asia, Raj Dugar, has relocated to from India.

The firm said it plans to make early-growth and growth stage investments of up to $30 million, predominantly around Series B, Series C and Series D deals. The focus of those checks will be startups in the technology, healthcare, consumer and financial services spaces. Already, it has three investments across Southeast Asia — including virtual credit card startup Akulaku, Eywa Pharma and fintech company Silot.

There’s a huge amount of optimism around technology and startups in Southeast Asia, where there’s an emerging middle-class and access to the internet is growing. A report from Google and Singapore sovereign fund Temasek forecasted that the region’s ‘online economy’ will grow to reach more than $200 billion. It was estimated to have hit $49.5 billion in 2017, up from $30.8 million the previous year.

Despite a growing market, investment has focused on early stages. A number of VC firms have launched newer and larger funds that cover Series B deals — including Openspace Ventures and Golden Gate Ventures — but there remains a gap further down the funding line and Eight Roads could be a firm that can help fill it.

“Southeast Asia has several early-stage and late-stage funds that cater well to the start-ups and more mature companies. The growth-stage companies, looking at raising Series B/C/D rounds have had limited access to capital given the lack of global funds operating in the region. We see phenomenal opportunity in this segment, and look forward to helping entrepreneurs as they scale their business, providing access to our global network of expertise and contacts,” Eightroad’s Dugar said in a statement.

This is how much VCs are paid

Venture capital is known for being an opaque industry, so it’s no surprise most of us have no idea what the average VC earns in a year.

I got a closer look at the survey results of J. Thelander Consulting‘s annual venture firm compensation survey and, unsurprisingly, VCs make a lot of money.

Just how much? Well, of the 204 VCs surveyed (172 male and 32 female), the average general partner expects to make roughly $634,000 this year, including a bonus for 2017 performance.

The averages varied a bit depending on the size of the firm. VCs at firms with less than $250 million assets under management (AUM), for example, earn less than their counterparts at larger firms.

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GPs, who sit at the top of the ranks at VC firms, have the largest compensation packages. Their yearly bonuses are, on average, larger than an associate’s, or entry-level investor’s, average base pay.

The survey didn’t parse out data from firms with billions AUM, aka the Sequoias, NEAs or Kleiner Perkins of the world. Those folks, if the above is any indicator, earn more.

Take note: This is all in addition to a VC’s carried interest, or percentage of a fund’s profits paid to firms’ partners.

Golden Gate Ventures closes new $100M fund for Southeast Asia

Singapore’s Golden Gate Ventures has announced the close of its newest (and third) fund for Southeast Asia at a total of $100 million.

The fund hit a first close in the summer, as TechCrunch reported at the time, and now it has reached full capacity. Seven-year-old Golden Gate said its LPs include existing backers Singapore sovereign fund Temasek, Korea’s Hanwha, Naver — the owner of messaging app Line — and EE Capital. Investors backing the firm for the first time through this fund include Mistletoe — the fund from Taizo Son, brother of SoftBank founder Masayoshi Son — Mitsui Fudosan, IDO Investments, CTBC Group, Korea Venture Investment Corporation (KVIC), and Ion Pacific.

Golden Gate was founded by former Silicon Valley-based trio Vinnie Lauria, Jeffrey Paine and Paul Bragiel . It has investments across five markets in Southeast Asia — with a particular focus on Indonesia and Singapore — and that portfolio includes Singapore’s Carousell, automotive marketplace Carro, P2P lending startup Funding Societies, payment enabler Omise and health tech startup AlodokterGolden Gate’s previous fund was $60 million and it closed in 2016.

Some of the firm’s exits so far include the sale of Redmart to Lazada (although not a blockbuster), Priceline’s acquisition of WoomooLine’s acquisition of Temanjalan and the sale of Mapan (formerly Ruma) to Go-Jek. It claims that its first two funds have had distributions of cash (DPI) of 1.56x and 0.13x, and IRRs of 48 percent and 29 percent, respectively.

“When I compare the tech ecosystem of Southeast Asia (SEA) to other markets, it’s really hit an inflection point — annual investment is now measured in the billions. That puts SEA on a global stage with the US, China, and India. Yet there is a youthfulness that reminds me of Silicon Valley circa 2005, shortly before social media and the iPhone took off,” Lauria said in a statement.

A report from Google and Temasek forecasts that Southeast Asia’s digital economy will grow from $50 billion in 2017 to over $200 billion by 2025 as internet penetration continues to grow across the region thanks to increased ownership of smartphones. That opportunity to reach a cumulative population of over 600 million consumers — more of whom are online today than the entire U.S. population — is feeding optimism around startups and tech companies.

Golden Gate isn’t alone in developing a fund to explore those possibilities, there’s plenty of VC activity in the region.

Some of those include Openspace, which was formerly known as NSI Ventures and just closed a $135 million fund, Qualgro, which is raising a $100 million vehicle and Golden Equator, which paired up with Korea Investment Partners on a joint $88 million fund. Temasek-affiliated Vertex closed a $210 million fund last year and that remains a record for Southeast Asia.

Golden Gate also has a dedicated crypto fund, LuneX, which is in the process of raising $10 million.

Coinbase plots to become the New York Stock Exchange of crypto securities

The future of Coinbase looks something like the New York Stock Exchange. That’s according a vision laid out by CEO Brian Amstrong who was interviewed on stage at TechCrunch Disrupt in San Francisco today.

Coinbase is known for being the most popular exchange for converting fiat currency into crypto — most of the largest traded exchanges are crypto-to-crypto — but he foresees a future in which it plays host to a growing number of cryptocurrencies as it becomes standard for companies to create their own token, which runs alongside equity as an alternative investment system.

“It makes sense that any company out there who has a cap table… should have their own token. Every open source project, every charity, potentially every fund or these new types of decentralized organizations [and] apps, they’re all going to have their own tokens,” Armstrong said.

“We want to be the bridge all over the world where people come and they take fiat currency and they can get it into these different cryptocurrencies,” he added.

That tokenized future could see Coinbase host hundreds of tokens within “years” and even potentially “millions” in the future, according to Armstrong. That’s a big jump on the five cryptocurrencies that it currently supports today, and it would make it way larger than financial institutions like the New York Stock Exchange, which is actually a Coinbase investor and is getting into Bitcoin, or the NASDAQ.

One of the critical pieces of making this vision a reality is, of course, regulation. This week at Disrupt, others in crypto space have argued that a lack of clarity around crypto regulation is costing the U.S. as innovation and startups are being developed in overseas markets. As the founder of a U.S.-based crypto startup that is valued at over $1 billion and is hiring hard, Armstrong doesn’t subscribe to that thesis but he did admit that there is “a big open question” over whether the majority of the new rush of tokens he foresees will be securities or not.

Still, Coinbase has made moves to add security tokens to its portfolio with the acquisition of a securities dealer earlier this year.

“We do feel a substantial subset of these tokens will be securities,” he said. “Our approach has always been to be the most trusted [exchange] and the easiest to use. So we want to be the legal compliant place where you can start to trade these tokens that are classified as securities.”

“Web 1.0 was about publishing information, web 2.0 was about interaction and web 3.0 is going to be about value transfer on the internet because now the web has this native currency and so applications can be built that instantly tap into this global economy on the internet,” Armstrong added.

How international can crypto become? The Coinbase CEO thinks that the total number of people in the crypto ecosystem can reach one billion within the next five years, up from around 40 million today.

You can watch the full video from Armstrong’s interview below.

Note: The author owns a small amount of cryptocurrency. Enough to gain an understanding, not enough to change a life.

Coinbase’s Brian Armstrong: ‘I’d love to run a public company’

Brian Armstrong, the CEO of cryptocurrency trading platform Coinbase, wants to take his company public — maybe on the blockchain.

Onstage at TechCrunch Disrupt SF 2018, Armstrong dished on his ambitions for the future of Coinbase.

“We are self-sustaining,” Armstrong said. “You know, we’ve been profitable for quite a while. We don’t have any plans to raise additional capital at this point, but never say never … Someday I’d love to run a public company.”

Armstrong didn’t rule out going public on the blockchain. He said he’s even considered going public on his own platform.

“I think it would be very on mission for us to do that because, of course, we are creating an open financial system,” he said. “Companies could list their stock, which are really tokens, and instead of a cap table, you tokenize the cap table. But I don’t have any decisions on that to share at the moment.”

An innovative exit would be very on-brand for Coinbase. As one of the earliest players in crypto-mania, the company has certainly had to make things up as it goes. It’s worked, as Armstrong said; the company is profitable and was the first-ever cryptocurrency startup to garner a billion-dollar valuation.

Founded in 2012, Coinbase is backed by IVP, Spark Capital, Greylock Partners, Battery Ventures, Section 32, Draper Associates and more. The company was valued at $1.6 billion in August 2017 with a $100 million Series D last year. The financing was reportedly the largest-ever for a crypto startup.

Watch the full interview with Brian Armstrong below.

Lending startup Portal Finance nabs $200 million for small business loans in Latin America

Latin American small businesses just got a big boost with a new commitment for a $200 million lending joint venture between the Bogota-based startup Portal Finance and Latin America’s largest financial services institution, BTG Pactual.

For Portal Finance, the deal with BTG caps a meteoric rise, which has seen the company raise $1.5 million at a $60 million valuation and move from a small $5 million lending pilot to a $200 million deal in the span of two years.

A year ago we were four guys in a closet. Now we’re 70 people,” says Diego Caicedo, the company’s chief executive and co-founder. 

The company’s success is a testament to the changing fortunes of many Latin American economies and the role that venture capital is playing. For the last several years Colombia’s economic fortunes have been rising since the successful conclusion of peace talks with the country’s largest rebel group, the Revolutionary Armed Forces of Colombia, brought an end to 50 years of civil war.

Meanwhile, investment firms like Magma Partners, which led the pre-seed and seed rounds for Portal Finance are linking innovative companies in places like Buenos Aires, Bogota, and Lima with Chile’s stable economic base to provide a market where innovative startups can gain traction.

It’s also a sign of the significant demand for small business loans across Latin America. In the aftermath of the 2008 global financial crisis small businesses found their credit lines pulled as banks refused to take on the risks associated with lending to small businesses.

That left businesses with only supply chain financing and factoring as the only alternatives. With interest rates that are typically between 20% and 50% annually. These rates are being charged even though invoices can be used as collateral and default rates hover at around 1% per year.

Portal Finance, and other companies like it, solve the problem by giving banks a better window into their borrowers finances by tackling the problem from three ways. The first is by working with factoring firms who were the lenders of last resort to companies who needed cash for operations and improvement and could not take out loans or raise equity financing. Second, the company has a window into the receivables of small businesses through the large corporate customers they supply. Finally, the company has reached out to the small businesses themselves to collect additional data, giving lenders a complete view of the borrowers’ financing.

That “full-stack” approach to small business financial statements was the vision that Caicedo had for his company from the moment he and his co-founders Felipe Puntarelli and Nicholas Bohorquez, took their first financing — $50,000 from Magma Partners (a Latin American focused venture capital firm).

The opportunity was so great that he was able to convince his eventual Charlie Cliff, a former defense contractor in the aerospace industry, to come down to Bogota without knowing a single word of Spanish to help jumpstart the business as Chief Technology Officer. Cliff, who was connected to Caicedo through Magma Partners’ managing director and co-founder Nathan Lustig, flew down after three phone calls.

Diego Caicedo and Charlie Cliff, the chief executive and chief technical officers for Portal Finance

Caicedo and Cliff first tackled the problem for the factoring firms that would lend money to businesses off of the projected income for accounts receivable. It was the first product that Portal Finance brought to market when it launched in 2016.

By 2017, it expanded its products to include an offering for large corporations to help them manage their payments to small businesses.

With that information in hand, Caicedo reached out to financial services firms to set up a lending operation. BTG Pactual agreed to a pilot in Chile in January, and expanded to the $200 million lending joint venture in July that covers both Chile and Colombia.

Caicedo called the program the largest investment in a fintech startup by a Latin American financial services firm. So far, the company has issued 200 loans in Chile and 500 in Colombia. On the heels of that investment, Caicedo says that the company expects to close an additional $2.5 million in financing soon and will be profitable by the end of November.

Payday startups are increasing access to wages, but is “make any day payday” the right choice?

Imagine you get a monthly paycheck on the 15th of the month but your bills come in on the 1st of the month.  Between the 15th and 1st you must set a portion of your check aside to pay bills.  This becomes a complicated budgeting equation. How much can I spend today vs how much do I need to set aside?

In a perfectly rational world people would reduce their consumption by the amount needed to afford their bills and have money left over to make it to the next payday.  Sadly, this isn’t what happens. When income and bills are farther apart, we struggle to make the math work.

Researchers Brian Baugh  and Jialan Wang found that financial shortfalls – payday loans and bank overdrafts – happen 18% more when there is a greater mismatch between the timing of someone’s  income and the bills they owe.

We come up short.

Baugh offers some reasoning: When we get paid, we spend money. More money than usual.  Research from Arna Olafsson and Michaela Pagel supports this. They find that both poor and rich households respond to the receipt of income, with the poorest households spending 70 percent more when they get paid than they would on an average day and the richest households spending 40 percent more.  This inclination to spend more on payday makes the monthly budget harder to balance – and sometimes makes it unable to balance at all.

Many fintech companies are starting to address pay period timing, in hopes they can close the gap between income and consumption needs.  Apps like Even, Earnin and PayActive provide people with instant access to their paycheck.  Gig economy employers like Uber and Lyft have features that allow drivers to cash out immediately after they drive.  For people who would otherwise get paid on a monthly schedule, this is critical.  Jesse Shapiro of Harvard  found that food stamp recipients consume 10 to 15 percent fewer calories the week before food stamps are disbursed.   Even a few days matter. In Baugh’s study, the difference between a paycheck period of 35 days vs a paycheck period of 28 days resulted in 9% more instances of financial distress.

The question we should be asking now is what is the optimal timing for pay periods?  Too long between checks causes hardship, but how short should pay periods become?  These fintech companies are offering to “Make Any Day Payday” with promises that people can “Get your paycheck anytime you want.”  While this smooths the gap between pay periods, given Olassof’s research, it may also serve to increase spending if everyday is payday.

To dive deeper into this problem, our team sought to understand what employees preferred.  As a reminder, our preferences don’t always represent what’s best for us. You may want to eat that chocolate cake, but that doesn’t mean it will help you with your summer dieting goals.  However, we were curious: do people have the intuition that more frequent pay periods are better, and how frequent is optimal?   To do this we asked 384 people making less than median income ($30,000 a year) to tell us their preferred pay schedule. Using Google Consumer Surveys, we gave them six payment schedules to choose from: Annual, Monthly, Bi-weekly, Weekly, Daily or Hourly.

What should people say? If everyone acts rationally, we would expect people to say they want to get paid hourly – immediately after working. It’s their money and they would be best off with unfettered access to it.

This is not what we found. Instead, people prefer to get paid on a bi-weekly or weekly schedule.  Aggregating everyone’s responses, people preferred bi-weekly (37.2%), followed by weekly (26.6%).

Why aren’t more people choosing hourly or daily?  While we can’t be sure, one guess is that Baugh’s findings ring true. Weekly and biweekly paychecks can act as a self control device for spending. If paydays were every day, they may be more tempted to spend on non-critical items, leaving less money for bills.  Weekly and biweekly paychecks also serve as a way to fix the misalignment of income and bills that Baugh cites drives overdrafts and payday loans.  Our team interviewed 40 people in Fresno, California and found this to be a popular budgeting strategy – one paycheck is used for the family car payment and one is used for rent.

When we break out responses by income, we find some correlational differences across income groups. People reporting less than $6,000 income (50% below poverty line) are more likely to opt for an immediate pay schedule.  As people’s income level rises above poverty (or part time status), the preference for weekly and bi-weekly pay schedules increases.

We also asked people to tell us how they would describe their personal need for money when paying their bills over the past year. No surprise, but the more people felt they needed money for immediate bills (or feeling scarce) the higher the demand for more frequent paychecks (hourly or weekly).

The verdict?

More research is needed to determine the effects of the growing trend to offer instant access to your paycheck. These apps can bridge critical gaps for people living paycheck to paycheck, but they may also have some detrimental effects if Baugh and Olafsson’s findings hold. If apps help people make everyday payday, and each payday results in higher spending, the end of the month may be much harder to get to.

Key insights for companies trying to improve people’s financial lives

  1. Help move people off a monthly pay cycle. Our study suggests that lower income individuals don’t prefer monthly and other research suggests it has costly implications for their financial lives.
  2. Help people match up their income and their bills. Lenders can do this upon loan origination or fintech apps (like EarnUp) can help people automate timing.
  3. Provide (thoughtful) access to the paycheck. Apps could ask people up front to precommit to when they want to take money from their paycheck. This would still allow people to have access, but could possibly slow down an urge to withdraw too frequently.

Security tokens will be coming soon to an exchange near you

While cryptocurrencies have generated the lion’s share of investment and attention to date, I’m more excited about the potential for another blockchain-based digital asset: security tokens.

Security tokens are defined as “any blockchain-based representation of value that is subject to regulation under security laws.” In other words, they represent ownership in a real-world asset, whether that is equity, debt or even real estate. (They also encompass certain pre-launch utility tokens.)

With $256 trillion of real-world assets in the world, the opportunity for crypto-securities is truly massive, especially with regards to asset classes like real estate and fine art that have historically suffered from limited commerce and liquidity. As I’ve written previously, imagine if real estate was tokenized into security tokens that you could trade as safely and easily as you do stocks. That’s where we’re headed.

There’s a lot of forward momentum around tokenized securities, so much so that based on their current trajectory, I believe security tokens are going to become a common part of Wall Street parlance in the near future. Investors won’t just be able to buy and sell tokens on mainstream exchanges, however; “crypto-native” companies are also throwing their hats into this ring.

The starter pistol has been fired

The race is on to bring security tokens to the masses

Because Bitcoin and other cryptocurrencies are not classified as securities, it’s been much easier to facilitate trading on a large scale. Security tokens are more complex, requiring not just capabilities around trading, but also issuance and, critically, compliance. (See more of my thoughts on compliance here.) It’s a major undertaking, which is why we haven’t seen the Coinbase or Circle of security token trading emerge yet (or seen these companies expand their platforms to address this — more on that later).

Meanwhile, regular exchanges are blazing the trail and moving into providing tokens trading. The founder and chairman of the company that owns the NYSE announced a new venture, Bakkt, that would provide an on-ramp for institutional investors interested in purchasing cryptocurrencies. Last month, the SIX Swiss Exchange — Switzerland’s principal stock trading exchange — announced plans to build a regulated exchange for tokenized securities. The trading and issuing platform, SIX Digital Exchange, will adhere to the same regulatory standards as the non-digital exchanges and be overseen by Swiss financial regulators.

This announcement confirms a few things:

  1. Most assets (stocks, bonds, real estate, etc.) will be tokenized and supported on regulated trading platforms.

  2. Incumbents like SIX have a head start due to their size, regulatory licensing and built-in user base. They are likely to use this advantage to defend their position of power.

  3. Most investors will never know they are using distributed ledger technology, let alone trading tokenized assets. They will simply buy and sell assets as they always have.

I expect other major financial exchanges to follow SIX’s lead and onboard crypto trading before long. I can imagine them salivating over the trading fees now, Homer Simpson-style.

Live shot of financial exchanges drooling over crypto trading fees

Crypto companies are revving their engines

The big crypto companies are preparing to enter the security token arena

Stock exchanges won’t have the space to themselves, however. Crypto companies like Polymath and tZERO have already debuted dedicated platforms for security tokens, and all signs indicate announcements from Circle and Coinbase unveiling their own tokenized asset exchanges are not far behind.

Coinbase is much closer to offering security token products after acquiring a FINRA-registered broker-dealer in June, effectively backward-somersaulting its way into a state of regulatory compliance. President and COO Asiff Hirji all but confirmed crypto-securities are in the company’s roadmap, saying that Coinbase “can envision a world where we may even work with regulators to tokenize existing types of securities.”

Circle is also laser-focused on security tokens. Circle CEO and co-founder Jeremy Allaire explained the company’s acquisition of crypto exchange Poloniex and launch of app Circle Invest in terms of the “tokenization of everything.” In addition, it is pursuing registration as a broker-dealer with the SEC to facilitate token trading — it could also attempt to take the same backdoor acquisition approach as Coinbase.

If there’s a reason Circle and Coinbase haven’t moved into security token services even more rapidly, it’s that there simply aren’t that many security tokens yet. Much of this is due to the lack of compliance and issuance platforms, keeping high-quality securities on legacy systems with which issuers feel more comfortable. As projects like Harbor ramp up more, this comfort gap will grow smaller and smaller, driving the big crypto players deeper into security token services.

The old guard versus the new wave

Expect a battle between traditional and crypto exchanges

This showdown between traditional finance incumbents and crypto giants will be worth watching. One is incentivized to preserve the status quo, while the other is looking to create a new, more global financial system.

The Swiss SIX Exchanges of the world enjoy some distinct advantages over the likes of Coinbase — they have decades of traditional financial operating experience, deep relationships throughout the industry and a head start on regulatory compliance. Those advantages probably mean that such incumbents will probably be the first to make infrastructural and logistical upgrades to their systems using security tokens. The first time you interact with a security token, it is likely to be through the Nasdaq.

Having said that, incumbents’ greatest disadvantage will be transporting an old-finance-world mentality to these innovations. Coinbase, Circle, Polymath, Robinhood and other newer players are better suited to harnessing the stepchange elements of security tokens — particularly asset interoperability and imaginative security design.

University of Oregon professor Stephen McKeon, an authority on security tokens, told me that “the potential for programmable securities to enable the expression of new investment types is the most exciting feature.” Harbor CEO Josh Stein explained why private securities in particular will be transformed: “by automating compliance, issuers can allow their investors to trade to the limit of their liquidity across multiple exchanges. Now imagine a world where buyers and sellers around the world can trade 24/7/365 with near instantaneous settlement and no counterparty risk — that is something only possible through blockchain.”

Those hypergrowth startups are going to experiment with these new paradigms in ways that older firms won’t think of. You can see evidence of this forward thinking in Circle’s efforts to build a payment network that allows Venmo users to send value to Alipay users — exactly embracing interoperability, if not in an asset sense.

The race is on

As Polymath’s Trevor Koverko and Anthony “Pomp” Pompliano have been saying for the past year, the financial services world is moving toward security tokens. As the crypto economy matures, we’re inching closer to a new era of real-world assets being securitized on the blockchain in a regulatory compliant manner.

The challenge for both traditional and crypto exchanges will be to educate investors about this new way to buy and sell investments while powering these securities transactions via a smooth, seamless experience. Ultimately, security tokens lay the groundwork for granting investors their biggest wish — the ability to trade equity, debt, real estate and digital assets all on the same platform.