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November 23, 2020

Market Spotlight

Regulated Tokenized Securities Venues in the U.S. With Texture Capital


Regulatory Landscape 

Texture Capital’s Johnson described a regulatory landscape in which a crypto token can trade in Japan and Europe and in the US very easily. But it’s not the same for security tokens, which are confined by the jurisdiction they’re in. He explained how the way they behave in the US is likely different from how they behave in other types of jurisdictions. 

One of the goals is to have 24/7 trading for security tokens. Many people talk about it, but Johnson believes the market is still a long way away from it. He says “we need to do the basic stuff in our own backyards first.” The regulatory environment, he adds, has been challenging and a slow process, as during the ICO craze there was a lot of focus on separating the good projects from the bad. But there’s been a lot of change lately indicating the SEC has changed its tone a little bit. He pointed to the upcoming change in leadership at the SEC and also a new Senator who was elected in the state of Wyoming, who is very pro-Bitcoin. 

(9:25) “That’s going to be a very positive voice to have on Capitol Hill,” said Johnson. 

He also pointed out that a lot of companies have moved offshore out of the United States, saying there was a bit of “regulatory arbitrage” going on for a while with jurisdictions such as Gibraltar and Malta popping up and being very blockchain friendly. He says that this dynamic is changing and that regulatory attitudes are improving in the United States. 

(9:54) “They’re getting more comfortable with it. It’s never going to be a revolution, it’s going to be an evolution. And we’re happy that we’re part of that system where there are regulators, and we want to work with them to bring this whole space forward,” said Johnson. 

He also discussed the ecosystem that Texture Capital works with to make all of the magic happen, pointing to custodians and transfer agents as being key. He explained how transfer agents record the official ledger of ownership, and you’ve got to have one of those involved in the US. Otherwise you can’t do it. While many people say the blockchain is the record of ownership and ‘let’s use that,’ Johnson says the industry isn’t there yet. 

Custodians are another key feature, and this has been an area in which regulators have struggled. If you think about bitcoin, he said, you can custody it on your private key. But if you took that framework into security tokens, it introduces a host of questions: What if other people had the private key? How can you be sure that it’s safe? As a result, you need a completely new framework for custody that’s different from crypto and different from regulated securities when you’re dealing with security tokens. 

(11:23) “That’s actually been one of the things slowing development down in this space. The good news on that front is that the DTCC seems to be making moves into this space…That’s another thing we need to have. It’s not just companies like Texture. We can’t do this on our own. We need the market infrastructure players around us to move forward. That’s how we will get take-off in this space,” said Johnson. 

Texture Capital built out all of its own technology though they are not a tech company, they’re a broker dealer. They can issue tokens on the Ethereum blockchain, but they are blockchain agnostic. They are talking to some other blockchains about possibly supporting them. They are also agnostic when it comes to token providers. So if somebody wants to issue a token that’s securitized, they want to trade that and get it into their ATS and figure out a way to trade it. 

Texture is focused on equity, given that one of the key features to have is liquidity. There are other players in the space, however, that are looking to fixed income, though he is doubtful about this asset class given the amount of liquidity that is available in the private markets. Johnson explained how at some point in the future, Texture hopes to integrate stablecoins. 

(15:57) “We really want to innovate here and if we have a security transaction go off in the ATS, then to be able to settle that instantly, delivery vs. payment in an atomic transaction vs. the stablecoin, it will be a huge development. So that’s definitely on our roadmap for 2021. 

Overall, Johnson said they don’t expect the private markets to be as liquid as the public markets but more liquid is a big improvement and can really transform how capital is allocated throughout the economy. 

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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