Digital technologies are changing virtually everything, and investment is no exception. Digital assets and securities are in the offing and, if they live up to their billing, will bring many new opportunities to investors. One of the avid observers of this tech wave is Scotte Carter, co-CEO of Monolith Global Partners. (along with co-CEO Chad White).
What are digital assets/securities?
Same as an equity or debt instrument you can purchase at your discount broker. In essence, it takes an asset and modernizes it via a digital smart security contract, which allows open source accounting, transparency, higher levels of anti-money laundering and financial crime protection, and the potential of faster transaction times. Digital assets represent something of value, and ownership of that asset is verified and recorded on a digital ledger. One of the best examples is alternative investments, such as commercial real estate. The value the digital asset may represent might be a number of different assets, including equities or real estate. For the most part, digital assets are viewed as securities by the SEC, as of the date of this writing. Many digital securities represent an investment contract, that verify and record ownership on a digital ledger. Digital assets or securities are subject to U.S. securities laws, and can take the form of shares in a company, debt instrument, bundle of assets, alternative investments or even fractionalized ownership in real estate.
What advantages do they offer investors and managers?
Asset modernization will aid in the access to assets and securities that many investors have never had access to. To date, these assets previously where only for institutions and the ultra-wealthy. The idea is to level the playing field and bring a higher level of trust and transparency to the capital markets. Secondly, digital assets and securities can help with the alternative investment liquidity problem. Many alternative investments, such as real estate portfolios, are illiquid, meaning the managers or sponsors are slow to sell off assets, leaving the investor with few liquidity options. Digital assets and securities could lead to enhanced liquidity by using smart contract technology. Transaction times could be cut to minutes rather than months. As a result, this would also modernize the primary and secondary capital markets.
How will the technology help promote wider use of alternatives?
There is a huge pool of alternatives investments that have liquidity issues. These assets could be the first to use dedicated liquidity centers, exchanges or alternative trading systems. This may provide investors with liquidity that did not exist before and could bring more efficient pricing. We also anticipate these digital securities having links to financial reports, capitalization tables, K-1 reports, research reports — information relevant to investors’ decision-making and creating a more transparent environment for the entire investment community. We also anticipate the digital securities having links to financial and current reports, capitalization tables, K-1 reports, research reports and other information relevant to investors’ decision-making.
Are federal agencies regulating digital securities?
Yes! These securities are still regulated like all other securities in the United States according to the securities acts of 1933 and 1934; these acts, along with updates and amendments, are enforced by the SEC.
What is the end game?
Humbly, I sense we’re in the third inning of a 15-inning baseball game. Some of the friction points continue to be education and awareness, infrastructure and global acceptance of current regulation within the digital securities space. Besides illiquid real estate and alternative investments, you will have many assets converting to digital securities from the likes of U.S. Treasuries, equities, exchange-traded products, corporate-backed bonds, municipal debt, even priceless paintings as demand for “authenticity” continues applying pressure to the auction houses. J.P. Morgan is using hyper-ledger technology with more than 220 banks from all over the world. IBM is talking about pricing the first multi-billion-dollar debt deal this summer, and the SEC is looking into U.S. Treasuries using digital security technology.