Securitize Inc.: Full-Service, Regulated, and 'Reinventing Private Capital Markets'
The ICO tokenization boom served as a proof of concept for a start-up's issuance and compliance platform for digital securities
Friday, January 22, 2021
By Jeffrey Kutler
The still unfolding saga of Bitcoin and other cryptocurrencies, while rife with speculation and skepticism, has given rise to a dynamic and growing class of digital asset products and entrepreneurial creativity. Take, for instance, Securitize Inc. Founded in 2017, when initial coin offerings (ICOs) were capturing crypto enthusiasts' imaginations - and causing considerable regulatory and institutional head-scratching - the company is well on the way toward “reinventing private capital markets from the ground up,” says co-founder and chief executive officer Carlos Domingo.
It was at the height of the ICO frenzy that Domingo and partners established SPiCE VC, a venture capital firm focused on what it calls the blockchain/tokenization ecosystem, with a portfolio that includes, along with Securitize, Intercontinental Exchange's soon-to-go-public Bakkt, London-based Archax and Singapore's InvestaX. Securitize, in turn, has obtained funding from the likes of Coinbase Ventures, Mouro Capital (formerly Santander InnoVentures), MUFG, SBI Holdings and Sony Financial Ventures.
Domingo, a former CEO of Telefonica R&D who is also a SPiCE VC general partner, stresses that Securitize's end-to-end issuance and compliance platform for digital securities, or security tokens, is not a mere “software patch to improve the various systems that run private capital markets today.” Beyond innovative technology, for reinvention “in the world of finance you need the appropriate licenses.” To that end, Securitize is a Securities and Exchange Commission-registered transfer agent; became registered with the Financial Industry Regulatory Authority (FINRA) as a broker-dealer and alternative trading system through the acquisition of Distributed Technology Markets (now Securitize Markets); and is a member of the Japanese self-regulatory organization JSTOA (Japan Security Token Offering Association).
The SEC and FINRA oversight “gives us the ability to create a completely integrated, frictionless digital pipeline for private capital markets, from issuance through liquidity, cradle to grave, that is fully within the purview of the appropriate regulatory bodies,” Domingo explains. “As we expand into other jurisdictions - like we have done in Japan - we will satisfy those idiosyncratic regulations and aim to build the same full-service solutions.”
In this recent interview, Domingo reflected on the origin of Securitize and its venture capital roots, how far along the San Francisco-based company is on its transformational mission, and remaining gaps in the digital-asset ecosystem.
What were the market factors, technology landscape, people and expertise that came together to create Securitize?
After years of running innovation and technology departments for some of the world's biggest telcos, I was ready to do something new. I was living and working in Dubai when I was introduced to blockchain technology, which, I quickly recognized, had the potential to fundamentally change how we capitalize ideas and manage ownership. So in early 2017 we launched SPiCE VC, one of the first tokenized VC funds and one of only a handful of security token projects that were launched that year, when the industry started. We were mostly shunned by the ICO world because we were willingly embracing the laws and regulations around selling unregistered securities. In fact, the whole premise of security tokens is to code laws and regulations into the token, essentially giving it the ability to regulate itself in a compliant way without needing third-party interventions.
We knew there was a good chance most of what was happening in the ICO world was likely selling unregistered securities, and the fact that they were having so much success was actually a proof of concept for security tokens.
We also knew what we were creating would some day end up being a game changer for private capital markets, once the technology matured, because unlike public markets, private markets are poorly digitized and, as a result, terribly inefficient, illiquid and inaccessible. Once SPiCE VC launched and we successfully deployed our technology to issue and manage the SPiCE token in a compliant fashion, we experienced tremendous demand from others to use our technology for their businesses. So I and others like Jamie Finn [co-founder and current Securitize president], who was an early backer of SPiCE VC, launched Securitize to help other private companies and funds issue their own security tokens. The reception to Securitize was extremely positive, and we've been revenue-generating from day one.
How did venture capital fuel Securitize's growth? Would there have been alternatives, or otherwise disadvantages, in not going the VC route?
VC funding can be either advantageous or not, depending on an almost endless set of factors. We were very fortunate to have found firms like Blockchain Capital and others afterwards that have not only provided financial support, but also great insights in many parts of our business. We also think that there are other interesting routes when you want either a broader distribution of your security, or a more hands-free approach like crowdfunding and using security tokens, which alongside money from the right VCs can be a great combination.
Multiple backers of Securitize are Japanese, and you recently announced strategic partnerships with NTT DATA and SBI Digital Asset Holdings. What was the entree, and is there an industry or global significance to what is happening in Japan?
Japan has always been vitally important to our success. I lived in Japan for many years - I did my post-graduate studies at the Tokyo Institute of Technology - and saw firsthand how far ahead Japan is in embracing digitization. Their regulatory environment with respect to security tokens is also very clear and advanced, and the Japanese people are avid consumers of technology. The Japanese economy is the third largest in the world, and Japan is a huge financial center. We think Japan will be a big market for security tokens, and one that will no doubt influence adoption in other world markets. That is why we established a strong presence in Japan early on by acquiring a Tokyo-based blockchain advisory firm that is now Securitize Japan, and by getting funding from prominent financial institutions such as MUFG, Nomura, SBI, KDDI, Mitsui Fudosan and Sony.
What is your take on the current state of VC financing generally, in the fintech segment, and in digital assets/blockchain?
Obviously fintech and blockchain are very hot topics today, and good companies with a solid management and track record have no problem raising money. If anything, I think that an excess of capital is in some cases inflating valuations that companies then have to live up to, which can create problems for those that do not deliver down the road. I also think that the ICO market has damaged the industry. It allowed many companies that have literally nothing to raise way too much money and then to stay in business for way longer than under more traditional circumstances. I am glad that is (almost) over.
What in the way of strategy, expertise or offerings differentiates Securitize - and what is the Importance of differentiation or clarity of mission in competing in the digital asset space, particularly in approaching and attracting institutional market participants?
Having a clear mission and a product that stands out is critical for success in any industry. Securitize has built a reputation of delivering, not just talking, and that is a key differentiator as the digital asset space is still nascent, and it will take a while for pretenders and weaker players to be washed out.
Our mission is also clarified by our focus on private capital markets, which are twice as large than public markets but 330x less liquid by way of annualized trading. That presents us with an enormous opportunity to bridge that gap and create more transparency and efficiencies for what has typically been an opaque and clunky marketplace. Liquidity begets liquidity, and attracting institutional participants will, over time, open the floodgates for private investors as well solve for the fact that currently only 2.5% of eligible accredited investors participate in private offerings. This has the potential to create opportunities and wealth as, in many cases, some of the largest ROI to investors actually occurs before a company IPOs.
Thus, our mission is clear, and points of differentiation are cemented - namely, nobody in the market can offer the breadth of services, nor has the experience nor necessary set of licenses and registrations, to provide a true offering across the product lifecycle. Moreover, we already have more than 100 customers to build upon, all of which are managed using our transfer agent platform and services and DS (Digital Securities) Protocol technology, and we have thousands of investors accessing our platform from our investor ID product Securitize ID.
What are the expectations - where are you on the optimism scale - for 2021?
We have no doubt that private capital markets will catch up to other industries and be fully digital in the future, and we expect to continue to lead the way forward. This will be an exciting and crucial year for both Securitize and the overall digital assets space with the rollout of Securitize Markets for both primary and secondary markets. By integrating Securitize Markets into our existing digital transfer agent platform and services, we will offer a seamless digital solution for issuers and investors that dramatically improves the experience across the board.
What are some missing links in smoothing the way for seamless capital formation, asset transfer and secondary trading - and how would you rate the progress or maturity of those efforts?
More seamless capital formation is clearly improving, with great crowdfunding platforms like Republic and the usage of security tokens, and we have made a huge amount of progress in terms of delivering a modern digital transfer agent experience. The biggest gap today is in secondary market trading. The few platforms that launch have failed to scale and deliver any meaningful liquidity or experience, and there are just a handful of digital securities being traded today without much liquidity, so our next focus is in developing that segment of the market.
Where or in how many roles do you foresee Securitize playing in the evolving and future security token ecosystem?
We see ourselves being at the fulcrum of the security token ecosystem, as we are perfectly positioned to provide an integrated platform for any company or fund to issue and manage their digital securities (security tokens) from issuance through to liquidity, and everything in between. As we aggressively roll out our Securitize Markets offering, we firmly believe we can play multiple roles to help tokenization achieve its true potential.