Five asset classes each the size of the current $2.27 trillion (CoinGecko) cryptocurrency market are making their way towards Wall Street institutional investors, with venture and private equity investment into third party firms facilitating these investments growing by factors of magnitude quarter to quarter, say market participants.
According to a summer note from Rosenblatt Securities, a New York-based institutional brokerage firm, $9.5 billion was invested into Wall Street infrastructure enabling institutional handling of digital assets in 1H of 2021, almost as much as in all 2020. Should this trend continue, and traditional investment pattern — where Q4 investments are roughly comparable to money attracted throughout the year — hold, 2021 will see $370 billion go into industrial grade institutional investor-focused tokenization infrastructure, The Tokenizer estimates.
“We have entered a new cycle in crypto. Institutional adoption is the key and is happening at a pretty impressive rate,” said Vikas Shah, Managing Director, Investment Banking at Rosenblatt Securities. “Right now, you have dozens of buckets of investors that form a very broad spectrum. On one hand, you have very opportunistic and very specialized funds that focus exclusively on crypto, there are other hedge funds that opportunistically use crypto as a way to generate alpha, then there are family offices that come over RIA (registered investment advisor) channel and slowly but surely there are the biggest institutional investors – the banks, the insurance companies, some of the asset managers, some of the endowments and pension funds.”
This optimism is fueled by a wholesale adoption of tokenization in a variety of asset classes that now get the same level of liquidity as traditional stocks, bonds and cryptocurrencies, and with that, new avenues to attract and place capital.
Rosenblatt defines these five categories as real estate, NFTs, art, sports and loyalty. Out of these five, real estate is the one at has all the potential to become the next bitcoin, Shah believes.
“All of the major asset classes will get tokenized. Different asset classes have different adoption rate and will go through cycles. So the cycle right now, in the asset classes we are seeing, is fastest on the real estate side, but as that matures, other asset classes will come online,” Shah said. “NFTs are already coming online but are still a very retail play. They are in an extremely early stage – like crypto wallets five years ago.”
The Tokenizer did a deep dive into two projects out of these five categories to find out what actually drives some of the firms and entrepreneurs to enable their digital asset strategies.
First, we turned our attention to real estate in the red-hot New York market, where the combination of the pandemic, social upheaval and controversial city politics enabled a great migration of residents between urban and suburban communities, enabling high levels of new construction, appreciation of secondary market and conversions.
Frank Muradov, the founder of Park Rock Capital, is both a living example of trying times for New York residents and an example of how tokenization can help RE professionals.
Formerly of ESA Mngt (Blackstone), Muradov moved into the suburbs for greater quality of life and started his own firm, named Park Rock Capital as a nod to bringing big city financial tools to service the main street needs. Park Rock’s business is pretty straightforward: it extends a variety of loans to real estate investors (construction, rehab, investment), repackages them as notes generating income, and sells them to Wall Street. The industry name of this product is CMBS – commercial mortgage-based securities.
The dynamics of this business have changed dramatically over the last few years, with Wall Street firms aggressively deploying capital to firms like Park Rock, pouring billions into real estate. These billions came with a price tag of following compliance and investment guidelines, making a lot of this capital inaccessible to smaller brokerage firms. Also, technology-embracing direct lenders like Quicken and Rocket Mortgage are now on the scene, edging out old school mom-and-pop real estate lenders.
“Those two trends are literally creating cheaper cost of capital, faster and more transparent lending practices, easier to understand private lending, commercial lending – an environment which is great for overall healthy lending practices and healthy industry,” said Muradov. “But not everybody is happy about that. The commercial lending still very, very old school.”
To a firm like Park Rock Capital, tokenization offers a chance to get capital from a source other than Wall Street, an opportunity to take on more business and potentially obtain capital at a cheaper cost. There is also a zero-sum concern – if they are not to tap this source of business, some of their competitors might, upending their market position.
Thus Muradov has been looking for ways to tokenize his CMBS portfolio. Thus far, he is not finding too many turnkey solutions he could use for his needs, and to potentially white label to kick-off tokenization service for his peers.
“I don’t see the service providers that would provide something for me, for the $900 billion a year CMBS industry,” he said.
Finding tools and/or services to tokenize CMBS loans is Muradov’s priority number one. Thus far, he spoke to a number of vendors that develop tools for tokenization (software) and countless attorneys that offer tokenization advice. The former either come with a huge price tag of over $250,000 or refuse the job because of unclear legal consequences. The latter lacks the software and/or technical acumen. Building in-house is the current course of action, but this is a whole big project, specked out to cost a fortune and take a significant amount of time.
Still, Muradov is optimistic that Park Rock will be in the market with tokenized CMBS assets in 12-18 months, selling them directly from its Web site or via private placements. The financial opportunity is too great to miss.
Welcome to Max Smetannikov
The author of this article is Max Smetannikov, and we are happy to announce that Max is The Tokenizer’s new columnist and reporter in New York, focusing in particular on Wall Street topics in relation to security tokens.
Max is both a journalist and a C-level executive with a proven track record of scaling companies, developing new business, increasing sales, increasing capitalization, and packaging businesses for both exit and entry into new markets and industries.
Having made his name as an analyst helping identify disruptive business models with the purpose of investment, Max has worked both on the side of the dealmakers and on the side of targets. Besides being a co-founder of Coinstreet Partners USA, a digital subsidiary of BMI, a Hong Kong investment bank, Max is the CEO of MVG LLC, an international strategic communications and advertising boutique agency. – MJR
“If we have a tokenization solution, we could probably do around ten-million-dollar’s worth of transactions, every month in tokenized assets,” Muradov said. “But if we have that platform available, what I’m thinking is to scale up and to bring on board all other lenders that I know personally who would probably take advantage of this platform. I’m talking about, you know, creating a network of private lenders who would be onboarded onto the platform. I’m talking about scaling up to hundred million, two hundred million, tokenized assets sold every single month. It’s a realistic volume for us.”
Such ambitious sales plans for tokenized CMBS assets coincide with Rosenblatt’s expectation that there would be a meaningful lift in interest in such assets from deep-pocketed institutional investors. The summer note mentioned above also refers to Fidelity Investments’ Digital Assets survey of 800 institutional investors, where 36% of the respondents said they are already invested in digital assets, and 6 out of 10 said they would increase allocations. The notes go on to state that over the next five years, 91% of the investors willing to invest in digital assets expect to have 0.5% of their portfolios allocated to digital assets.
So while Muradov plans to be selling his tokenized assets from Park Rock Capital’s Web site, sort of “a tree by the wall,” 18-th century Dutch style, Rosenblatt anticipates that these assets would be purchased and marketed to individual investors by an assortment of Wall Street and international banks.
Explosive growth is also afoot in the NFT segment. Here The Tokenizer caught up with Yohei Iwasaki, Anifie Founder and CEO, formerly the founder of mOasis, Kurion, and a board member of Orchestra. Anifie just finished an angel round with Stanford Angels and Entrepreneurs Network and has rolled out the first set of partnerships.
The mission of Anifie is filling the void that streaming has left in funding careers of young musicians. In the era spanning from Led Zeppelin to Metallica recording industry kept the lion share of profits, charged consumers high prices for music and put some of this money to work – at its discretion – to develop young talents. Once artists got signed to a label, they could expect a level of investment needed for their talent to blossom.
Streaming, spearheaded by Google and Apple, made music all but free to consumers, forcing the recording industry to focus on top 40 acts that can recoup the investment by touring, but cutting off budgets for unknown acts.
“The vast majority of the musicians don’t have anything in terms of financial mechanism to support them. So if you think about it what they have today – it’s Kickstarter. There can they can raise money from fans. But if you think about it, you know, but from the fans’ perspective, you can support musicians financially and emotionally, but in exchange for offering financial support you are not getting financial return,” said Iwasaki. “So the solution for that is already happening. Since the beginning of last year, more than 80,000 music NFTs were minted, sold for $69 million.”
That’s where Anifie comes in. Its mission is to help young musicians with nascent following stage their shows in 3-D metaverse and sell virtual merch – NFTs – directly to fans interested to see them grow. To date, most NFTs are sold as imprints of recorded music, so selling NFTs for live performances is pretty radical.
First shows staged in Anifie metaverse support the business case of up to 5% of artist’s fanbase to purchase live concert NFTs.
Growth, the very stat that Wall Street is anticipating with these new asset classes, is overwhelming with NFTs. Since launching less than a year ago, Anifie signed up over 1,000 musicians, all through word of mouth. Without divulging proprietary sales statistics, this means that Anifie artists stand to sell tens of millions of dollar’s worth of NFTs by next summer, a sobering statistic for NFT sceptics and a boon for would-be Wall Street investors.
This explosive growth has caught industry attention. AirWire, a Los Angeles-based startup backed by a VC fund Alpha Sigma Capital, has inked the deal with Anifie to give its musicians its “NFT camera” – a point and click smartphone app allowing to create and trade NFTs. Fans coming to metaverse concerts download the app, mint NFTs for a small fee going to the artist, trade it through AirWire marketplace: everybody wins.
“We firmly believe that NFTs would become a currency in their own right in the nearest future, hitting mass market as the next asset class after cryptocurrencies,” said Ken DiCross, AirWire founder and CEO. “We are thrilled for a chance to put our app into the hands of thousands of Anifie’s musicians, who can help to advance NFTs into public consciousness by using them as a tool to advance their careers.”
NFTs are also a key component of taking some of the billions of dollars that Facebook and Google make on selling creative assets made by its users and putting them into people’s pockets, making wealth distribution more democratic.
With an eye to new tokenized assets capturing the attention of investors in the same way cryptocurrencies did, Wall Street is readying its infrastructure to start adding these assets to its balance sheets.
“Building infrastructure is a pre-requisite for institutions to participate. We are in that building phase right now,” Shah said. “We see a number of companies, and we mention a few in our report and we heard quite a few speak at our panel. You need this infrastructure build for institutions to participate.”
Rosenblatt Securities believes that the taxonomy of this new execution infrastructure centers around five classes of services, which basically follow the five stages of the trade lifecycle.
- Pre-trade services and product distribution: Mostly this is analytics for new assets, services used to gauge the value of newly digitized and native digital securities. Some of the first engaged in this business are Tradeblock, which offers analytics for crypto traders, and which was bought by Coindesk in January for an undisclosed amount, and ArtBnk, an AI-driven platform for valuing art.
- Execution services: These are exchange-like platforms that help with better price discovery, aggregate liquidity, reducing execution risk, and broadening investor access. An example is Masterworks which enables buying fractional shares of collectible Art and FalconX to help institutions execute $1Billion+ Bitcoin orders.
- Post-trade facilities: clearing, settlement, and custody. Examples of such firms are Anchorage, a crypto platform for secure custody, and Paxos, a brokerage settlement and post-trade automation provider.
- Risk management and compliance: with no regulation, the only thing that stands between fraud and investors’ money being safe is adequate risk management, regulatory compliance, fraud management, and AML/KYC. Rosenblatt points out five leaders in this space – Elliptic, Eventus Systems, Looking Glass, Onfido, and ThetaRay.
- Securities lending and prime services: paying clients a fee to loan their positions and helping customers earn a yield on their balances is very new in this space, but a growing niche. BlockFi offers that to BTC holders, Rosenblatt expects other digital assets to be eligible for the same treatment soon.
As hundreds of billions are going into these five categories this year, it is important to remember that it is firms like Anifie and Part Rock Capital that ultimately would be driving a trillion-dollar wave of tokenization of assets, as they advance their businesses into new digital assets markets.