Could you please give just a brief presentation of DigiShares?
DigiShares is a provider of white-label tokenization solutions for security token issuance, corporate management, and trading. Our preferred client is an asset manager or financial services provider that wants to offer tokenization capabilities to their own clients. As a company, we have chosen a focus on the real estate industry as we view it as the largest potential homogeneous market for tokenization. The real estate industry is plagued by complicated paper-based workflows and very low liquidity, so a good target for tokenization.
How is the corona crisis affecting your company?
The corona crisis has had several effects on our clients, most of them negative. Many of our clients have existing real estate properties that they own and operate, including hotels and residential buildings. They are experiencing that their renters are stopping to pay rent and that their hotels are closing down. Obviously they are going to focus their efforts on keeping their existing assets alive and not on creating new ones. Other clients are seeking to raise funds for real estate development projects from retail, professional and/or institutional investors – however, many retail investors are going into cash and many professional and institutional investors are refraining from new investments in order to protect their existing portfolio.
So there is no doubt that we will see a postponement of many tokenization projects, certainly in the real estate industry, for at least 3-6 months, potentially longer than that.
DigiShares as a company will survive. We are set up for the long haul and can survive almost indefinitely on the current activities of the company. However, part of the tokenization industry is venture-funded (or STO funded) and may suddenly start to suffer from “premature scaling” – the number one cause of startup failure.
What is your analysis of how the crisis may impact the emerging industry of security tokens and asset tokenization both in the short and long term?
The short term effect will surely be negative and will cause parts of our ecosystem to die or weaken. The roll-out of the global tokenization ecosystem will surely be delayed. For a period of time, tokenization as a concept will not be as interesting or attractive in the eyes of investors.
The crisis will force us to reinvent ourselves and to find new ways to be relevant and provide value. Some elements of our value proposition have the potential to make tokenization increasingly relevant during a crisis, such as:
Claus Skaaning Digishares CEO
- Democratization and fractional ownership: ticket sizes can be reduced dramatically to enable retail investors to invest in hitherto inaccessible types of assets. The total amount of investors that can be approached for any given capital raise will be higher. In times of crisis, it may be easier for investors to part with a small amount rather than a big one.
- Cost reduction: the ability to automate 90% of the issuance and corporate management workflows leads to a great cost reduction. Self-sovereign (well, almost) security tokens on a non-permissioned blockchain enable us to remove middle-men that are acting as guarantors for the presence, ownership, and value of assets and create an additional cost reduction. Technologies that perform better at a lower cost are bound to have an advantage during a crisis.
- Access to international investors: as opposed to earlier types of digitized securities, we, in the security token industry are actually working together globally to create standardized inter-operable securities that can be issued in Denmark, transferred to Singapore, and traded in the US. Governance and compliance are built into the smart contracts and the token becomes able to move across borders in an automated fashion. This causes a great cost reduction but also very significantly opens up the scope for international investors to participate much more easily in Security Token Offerings (STOs) than what was seen previously.
- Increased liquidity: during a crisis, cash is king. More liquid investments will always be preferred over less liquid investments, and even more so now, during the crisis. While security token exchanges are still not present to any significant degree, solutions such as the DigiShares platform offer some liquidity to investors – right now – right here.
- Increased design scope: paraphrasing Marc Andreesen, “software eats securities” – securities are becoming fully software-based, including governance, cash flows, voting rights, risk balancing, asset allocation, etc. The scope for designing new types of securities is exploding, enabling us to design securities that are more suitable to times of crisis. The risk-reward ratio may be fine-tuned to more precisely match investor requirements.
I have spoken to several of my colleagues in the industry and there seems to be a consensus that for the above reasons, the tokenization industry will emerge stronger after the crisis. Our value proposition will become more sharply focused on the areas where we actually provide huge value compared with the status quo.
Has it become significantly more difficult to raise investments for industry development?
I spoke with a venture capitalist last week. He said that most VCs were postponing new investments and instead focused on keeping their portfolio alive. I believe this is a quite general sentiment that we as an industry must take seriously. The tokenization industry suffers (like most other industries) and like any other industry we have to find ways to provide value throughout the crisis – both to survive but also to help the world recover from the economic setback.
The STO market was just about to take off when the corona hit the world – is that market drying out now, and when will it be back on its feet and ready for a new take off?
I am not sure the STO market was about to take off prior to the corona crisis starting up. Actually I think the industry as a whole was still struggling to prove its relevance and get its act together to showcase some convincing STOs with real value to both the issuer and investors. This work will surely be delayed but as indicated above, I believe the corona crisis may actually strengthen the tokenization industry and force us to focus on bringing real value to our clients in terms of automation, cost reduction and increased liquidity.
In my estimation, we are looking at a 3-6 months postponement. I believe parts of the global industry will recover faster than expected, but other parts will linger for years. Our technology is industry-agnostic, so we will just focus on those types of industries and investors that are fast to recover.
Is there anything that the security token industry can do proactively to help combat the global crisis?
There are some specific application areas where tokenization may provide real value during the corona crisis and actually help the world recover. We actively seek collaboration with companies and individuals who are interested in working on these, such that we can do our part in the recovery. Some of these areas are:
- Startup fund-raising: growth-stage startups are severely hit during the crisis. They have invested heavily in future growth and have budgeted with a period of being cash flow negative in order to achieve market domination. But this period will now suddenly be much longer. Token-based equity crowdfunding is surely the answer to this. Many growth-stage startups have a community that may be activated to help save the company and they may be able to obtain bridge investment from retail investors when the VCs have closed their wallets.
- Fund-raising for infrastructure or cultural institutions: many infrastructure-type companies are dying now. With infrastructure implied in the broadest sense possible. The local neighborhood restaurant is closing down. The airline responsible for 20% of a country’s connectivity is shutting down (Norwegian in Denmark). A ferry route that is bringing foreign tourists to a local region is shutting down resulting in huge losses for the tourism industry. What if the community or industry that is dependent on the company or operator could equity crowdfund a bridge loan to keep it alive? The security that is issued could contain special benefits for the investors, such as free tickets, free meals, discounts, etc. hence the increased design scope
Tokenization is part of the overall DeFi trend, and if you look at the current crisis from a more overall perspective would you agree that something like the corona crisis where suddenly people are unable to meet up and act in the physical world only confirms that digitisation is becoming increasingly important and so are next-generation digitisation like decentralised finance solutions?
Yes, certainly. The tokenization industry is 100% about digitization and any industry that has digitization as its basic raison d’être stand to gain from the crisis. All else being equal, it will become more natural for people to take investment decisions without prior face-to-face meetings. The real estate industry is very traditional in this regard and many deals are settled with a handshake. When handshakes are no longer an option, maybe some of these deals can be settled with an electronic signature instead?
Do you have any advice for the industry about how to get the most out of the current situation?
Re-adjust your burn-rate to account for lower income during 6-12 months to ensure survival. And sharpen your focus to provide real value, both during the crisis and after.