Thursday, June 14, 2018

Crypto News: June 14, 2018

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The tokenized security game got much more interesting yesterday.

Swarm Fund, a Silicon Valley startup, announced they were tokenizing equity in Coinbase, Robinhood, Didi and Ripple via secondary transactions. Instead of celebrating the milestone moment, the crypto community & media erupted in negativity.

The companies immediately issued statements saying they didn’t know who Swarm Fund was and Coinbase even sent a cease-and-desist letter. The backlash was swift and strong but it illuminated something interesting - disruption is happening right in front of eyes.

So what is Swarm Fund doing exactly?

They have gone to individuals who own legal entities that hold shares in the companies mentioned & agreed to tokenize the equity in the legal entities. These can be venture capital funds or special purpose vehicles (SPVs). Swarm Fund is not tokenizing the actual equity in these companies, but rather the equity in legal entities that hold the equity. The key detail is that the original shares of Coinbase, Robinhood, Didi or Ripple never change hands so the company can’t exercise their Right of First Refusal rights, etc.

Here is an example:

  1. Investor A previously invested in Robinhood and is holding the Robinhood equity in a LLC named “Robinhood Equity LLC.”

  2. Investor A now agrees to tokenize Robinhood Equity LLC through Swarm Fund. Investor A is not tokenizing or touching the original shares from Robinhood.

  3. Once tokenized, Investor A offers any accredited investor in the US, or any regulatory compliant investor abroad, to buy equity tokens in Robinhood Equity LLC (which owns the original shares in Robinhood).

  4. Investor B comes along and buys the tokens for Robinhood Equity LLC.

  5. Investor B now owns a piece of a legal entity that is holding equity in Robinhood, but the original shares from Robinhood never changed hands.

  6. The Robinhood cap table still shows Robinhood Equity LLC as the owner of the shares and therefore Robinhood can’t exercise their ROFR.

This is a very common mechanism for secondary traders when dealing with late stage technology companies. It happens on a weekly basis and there are no tokens included.

In this case, the tokens merely make it a little easier for accredited US investors to buy equity in the legal entities holding the original shares, with the option of later listing the tokens for trading on a regulatory compliant exchange.

The negative backlash yesterday to a fairly well understood and popular process only shows what I have been saying for some time - the traditional financial markets are flat-footed right now and they are going to get blindsided by tokenized securities.

The walled gardens are coming down. The financial system is becoming more global. I couldn’t be more excited to watch this play out over the next few years.

THE RUNDOWN:

Circle CEO: 'We are at the beginning of tokenization of everything:’ Circle’s CEO outlined a vision of a tokenized global economy and society, in which “every form of value storage and public record becomes a crypto-token” that has free-floating market value and can be traded on global digital exchanges. Read more.

Banks unlikely to process payments with distributed ledgers for now, says Ripple: Banks are unlikely to use distributed ledgers to process cross-border payments for now because of scalability and privacy issues, according to Ripple. “I will concede, we haven’t gotten there yet,” Ripple’s chief cryptographer David Schwartz said in an interview. Read more.

Western Union CEO says Ripple’s XRP isn’t making payments cheaper: Western Union CEO Hikmet Ersek said that while his company is still experimenting with Ripple’s product xRapid—which uses XRP as a conduit to transfer money between foreign currencies—for payment settlements, it has not saved money so far. Read more.

Adblock Plus wants to use blockchain to call out fake news: The beta browser extension, which is called Trusted News (initially it’s just available for Chrome), is intended to help Internet users spot sources of fake news when they’re exposed to content online. Read more.

Bitcoin’s price was artificially inflated last year, researchers say: A concentrated campaign of price manipulation may have accounted for at least half of the increase in the price of Bitcoin and other big cryptocurrencies last year, according to a paper released on Wednesday by an academic with a history of spotting fraud in financial markets. Read more.

Thomson Reuters adds sentiment data tracking of 100 top cryptocurrencies: Canadian mass media and information company Thomson Reuters will now be tracking the top 100 currencies in its sentiment data tool. The necessary data will be provided via a partnership with MarketPsych Data LLC. Read more.

Report: Misconfigured Ethereum clients have resulted in $20M hack: About $20 million worth of Ethereum have reportedly been stolen by a group of hackers, exploiting misconfigured Ethereum clients. The hackers were able access applications using the Ethereum software which configured their interface to expose a Remote Procedure Call. Read more.