Tokenization in Crowdinvesting Platforms - How Blockchain Technology and Alternative Financing can Revolutionize the Financial Market Together

Like any other token or digital contract, securities tokens represent a security investment contract on a blockchain. Their offerings, called STOs (Security Token Offerings), are treated like any other security offering, making financial service regulations apply to most token generations events that represent an investment or qualify as tradable security. 1?

An STO can be a real estate investment contract, a financial derivative product, or an issuance of debt or equity. This kind of investment was approved as a regulated financial product by German authority BaFin in 2019.?2?Although most private investors associate blockchain technology with cryptocurrencies like Bitcoin and thus with high volatility, German crowdinvesting platforms discovered the opportunities offered by digital securities.?3

The tokenization of real estate started relatively early. Two real estate projects were among the first four security token offerings approved by the European Regulators. In summer 2019,?Exporo, founded in 2014 as a crowdinvesting platform for real estate projects, managed the first fully regulated STO for the real estate market in Europe. By now, the company has 25 realized real estate assets and 45 project developments with an issue volume of over EUR 260 million on the blockchain, explains?Patrick Hartmann, Exporo’s managing director. ?

Known as?Invesdor?after its merger in 2021, Kapilendo stood for the largest German STO in SME financing for quite some time. With the token-based bond for FR L’Osteria SE restaurant chain, the company raised EUR 2.3 million from more than 1,300 investors in 2019.?

Wiwin, founded in 2011 as a platform for sustainable investing, conducted Tomorrow Bank’s two fundraising rounds as digital security in 2020 and 2021. In the first one, the fintech raised EUR 3 million in 5 hours, and in the second one, EUR 8 million in 24 hours. It’s pretty interesting how the German tokenization market for investors emerged inside crowdinvesting platforms. Many factors that convert to the same point, products and process simplification, can explain this dynamic.?

The?Bundesverband Crowdfunding e. V.?(BVCF) is the central representation of interests and the network of these platforms in Germany. It was founded in 2015 in Frankfurt am Main and is based in Berlin. The members jointly articulate their interests concerning politics in Europe, Germany and the federal states.?

When the Technology Meets the Startups’ Needs

According to the German regulation, some investments require plenty of documents before going public. The preparation is long and expensive, making it often impossible for startups. On the other hand, a security token investment asks for a security prospectus rather than a sales prospectus under the asset investment act.?2?Therefore, the regulation makes the process more accessible when the company and platform choose the right instrument.

While the big financial players keep making the sector one of the most profitable in the world, thinking of not changing the status quo, after all, they make a lot of money during the entire process; the crowdinvesting platforms need to be creative to reduce costs. Innovative and risk-taken, they lead the blockchain technology’s adoption, showing that a more efficient solution can democratize assets and make the crowd profit from them.

This market disruption is also a game-changer for startups and SMEs since the advent of security tokens representing debt and equity can perform a great instrument to companies raise capital and even go public. Why not have a “pre-IPO” happening naturally in the startup growth cycle in place of waiting for the company to become huge??

The Promising Future

In a system that protects itself, it’s reasonable to consider that the incumbents won’t disappear suddenly overnight. Still, they will likely absorb the new technologies within their legacy systems. For example, in a stock trading life cycle, studies show that custody is the most promising service for blockchain technology without significant changes in the business model.??

Unfortunately, the effort to transform illiquid assets into tradable ones is a long way once some challenges come along with the STOs. The lack of a secondary market limits the primary market development, making a genuinely tradable instrument still a promise. Moreover, the lack of interoperability and implementation of a single tokens protocol among different platforms presents plenty of difficulties to the feasibility of the global security market.?Philip Filhol,?neoFIN’s?CTO, also points the tokenization market acceptance as another obstacle since there is no integration with the classical financial market. Big banks would love to offer security tokens for their clients, but with the present structure, they would take money away from their own ecosystems with the current framework.?????????

Of course that beyond the obstacles, the opportunities are tremendous. Philip is entirely sure that tokenization will replace all financial instruments in the future. ? Currently, the global equities market represents EUR 62 trillion, and the global bonds market is about EUR 81 trillion. These segments are mainly restricted to professional investors and high-net-worth individuals. There is an exponential potential of using securities tokens among the internet’s 4.1 billion users. Utilizing security tokens technology can further expand the number of global equities and bonds available. 1????

Cashlink Case

After pivoting from being a P2P German payment startup,?Cashlink?started as a tokenization solution in late 2018. Initially, the fintech was focused on issuing tokenized company shares and incrementally moved from niche to niche going through different types of products.

Cashlink’s website screenshot

Founded by Michael Duttlinger, Lars Olsson, Niklas Baumstark and Jonas Haag, the startup based in Frankfurt provides an all-in-one software solution for securities tokenization. The technology combines all processes and required licenses from the primary to the secondary market. Besides the API for proprietary investment platforms, Cashlink also offers a whole investment platform as a service with the tokenization engine integrated.

Benedikt Scheungraber, Cashlink’s CMO, confirms that offering a complete solution was a game-changer for improving customer service. The topic’s complexity is still a problem, especially if companies out of this business must handle the entire process themselves. The great partnership network created by the fintech around its services allows a fast response through a standard product, whereby customers can choose the most feasible arrangement according to their needs.

The tokenized assets’ range is quite wide, from real estate, solar panels, forest, ships to VC funds, Cashlink’s customers structure their offers usually through a debit instrument that seems like an equity one; a profit participation rights. Agnostic about the adopted blockchain, the fintech uses Ethereum, Stellar and Polygon to issue the security tokens.

Compared to classical securities, the most significant advantage from tokenization pointed by Benedikt is the speed settlement. Two settlement days make the traditional capital market inefficient, thinking it’s necessary only a few seconds to transfer tokens. On the other hand, transferability is undoubtedly the most relevant improvement reached compared with the real estate market.

Cashlink has won the Fintech Germany Award two times. In 2020 under the Blockchain category and 2021 under the Early Stage category. Offering a P2P trading solution with a market maker to the secondary market is part of the fintech futures plans. The CMO believes it’s the logical next step to make tokens actually tradable. He also imagines a short future when blockchain technology would replace the clearing process and the custody from the classical stock market. ?

Wiwin Case

Wiwin, the German crowdinvesting platform for sustainable projects, was founded by?Matthias Willenbacher?in 2011 with the motivation to involve citizens more in the energy transition. Based in Mainz, the fintech offers renewable energies, sustainable startups and energy-efficient real estate projects to people that can make large investments possible with small individual amounts.

With more than 10,000 investors and EUR 116 million raised to sustainable projects, Wiwin has an expansive offering portfolio that includes some token-based opportunities structured through Cashlink’s investment platform.??

Wiwin’s website screenshot

Felix Auspurg, Wiwin’s project management team leader, explains that tokenization makes the investment process easier because it reduces bureaucratic steps faced by investors from classical securities. Besides improving the user experience, which is imperative for the success of startups campaigns, blockchain technology ensures any further system integration possible.

For example, in Tomorrow’s case, one of the platform’s most successful token offerings, people should invest using the bank app, which naturally complicates the inclusion of a lot of information. In addition, keeping all the data in blockchain eases building a trading environment for the fintech tokens in the future. The minimum investment of EUR 100 combined with the strong customer community contributed to the excellent campaign success: the company raised EUR 8 million in 24 hours.??

Wiwin provided digital wallets for clients that didn’t have them. Soon, its customers can transfer the tokens using the platform’s dashboard exclusively; there will be no need for a two-factor authentication made by an app.

Felix believes that tokenization’s most significant advantages are the efficiency of a cheaper process and the different possibilities to show people investments once the information is recorded in a distributed ledger. In this way, it’s not necessary to consult it in other places, as traditional securities do.

The regulation does not allow platforms to offer the best solutions yet. Much of this market is still being developed and several aspects need to be created and approved. Even starting with so many limitations, Felix is convinced the tokenization market will replace the traditional instruments bringing efficiency and simplifying investors’ and startups’ lives. Opportunities to people investing in instruments that weren’t accessible in the past and making part of these markets is already a great advance.???

Carlotta Clau?en, Wiwin’s business development manager, confirms that the fintech is looking to the big picture. Its strategy includes having, at this moment, products technically prepared for the future market. Although the tokens are not truly tradable due to the secondary market’s lack, she sees this scenario changing in a few years. She concludes that it’s really smart to develop now what the market will trade tomorrow. ?

Liqi Case - the Brazilian market

Founded in 2021 by?Daniel Coquieri,?Felippe Percigo,?Persio Flexa?and?André Montenegro,?Liqi?is a Brazilian token marketplace based in S?o Paulo. The fintech transforms assets and businesses into digital fractions to make them accessible to ordinary investors.

Liqi’s website screenshot

The company’s name mentions one of the tokenization’s advantages: enable some investments groups to have greater or even some liquidity. Solidarity mechanism’s token, impact’s token and receivables’ token have been offered by the fintech so far on its platform. According to Daniel, Liqi’s CEO, building instruments with different features is crucial to show regulators and incumbent players the possible technology’s applicability cases, besides meeting the market demand.

However, he believes that advance on receivables is the type with the most significant appeal for acceleration, at this moment, in the Brazilian market, once it’s a trillionaire industry accessible only for corporate investors. In addition to investment democratization, tokenization can considerably facilitate the process for the receivables’ holders.

With 2,527 active investors and almost EUR 700 thousand raised, the fintech offers the tokenization process in a verticalized way. The first phase is the token origination that includes its legal structuring. After that, the token is issued at the blockchain and ready to be negotiated. Liqi ensures the primary offer on its platform and the tokens’ custody. The secondary market, which happens at the BitPre?o platform, is under development, and Daniel admits this feature will be available soon in Liqi’s platform for all customers.??

Better spreads, less bureaucracy and middleman elimination, the blockchain technology promises are coming true, and Daniel considers them a fundamental way to revolutionize the financial market. Unnecessary intermediaries in the chain can be reduced to make the investment more interesting for investors and companies at the same time.??

Regulation and the traditional agents’ resistance are still a problem that slows down the market evolution in Brazil. Fortunately, the incumbents are more open mind than years ago when blockchain technology emerged. Fear of losing another positive movement has made the classic and the neo-market build important partnerships.???

Pilot projects show how tokenization can be part of products and services in the traditional market. They are significant inputs to the parallel agenda that Liqi has with the regulator once it doesn’t have the opportunity to participate in the Brazilian sandbox environment.?

The asset tokenization creates the chance to build other products focused on B2C. Most of them are related to tokens’ distribution, for example, loans, portfolio management, robots, etc. Daniel considers that Liqi’s future is in this segment combined with the “token as a service” offer, in which all specialized companies would plug in themselves in the infrastructure. The fintech raised in January 2021 EUR 4.5 million, which will be directed towards marketing strategies and the team’s expansion. ??1?

Exporo Case – Tokenization in Real Estate Crowdinvesting

In 2014,?Exporo?co-founders had the vision to enable real estate investments for everyone. Besides being the most prominent market globally, real estate has less volatility than any other asset class and high demand from private investors. However, there are many obstacles regarding investing in this kind of assets, such as difficult access, high minimum investment amounts and substantial transaction costs. In addition, steadily increasing regulatory requirements are making it more difficult, not to mention the impact of low-interest rates, making investors look for new and innovative investments opportunities with attractive returns.

The Hamburg-based fintech wants to democratize access to real estate investments for all, including the smallest investor, by bringing full transparency and liquidity to this market through its digital platforms.?exporo.de?enables access to real estate via the token-based product category called “Financing”. Investors can acquire token-based bonds and thereby invest in real estate development projects. Such investments are relatively short-term (generally between 18 – 36 months) and are suitable for more risk-affine investors. The fixed interest rates are around 5 – 6%.?

Through?propvest.de, investors can invest, via token-based bonds, in existing real estate projects and profit from the rental income (approx. 4 -5 % return) and the increase in properties’ values. These investments have an extended horizon and help investors build up a long-term real estate portfolio.?

Both investment products are issued as token-based bonds on the Ethereum Blockchain. Investors can not only conclude investments from anywhere in the world but also – in the case of Propvest – trade their “pieces of real estate” acquired via Propvest secondary market with other investors daily and within seconds. Using blockchain-based security tokens has been proven to be superior compared to legacy bonds in terms of cost efficiency, flexibility and processes automation.?

Digital token-approach

In addition, Exporo sees this technology’s strengths in significantly reducing minimum investment amounts. It allows a healthy and straightforward portfolio diversification with suitable quantities for everyone. This blockchain technology application shows us that it has outgrown its conceptual phase and offers real added value for investors and companies.

Nowadays, Exporo has the leading platforms for digital real estate investments in Germany, holding more than EUR 280 million in assets under management and since its incorporation in November 2014, more than EUR 900 million have been digitally intermediated. 11

Do you want to know more about fintechs and the entrepreneurial ecosystem? Find out about my research in Germany?HERE, and don’t miss the next chapters of this series on the German and Brazilian markets.

Read the first chapter of this series?HERE?and the second?HERE.

Originally published on tamarafschmidt.com

Fonts

1 Nascimento, A. The STO Financial Revolution: How Security Tokens Change Business Forever. 3rd Edition. 2020.??

2 BaFin Site. 2019. Tokenisierung.?https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2019/fa_bj_1904_Tokenisierung.html?

3 neoFIN Site. 2021. Tokenised Assets Will Simplify The Processes Of The Financial And Investment World. What Is Already Possible Today, What Is Coming In Germany??https://www.neofin-hamburg.de/en/tokenization-of-assets-the-future-of-investing-is-digital/

? Patrick Hartmann’s Interview from Exporo on November 16th, 2021.

? Schmidt, T. F. Aplica??o da Tecnologia Blockchain na Transforma??o dos Servi?os Financeiros: com Estudo de Caso na BM&FBOVESPA. Campinas, 2017.?SCHMIDT, Tamara Ferreira. Blockchain Technology.pdf??

? Philip Filhol’s Interview from neoFin on November 19th, 2021.

? Benedikt Scheungraber’s Interview from Cashlink on November 8th, 2021.

? Felix Auspurg and Carlotta Clau?en’s Interview from Wiwin on November 10th, 2021.?

? Daniel Coquieri’s Interview from Liqi on October 15th, 2021.

1? Velleda, I. 2021. Startup de tokeniza??o e criptomoedas Liqi recebe aporte de R$ 27,5 milh?es. Forbes.?https://forbes.com.br/forbes-money/2022/01/startup-de-tokenizacao-e-criptomoedas-liqi-recebe-aporte-de-r-275-milhoes/?

11 Daniel Weitmann from Exporo on February 8th, 2022.

Tamara Ferreira Schmidt is hosted by Bundesverband Crowdfunding and supported by Alexander von Humboldt Foundation.