The ability to tokenise securities and open a path for retail investors to invest in private companies is something that has been championed since the Ethereum Whitepaper. Current implementations are blocked by delays in creating appropriate security token and disclosure frameworks, says Robinhood CEO Vlad Tenev.
In an opinion piece written for the Washington Post, Mr Tenev observes that private-market investment (that is, investment in companies that have not had a public offering) has increased, yet access to these potentially lucrative investments is limited to only 20% of the United States' population, being those who are "accredited investors".
The "accredited investor" rules, requiring those wishing to participate in private-market investing to have a net-worth of over USD$1,000,000 or earn over USD$200,000 annually is the stated reason for the shut out. However, Mr Tenev believes with appropriate regulation and frameworks in place, tokenising private markets could open investment to retail investors:
Tokenizing private-company stock would enable retail investors to invest in leading companies early in their life cycles, before they potentially go public at valuations of more than [USD]$100 billion. This would also benefit the companies themselves, enabling them to draw additional capital by tapping into a global crypto retail market that is growing increasingly more sophisticated
The tokenisation of securities has been a hot topic in crypto over many years and is seen as one way to create greater liquidity and access to private markets. It goes beyond the ongoing battles over crypto regulation, touching the tokenisation of markets and securities more broadly and bringing TradFi into a decentralised world.
To understand the coming trading revolution, however, we should start thinking of crypto in a different way: as a technology that enables the partitioning and trading of all assets, including real-world ones such as private companies
Last week, the SEC announced a crypto 2.0 taskforce, which is aimed at defining realistic paths to registration for crypto projects, developing appropriate disclosure frameworks and better deployment of enforcement resources. This development could signal a broader appetite to embrace tokenisation and digital markets as part of a growth and equity agenda. In Australia FCX Markets was recently granted a markets licence and a clearing and settlements licence and uses Ethereum technology to help trade traditional financial products.
Mr Tenev has called on the United States to develop a security token framework following in the footsteps of other jurisdictions which have embraced crypto regulation and tokenised markets.
In the United States, private-company stock and similar assets are regulated by the Securities and Exchange Commission, which has yet to provide the regulatory clarity to enable listing securities on domestic crypto platforms and make them available to retail investors. As a result, the United States risks ceding this market to the rest of the world.
Mr Tenev suggests three key regulatory changes required to open private company investment to retail customers:
Removal of the wealth-based accreditation requirements for private investments. If the rules must exist, replace them to be based on knowledge of investing and its risks, or self-certification.
Establishing a security token regime, allowing companies to create token offerings open to US investors, as an alternate path to the traditional IPO.
Clear guidelines for what US based broker-dealers and exchanges must do to list the tokens and make them available.
The incoming Trump administration has opened a conversation on broader crypto and market reforms with ambitions to re-energise US domestic innovation. Robinhood’s call to tokenise private markets is a stark reminder that the current private and public markets model allows privileged access to only some investors who capture the lion share of gains wrought by innovation.
Australia faces it own regulatory hurdles, with ASIC's draft INFO 225 focusing narrowly on the application of existing laws to crypto-asset offerings with effectively no comment on tokenising of financial products. While early stage investing involves significant risks, the time may be ripe for a rethink on how we can all take a stake and share the gains of Australia’s economic future.
By Steven Pettigrove and Luke Misthos with Michael Bacina