Digital assets are all the rage today.
While just a thought a year ago now they are front and center – getting attention in more common spaces than in the more savvy echelons of Wall Street. So much so, that even the recent Security Traders Association’s 86th annual Market Structure Conference in Washington D.C. had a panel discussion on them.
Amid some changes in senior leadership and a new corporate office space, tZERO’s Chief Executive Officer Saum Noursalehi spoke with Traders Magazine about the state of the digital asset market, liquidity and trading, and the firm’s plans for a new marketplace.
TRADERS MAGAZINE: What are your thoughts on the state of digital asset creation?
Saum Noursalehi: Digital asset creation is in an exciting place. It has been progressing steadily as infrastructure (e.g. blockchains, smart contracts) and the tokenization and trading platforms built on top of this infrastructure continues to innovate and enter the mainstream, in a thoughtful and compliant manner.
tZERO is in communications with a robust pipeline of prospective issuers of security tokens spanning a wide breadth of assets, including private/public companies, real-estate, funds and film. Prospective issuers are beginning to recognize the benefits that blockchain technology can offer.
TM: Is the pace slow or just right?
Noursalehi: The pace is slower than I would like, but this is to be expected given the level of regulation in financial services. Recreating capital markets by using blockchain and smart contract technology requires a solid understanding of what is achievable today, market education and close collaboration with the regulators to ensure investor protection.
Today, security tokens and security token trading ecosystems are analogous to the first cellular network towers and Motorola “brick” mobile phones. Those early products were not at their full potential; however, they showed the promise and capacity for cell phones to become far more superior to what was traditionally available. While tZERO nominally builds mobile phones (tokens), our focus and key to success lies in building a next-generation global network (just as it was in the early years of cellular technology, what matters is who owns the towers). This is where tZERO not only has a substantial lead, but also has patents protecting how the network is built.
TM: What is the best way to promote liquidity in the sector?
Noursalehi: The best way to promote liquidity is to create a robust marketplace for the secondary trading of digital securities, which is what tZERO’s wholly-owned subsidiary, PRO Securities, strives to do through its ATS. We are working to expand our ecosystem to onboard more quality security tokens for trading, subscribe more broker-dealers to facilitate trading and partner with more clearing firms to settle the trades. At tZERO, we are confident that we can expand the model used for our security token, TZROP, into a vibrant marketplace for attractive securities that not only complies with existing laws and practices, but also benefits from blockchain technology’s advantages. Once issuers have a clear path to liquidity, it will ignite the issuance of digital securities.
TM: What are some of the issues that need to be addressed to better facilitate digital asset trading?
Noursalehi: We are live with trading on the PRO Securities ATS, but we need more quality assets trading on our ATS, as well as more broker-dealers subscribing to it. It is a bit of a “chicken or the egg” issue – you need quality securities to attract major players and investors to the ecosystem, but you also need investors to attract those assets to the ecosystem. We are approaching this supply and demand challenge from both ends by working with issuers and other regulated institutions to encourage them to enter the ecosystem.
TM: Can you discuss the regulatory future of digital assets?
Noursalehi: tZERO is a proponent for progress and change in capital markets and we are pushing to advance regulatory laws, however, this change will be incremental and requires complying with existing laws and utilizing traditional regulations, with the added benefit of blockchain and smart contract technology to enhance the investor and issuer experience in a way that does not compromise that.
There are also promising signs for change like the recent legislation in Wyoming, which enables innovation and creativity in this space. States have often been the laboratories for new legal landscapes in this country. Wyoming will hopefully serve as an example to the nation of how distributed ledger technology improves market efficiency without sacrificing the safeguards for market participants.
TM: Why do you believe that digital assets are the future and what are the specific advantages they offer compared to traditional equity investing?
Noursalehi: I believe that digital assets are the future as they have a number of advantages over traditional equity investing, including democratized access to assets that traditionally had limited access, instant settlement and increased liquidity for traditionally illiquid assets (e.g. private securities, real-estate and funds).
TM: What are some of the major advancements you see over the next six months to a year that will impact digital asset trading?
Noursalehi: In the next year, we will see higher-quality assets being tokenized and trading, as well as more liquidity on the ATS. Furthermore, in partnership with BOX Digital Markets, we also expect to launch the first regulated national security token exchange through our joint venture, the Boston Security Token Exchange (BSTX). With BOX’s experience in building and operating a sophisticated securities exchange and tZERO’s industry leading blockchain technology, we have brought together our organizations’ combined expertise to fundamentally improve the marketplace for digital securities. We expect this to launch in 2020.