Digital securities (often referred to as security tokens) represent ownership of regulated financial products backed by equity, debt or equity/debt derivatives stored on a blockchain-based database system. Unlike the wild-west behavior found with initial coin offerings, digital securities apply the established rules of compliant fundraising for businesses into the new technical features of a blockchain-based asset. This field continues to grow in hype, but skeptics have persisted in questioning the real-world use case for such an approach. Precision finance is one such use case.
As precision medicine seeks to customize medical interventions based upon individual genetic and health contexts, the emerging trend of precision finance seeks to customize financial interventions based upon individual investor and company contexts. It’s now possible to write financial structures, compliance and corporate governance into code, allowing for capital markets to flexibly address the needs of investors and businesses globally at lower cost and with new, beneficial features. In aggregate, it allows for novel improvements on traditional measures of financial risk and reward. As the CEO of a company that provides this type of software, working on the second-ever “digital security” issued in the United States, and my earlier experience as a FINRA-licensed rep working for a financial firm and private hedge funds, I have had the unique opportunity to see how this happens in actual practice.
For example, there’s a company that allows investors to buy fractional ownership of specific artists’ works, so one day you could go long on Monet and short on Renoir. Another project under development allows for celebrities to sell their brands’ royalty streams as securities to investors and fans around the globe à la Bowie bonds.
And this isn’t just for novelty items. Take one of my company’s clients, for example. They recently announced a unique $100 million digital security offering. The vehicle allows for investors to participate in the commercial success of one of their immuno-oncology assets in late-stage clinical trials. Rather than diluting shareholder equity or forcing investors to invest in the broader corporation, the offering allows for precise and targeted financing for this medicine.
This same approach can be applied to a plethora of other drugs that either get developed more slowly or not at all due to capital market inefficiency. Furthermore, precision finance can apply to other industries. Imagine investing in Tesla’s next car rather than Tesla Inc. By funding its development, passionate and savvy investors could, for example, invest in a self-driving truck for large payloads and benefit from its success. Financing for charging stations and a business around future cash-flows for these vehicles could be an entirely separate line of investment with this approach.
This likely sounds speculative and futuristic to the average reader. But this is happening now. If these early instances of precision finance prove successful in the months to come, we could see a rapid shift toward this fundraising mechanism.
At scale, this can allow for investors to back a specific researcher, medical approach or class of drug, rather than entire companies or more complex theses behind large corporations’ development strategies. From here, we could see even more novel fundraising structures that incorporate other types of values — like in-platform benefits or discounts on leasing vehicles — intertwined with the investments themselves, opening up new methods of raising funds and parsing investments for professionals in the finance industry.
Much work remains before this vision is made manifest. One major risk stems from an adverse selection issue. If primarily low-quality investments take this path and they fail, the credibility and momentum of the opportunity will come about slowly or not at all. Additionally, the complexity of investments into precision finance vehicles like biotech drugs or large infrastructure projects presents challenges for those without specialized knowledge to make good decisions. Providing quality investments, industry-specific reporting and data, and transparency around these investments will play a key role in their success.
New methods for structuring financial products with technology allow for innately better products. Precision finance offers all of the traditional aspects of a security product with added benefits for flexibility, liquidity and efficiency. We could be standing at the precipice of a new era of capital markets.[“source=forbes”]