Blockchain

tZero CEO: Blockchain Can Boost Private Market Liquidity Amid The Pandemic

Could Blockchain Boost Private-Market Liquidity?

Not all that long ago, blockchain and bitcoin were inseparable – shorthand for the Wild West of cryptocurrencies and speculation.

And you might recall that digital tokens were emblematic of volatile price swings. A boom and crash just a few years ago showed that, as estimated by Bitcoinist.com, as many as 160 projects were on tap at as of January 2018, and by October of last year, that tally was zero.

But more recently, the pandemic has spurred firms to address pain points in various markets through digital shifts.

One firm, tZERO Group, is betting that blockchain can help disrupt capital markets themselves.

In an interview with Karen Webster, Saum Noursalehi, CEO of tZERO Group – a majority-owned subsidiary of Overstock that owns and operates a platform enabling investors to trade shares in private companies through a two-sided marketplace underpinned by blockchain – said that new digital processes can democratize private-market investments.

“The country and the world is ready, more now than ever, for a shift to all-digital," he told Webster.

At a high level, the private-market landscape is becoming more densely populated, giving tZERO the opportunity to scale its platform to help retail investors trade shares across a growing roster of companies.

As tZERO has estimated, there are half as many public companies listed on public exchanges as there were at the end of the 1990s: 4,000 firms today compared to 8,000 then. The multiples investors will pay for public companies tend to be lower than those given by private investors, as measured from Series A funding rounds all the way through initial public offerings (IPOs).

The implication is that private investors could realize better returns on their holdings … if only they had access to those investments in the first place.

The problem? The private markets are relatively opaque, and relatively less liquid than might be seen on public exchanges.

But by tokenizing assets, issuers on tZERO’s ATS platform, with the aid of blockchain’s decentralized ledgers, can raise new capital or sell existing equity. Tokenization also lets real estate firms sell and trade fractions of, say, land and developments.

Noursalehi told Webster that his firm helps investors gain access to those previously out-of-reach assets across an automated, and orderly, market. Blockchain can help automate compliance efforts and settle trades with speed.

The trend is here to stay, maintained Noursalehi, despite the fact that the coronavirus has slightly slowed capital deployments.

Drilling down a bit, he said tZERO has seen a healthy pipeline of several hundred issuers that are looking to trade across its platform.

Regulators, he said, are becoming more comfortable with the digital platform model that takes middlemen out of the equation (the demand side comes through broker-dealers).

“The timing is right for disruption,” Noursalehi said, as watchdogs such as the Securities and Exchange Commission (SEC) and central banks (including the Federal Reserve) are becoming more aware of using blockchain to create digital coins and settle transactions quickly. He cautioned that though tZERO is not trying to build digital currencies, it is exploring an instant settlement solution.

The Use Cases 

With a nod toward the frictions that exist in the private markets, Noursalehi said that transactions are manual and time-consuming.

Depending on the revenue opportunities or how companies are structured, there can be different types of offerings with varying levels of compliance that need to be satisfied, including whether they need to register with the SEC.

Real estate is especially illiquid, Noursalehi added, and makes up a significant percentage of tZERO’s issuer pipeline. Tokenizing and trading properties — and monetizing those assets — can be especially attractive, he maintained.

Late last month, the company said that it entered into a partnership with Aspen Digital Inc. to bring the latter’s digital security (ASPEN) to trade on the tZERO ATS platform. The shares themselves represent an aggregated $18 million indirect ownership stake in the St. Regis Aspen Resort based in Colorado.

Said Noursalehi of the offering: “It completes that cycle of a marquee real estate project, showing that they successfully raised [capital] through a digital offering and are now trading on the tZERO platform.  We're hoping to get that live and trading for those investors this quarter."

Down The Road

Looking at listings that may come down the road, Noursalehi said that tZERO is examining exchange-traded funds (ETFs) for startups, or Y combinators that enable investors to invest in early-stage companies, while communicating risk profiles to those end investors.

"We are going to be really careful about what assets we let on the platform. And we're generally looking at more mature companies," he said, as the ATS platform currently mandates that issuers have a minimum $15 million in revenues and a demonstrable financial history.

Momentum is building across ATS, he said: In the first few days of August, the volume has been comparable to that seen in all of July – itself a record month with more than $700 million in assets changing hands.

But gaining visibility and educating investors and regulators will be a long-term process, Noursalehi said.

As he told Webster: Building a decentralized peer-to-peer exchange of securities “is not something that can be done overnight.”

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