Security Token Exchanges May be the Next Phase in the Finance Evolution.
Security token exchanges could prove to be an option for companies that are seeking public funding but can’t partake in the current IPO process.
In 1996, there were over 8,000 public companies listed on exchanges in the United States. Fast forward to 2020 and there are only approximately 4,400 — a drop of 46% despite the fact that the S&P 500 quadrupled in value. Conventional wisdom would lead readers to think they are looking at a misprint. This paradox has led to efforts from both the public and private sectors to help jump-start initial public offerings. Unfortunately, legislation like the Jumpstart Our Business Startups Act, or JOBS, has not had the desired impact, and companies have instead elected to stay private longer than they once did. While we could chalk this up to capital being freely available via private equity and venture funds, the simple fact is that, for smaller companies, the benefits do not currently outweigh the burden and expense of going public.
Legislation like Sarbanes-Oxley Act, or SOX, the additional scrutiny that comes with being a public company, and byzantine U.S. equity market structure are all partially to blame. Fortunately, the pace of formation of private companies is at a record high and entrepreneurism is alive and well in the U.S. There has been a 106% growth in the number of private equity-backed companies from 4,000 in 2006 to more than 8,000 in 2017. While we champion the formation of new innovative companies, the shift from public to private ownership has had the negative side effect of locking out most public investors from the rewards of ownership. AOL, Microsoft, Intel, Facebook and many other successful companies went public early in their evolution. Now, with large companies going public later, private investors reap most of the financial gains by the timeshares that are available on a listed exchange.
Secondary equity market trading has been transformed by technology, but capital raising on public markets is stuck in the past.
Technological innovations have so far not significantly improved the process of going public on an exchange. Transformational tech companies are going public in an almost identical fashion as did their grandfather’s rail and industrial companies decades ago. However, there are green shoots to be seen in fintech today that could help the financial markets evolve and improve the path to becoming a public company. Novel technologies such as blockchain are starting to be embraced by stakeholders in financial industries. One application of blockchain technology that has been getting particular notice is security token exchanges.
Security token exchanges would allow blockchain technology to simplify the complexities of custody, clearing and trading. The outcome is a simple exchange listing venue with price discovery that has the potential to encourage more issuers to go public to reach new investors. In turn, investors would benefit by gaining access to previously closely held assets — a virtuous circle for capital markets.
New token exchanges would comply with traditional regulated public exchange processes but have the benefits of the computer programmability features of smart contracts. Compliance processes, ownership restrictions, contractual terms and condition s would be automatically implemented and embedded via a distributed network of computers that maintain a shared source of immutable information.
In Canada and Europe, there are options, namely the TSX Venture Exchange and the AIM Market, respectively, for small to mid-sized companies to access public markets. Currently, there is no U.S. venture market equivalent. In the U.S., if a company is considering public routes for capital raising and attracting new investors, their options are limited to:
- Traditional IPO: Expensive, requires outside expertise, risk of poor trading quality.
- OTC markets: Limited number of institutional investors, negative public opinion, non-compliance with U.S. accounting standards, low liquidity and no price discovery.
- Crypto exchange, ICO: Negative investor and regulatory sentiment from the 2018 crash, few investors, and little in the way of corporate governance and investor protection doctrine.
- Alternative trading system: No price transparency and limited investor interest.
- Regulation A offering: Regulated but only reaches a fraction of the investor pool that companies would otherwise have access to with a traditional listing.
All of these options need improvement one way or another. However, regulated security token exchanges have the potential to improve on all the current incumbent options and offer price discovery, corporate governance and investor protection. In addition, security token exchanges can also offer a less complex path to an IPO. These are the central functions that regulated exchanges do well for large-cap issuers. Furthermore, a security token exchange is not limited to just accredited and institutional investors but is open to all participants — thereby providing issuers exposure to a greater number and variety of investors.
Prospectuses and earnings reports are used by investors to gauge the risk factors involved in investing in companies listed on a public exchange. Regulated security token exchanges will be equal to the incumbent exchanges by imposing high corporate governance standards and investor protections as part of their responsibilities as regulated listing venues.
Security token exchanges will follow the same rules that govern the trading of companies on incumbent exchanges. They will also have a responsibility to maintain fair and orderly markets and provide oversight and surveillance. Security token exchanges will take a role in helping corporate issuers understand their disclosure and regulatory requirements of being a publicly-traded company, and all listing candidates will undergo a comprehensive review to ensure they meet the listing standards of the security token exchanges.
Mid-sized companies looking for a quicker route to access and receiving funding from the public market may also find the direct listing of a token on a security token exchange to be the more efficient path when compared to a traditional IPO process.
For starters, listing on a security token exchange costs less, as there are lower frictional costs involved. Costly registration fees that are charged by the incumbent exchanges for IPOs are avoided on a security token exchange, and listing fees are logically based on market capitalization rather than public share count. This results in lower costs for equity tokens versus traditional listings. A token offering would provide a more streamlined process at a lower cost for a mid-sized startup that is looking to raise money, create monetization opportunities for early investors and employees, restructure a cap table, or take the next step to go public.
From the public investor standpoint, being able to buy and trade security tokens on an exchange opens up access to a new universe of assets that were previously closely held and traded. Ownership limitations of closely held assets have primarily benefited sophisticated institutions and accredited investors.
Furthermore, a token can represent ownership not only of traditional listed equity and debt securities but also securitized assets, such as real estate, income streams, art and wine. Tokenization can enable difficult-to-hold assets to be divided into smaller units, which, in turn, allows investors a chance to own a share of the underlying assets previously unavailable to the investing public.
Security token exchanges would allow secondary trading of tokens through a transparent and regulated platform. This would streamline the process to boost liquidity and provide exit options for investors who might have otherwise had to go through a more complicated route to liquidate their investment.
Through owning a token, which would represent vested interest in a security, disposing of an investment would take the form of a traditional clearing process with a potentially quicker settlement process.
From a regulatory perspective, a security token exchange gives greater transparency on asset ownership throughout its lifecycle since records are maintained on a decentralized network of computers that share the same source of information. Trust is further enabled, as data is stored in a cryptographic algorithm that ensures immutability of data.
Moreover, since records are shared, there is no need for reconciliation among network participants. This, coupled with the higher degree of automation that exists in smart contracts, could remove the need for registrars and nominees, which could shorten overall settlement times and increase the efficiency of financial markets in general.
In the future, tokenization could introduce a new option for raising capital, improve liquidity for issuers and their employees and investors, speed up settlement times, and lower costs overall for both the listed company and market participants.
Security tokens and the exchanges on which they operate could prove to be the next phase in finance as they are technologically more efficient, safe and transparent — all of which are qualities that are embraced by stakeholders in the industry who range from investors to regulators.
Although the concept of tokenization will need to be socialized to the many participants in capital markets, they hold promise to jump-start the IPO process where other efforts have faltered. Security token exchanges could be the future for small to mid-cap companies and the inevitable securitization of closely held assets.
Author: By Daniel Rogers
- XRP Nearly As Popular as Bitcoin (BTC) Among Crypto Traders in Japan, With Ethereum (ETH) Distant Third, Survey Shows
- JPMorgan Hires Former Crypto Exec for Its Payments Innovation Team
- Coinbase Pro Announces Support for Compound’s DeFi Token COMP
- One Month Left to Crypto Tax Season — 5 Critical Mistakes to Avoid
- EY Launches First-Of-Its-Kind Cryptocurrency Reporting App
XRP Nearly As Popular as Bitcoin (BTC) Among Crypto Traders in Japan, With Ethereum (ETH) Distant Third, Survey Shows
A new survey from the Japan-based crypto exchange Bitmax shows Bitcoin and XRP are neck-and-neck in popularity.
The exchange released the results of its poll on Twitter. It shows that BTC is the favorite crypto asset among 26% of respondents, with XRP behind by one percentage point, at 25%.
Ethereum clocks in at a distant third, with 9% of the vote. The remaining 40% is made up of various altcoins including NEM, Mona, Nano, Chainlink and Chiliz.
A total of 1,498 people participated in the survey.
🥇1位は #ビットコイン 🥇#リップル も僅差でした。
— BITMAX (@BITMAX_JP) June 12, 2020
The Japanese messaging giant Line launched Bitmax in September of last year after receiving approval from the country’s Financial Services Agency.
The results of the survey line up with data from the Japanese crypto exchange JVCEA, which reported that Bitcoin, XRP and Ethereum, ranked first, second and third as the most popular coins on its platform throughout 2019.
The three coins are on very different trajectories in 2020. This year, Bitcoin has rallied from $7,203 to $9,391 – a 30% increase. Ethereum has moved from $130.67 to $229.30 – a 75% increase. Meanwhile, XRP has remained flat and is now exactly where it began at the start of the year, at $0.19.
Analyzing the most popular coins by global trading volume reveals a very different story.
According to CoinMarketCap, the most popular coin by volume is Tether, followed by Bitcoin, Ethereum, Litecoin, Bitcoin Cash, EOS and XRP.
JPMorgan Hires Former Crypto Exec for Its Payments Innovation Team
Sarah Olsen, former managing director of corporate development at the crypto exchange Gemini, is now an executive director at JPMorgan’s Corporate & Investment Bank (CIB).
Before leaving Gemini in March, Olsen was involved in the exchange’s efforts to increase adoption of the stablecoin Gemini dollar (GUSD), forming a partnership with the crypto wallet SPEDN and listing GUSD on the crypto lending platform BlockFi.
Olsen also previously held marketing roles at financial services firms Apollo Global Management and Brightwood Capital.
The Block reports that for her new position, Olsen is working on business development for JPMorgan’s wholesale payments innovation team.
This isn’t the banking giant’s first high-profile hire from the crypto industry. In May, the firm hired the former chief executive of the cryptocurrency trading platform Bakkt, Mike Blandina, as head of wholesale payments technology.
JPMorgan is involved in several crypto initiatives, which include JPM Coin, the bank’s digital asset for settling transactions between clients of its wholesale payments business.
Last month, the largest bank in the United States announced that it’s offering banking services to the crypto exchanges Coinbase and Gemini.
Author: Published 16 hours ago
Coinbase Pro Announces Support for Compound’s DeFi Token COMP
United States cryptocurrency exchange Coinbase Pro announced the listing of COMP, the token powering the decentralized lending protocol Compound.
According to a Thursday announcement, COMP trading will start on June 23 at 9 a.m. Pacific Time if the liquidity requirements are met. Furthermore, users will be able to deposit their COMP tokens the day hours before the trading activity is scheduled to start.
After a sufficient — and unspecified — supply of COMP tokens make their way to Coinbase Pro, the exchange will progressively roll out trading functionality for the tokens. There will be two trading pairs including the token in question, namely the COMP/Bitcoin (BTC) and COMP/U.S. dollar pairs.
Initially, the pairs will be available in post-only modes. Limit orders will be allowed sometime thereafter. Once the firm’s expectations for what constitutes a healthy market are met by the pairs, full trading with the market, stop and limit orders will start.
Compound is an Ethereum-based decentralized finance protocol that allows its users to borrow tokens or deposit them in exchange for interest. The announcement notes that “COMP is not yet available on Coinbase.com” which possibly implies that Coinbase’s popular retail crypto exchange will also list the token.
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One Month Left to Crypto Tax Season — 5 Critical Mistakes to Avoid
There is only one month left until the United States tax season. After being extended due to the COVID-19 pandemic, the official deadline to file tax returns is now July 15.
If you think that the U.S. Internal Revenue Service is all hung up on dealing with the COVID-19 stimulus package and will not carefully examine crypto reports — you had better think again. The IRS is taking steps to build cases against taxpayers who fail to report cryptocurrency, and after the new crypto tax guidance was published in October 2019, there are really no more excuses left to not report crypto activity.
So, if you have not filed your returns by now, here are the five critical mistakes in crypto tax reporting you want to avoid:
Cryptocurrency tax reports should be like any other tax report — true, correct and complete. Do not assume that you know which information the IRS has access to. The IRS can not only rely on the information provided with your standard tax return, but they can also combine information received from third parties such as crypto exchanges and payment systems, among others, to determine the validity of your crypto filing. Reporting only part of your crypto activity is not only gambling on the information available to the IRS, but it is illegal.
So, make sure you are collecting all of your data before submitting your report. This includes all your crypto transactions from all your crypto exchange accounts, all addresses from all your wallets, any income in or gifted crypto, mining activity, airdrops and forks.
U.S. tax law has a tax exemption for certain property exchanges called like-kind exchanges, under Section 1031 of the Internal Revenue Code. This is an asset transaction that does not generate a tax liability from the sale of an asset when it is sold to acquire a replacement asset.
The IRS clearly states that like-kind exchange treatment applies to real property and not to exchanges of personal or intangible property.
Moreover, the IRS has even specifically mentioned that like-kind tax exemption has never applied to crypto transactions.
Classifying your crypto transactions correctly is the only way to make sure you are reporting accurately. Remember:
If you acquired or sold cryptocurrency in a peer-to-peer transaction or traded on a non-facilitated cryptocurrency exchange, you need to establish an accurate fair market value, or FMV.
The IRS will accept the evidence of FMV from a blockchain explorer that calculates the value of the cryptocurrency at an exact date and time. If you do not use a crypto explorer, you must establish the value as an accurate representation of the cryptocurrency’s FMV.
After classifying your crypto transaction correctly, you need to make sure you are filing the right tax form. If you are not sure, or if you have more income and capital gain to report, you should seek a professional tax consultation.
If you have capital gains, use Form 8949, entitled “Sales and Other Dispositions of Capital Assets,” and then summarize your capital gains and deductible capital losses on Form 1040, Schedule D, entitled “Capital Gains, and Losses.”
If you have an ordinary income from crypto, use Form 1040, entitled “U.S. Individual Income Tax Return,” Form 1040-SS, Form 1040-NR or Form 1040, Schedule 1, entitled “Additional Income and Adjustments to Income,” as applicable.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Or Lokay Cohen is a vice president at Bittax, a crypto tax calculation platform. Or has 10 years’ experience with regulation, managing a leading tax consultant firm. She holds a LL.M. law degree, a B.A. in communications and an M.A. in management and public policy. In her work at Bittax, Or promotes the goal of bridging between cryptocurrency to the taxation reality to enable tax reporting under a clear regulatory framework and specific identification methods.
EY Launches First-Of-Its-Kind Cryptocurrency Reporting App
NEW YORK, June 18, 2020 /PRNewswire/ — Ernst & Young LLP (EY US) announced today the launch of EY CryptoPrep, a cryptocurrency application that assists with US tax filings. This new Software as a Service (SaaS), web-based product is a fully automated, enterprise-grade crypto tax engine offering step-by-step guidance through the crypto tax process.
Shifting Strategies: 2014 EY Global Hedge Fund and Investor Survey (PRNewsFoto/Ernst & Young LLP)
EY CryptoPrep supports many major cryptocurrency coins and exchanges. Aggregating and reconciling transaction data, it applies appropriate tax rules to deliver a detailed account of cryptocurrency capital gains or losses. It then provides a completed Form 8949 for all applicable tax years. The core technology and service are also available to clients as a managed service through EY TaxChat and the EY Blockchain Analyzer.
“Our clients increasingly hold and trade crypto assets, creating the need for an innovative solution to address the evolving complexity around filing crypto taxes,” said Marna Ricker, EY Americas Vice Chair of Tax Services. “The EY Foundry, our internal corporate venturing unit, created EY CryptoPrep to modernize the crypto tax accounting process.”
Cryptocurrency transactions trigger tax filing obligations on the basis of the resulting capital gains or losses. EY CryptoPrep calculates crypto responsibilities for the current tax year and even enables users to submit amended returns for prior years to reconcile previous tax liabilities.
“EY CryptoPrep expands our innovative portfolio of successful new digital businesses,” said Chirag Patel, EY Foundry Leader. “EY CryptoPrep is another great showcase of our commitment to address the evolving needs of our clients.”
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com.
This news release has been issued by Ernst & Young LLP, a member firm of EY serving clients in the US.
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