February 2021 | Security Token Offerings (STO) were approved as regulated financial products by German authority BaFin in 2019. Since, a lot has happened in terms of digital securities and tokenization in Germany. In addition to a further improved legal framework, awareness of tokenized assets is rising among investors. The same happens with issuers, who are increasingly coming from the SME sector. Digital assets are now also gaining a foothold in the institutional investor space. Why tokenization will permanently change the financial markets and why family offices and advisors should also keep an eye on the developments.
Platforms drive tokenization in Germany
When the first tokenized assets came onto the market in Germany, there was great enthusiasm among experts. For the general public, however, the topic was still uncharted territory. In the minds of many private investors, blockchain technology was still associated with cryptocurrencies like Bitcoin and thus with high volatility. However, platforms from the crowdinvesting sector soon discovered the opportunities offered by digital securities. No wonder, since in addition to their experience in crowdfunding, they bring with them an already existing, open-minded and not least finance-savvy investor base.
Their success is reflected in growing public attention, as these examples prove:
- Kapilendo (today: Invesdor) stood for the largest German security token offering in SME financing for quite some time. With the token-based bond for the restaurant chain FR L’Osteria SE, the company raised €2.3 million from more than 1,300 investors in 2019. Meanwhile, Kapilendo had a crypto custodian licence and was launching its first crypto fund with Bankhaus Hauck & Aufhäuser. (Update September 2021: Hauck & Aufhänger took over Kapilendo Custodian)
- Wiwin conducted Tomorrow Bank’s fundraising as a digital security in 2020. The result: 3 million euros were raised in just 300 minutes – one million more than originally planned. The average investment was 1,500 euros. What is special here is not only the high sum and the record speed. But also a visible shift in the target group and the power of the community. Tomorrow eagerly beat the advertising drum on social media for the campaign and involved influencers with a wide reach. So among the investors are numerous fans and customers of the bank, which is focused on sustainability and impact investing.
- The tokenization of real estate started relatively early. Among the first four security token offerings approved by BaFin were two real estate projects. Nevertheless, Exporo is the leader in this field. Already in summer 2019, the company, founded in 2014 as a crowdinvesting platform for real estate projects, conducted the first fully regulated security token offering for real estate in Europe. Just one year later, there were 14 digitised real estate projects with a total volume of over 45 million euros.
Digitisation of tangible assets opens up new target groups
The large number of already tokenized assets also shows the strongest advantage of security tokens for private investors. It is the affordable minimum investment. Numerous classic financial products have very high entry sums. For example, investments in closed-end real estate funds usually start at 10,000 euros. Private equity funds start at 100,000 euros.
But not everyone can or wants to invest such sums. Private investors are also looking for suitable investment opportunities without having to invest all their money on the stock market. That is especially the case in the ongoing low-interest phase. Financial products such as tokenized assets with low minimum subscription amounts offer a good opportunity to spread the available money more widely and perhaps also to start investing money first. The digital subscription route makes this particularly easy and also attracts younger investors.
Digital securities are predestined for tangible assets
In addition, almost all assets can be tokenized and thus become accessible to a broader target group. Tokenized real estate still dominates the market, but if you take a closer look, you will already find a whole range of profitable, digitised tangible assets. Through fractionalised ownership, investors can also buy only a small part of these tangible assets and thus generate returns. After all, who has the money to buy an entire ship, for example? The Green Ship Token makes it possible to participate in the Green Deal of the traditional Hamburg shipping company Vogemann for as little as 1,000 US dollars.
Another example are investments in collector’s items such as art, whisky, vintage cars or luxury watches. The market price of an Omega Speedmaster Professional “Moonwatch” has more than quadrupled since 1995 (source: Zeigr.com). The increases in value of Rolex are legendary anyway. And even with younger watch brands, immense increases are possible. Admittedly, if investors could acquire a luxury watch like Richard Mille in the form of a digital investment, they would not tie it around their wrist. Unlike tennis star and brand ambassador Rafael Nadal does. The decorative effect is then reflected in the portfolio. In other words, you don’t have to be behind the wheel of a sports car to profit from its value.
Institutional investors are getting in on the act
Institutional investors such as banks and pension funds are now also recognising the opportunities of tokenization. Most recent example is Vonovia’s security token offering. The residential construction group was the first DAX company to issue a fully digital registered bond. 20 million euros is the volume of the Security Token Offering.
The exclusive investor is M.M.Warburg & CO. The private Bank based in Hamburg will resell the digital securities to its customers. That shows how interesting the financial instrument is also for institutional investors. Bitbond CEO Radoslav Albrecht, who in 2019 became the first German company ever to receive approval for a digital security from BaFin and thus goes down in history as the first German STO:
“From our point of view, this is an important milestone to bring digital assets, in this case tokenized debt securities, into the institutional space.”
Asset managers are also benefiting from tokenization in Germany
Other professional investors such as asset managers, for example family offices, are also discovering the potential of digital securities. The lucrative returns play just as important a role as the high degree of automation. Blockchain technology ensures manipulation-free processes in real time. Basic key data such as dividend or interest payments are programmed in via smart contract and triggered automatically. Another major advantage is that they can be traded around the clock, because the blockchain does not have a closing date. Token-based assets therefore have what it takes to simplify the processes of the financial and investment world in the long term.
Joachim Olearius, spokesman for the partners of Warburg Bank, sums it up in a statement:
“Tokenization will significantly expand and structurally change the range of financial products and services.”
Technology simplifies processes – also in investor support
What also makes work easier for financial advisors and investment brokers is a transparent dashboard. It clearly displays all investors and their transactions. Commissions are also paid out automatically via the system. In cooperation with fixed partners such as neoFIN Hamburg GmbH, this quickly becomes ongoing remuneration. With subsequent tokenizations, advisors are already registered and can thus benefit from new assets for their investors.
Get in touch with us and learn more about tokenized assets in the form of digital securities.