CEZEX, a digital asset exchange based in the Philippines, will allow tokenized trading of most asset classes.
The need for a tokenized securities exchange
Inbase Partners, a Cayman Islands-based blockchain advisory and consultancy firm, is launching a licensed digital asset exchange CEZEX in the Philippines by the end of 2018. CEZEX aims to become the first licensed exchange in Asia to offer regulated security token trading.
According to Inbase Partners managing partner Carlos Salas, “CEZEX is no different from traditional stock exchanges in Singapore, Hong Kong, or New York. The only difference is that we will only trade digital tokens that are backed by real-world assets.”
With utility token fundraising through ICOs down precipitously in 2018, the focus is shifting to security tokens because of their potential to better protect investors and link the token to underlying assets and businesses. Stephen Lynch, also a managing partner for Inbase Partners, said “During the ICO craze, white papers were telling great stories. Yes, some of them were great businesses, but it was literally ‘donate your money to me and maybe I will deliver what I’m promising.’ There was no legal recourse for investors if something went wrong.”
Anticipating an industry shift towards regulatory compliant security tokens that provide investor protections, Inbase Partners became a founding partner of CEZEX, an exchange that allows trading in any tokenized asset including companies’ security tokens. “When institutional money started coming in, the industry started requiring higher standards in compliance and fundraising. The industry is shifting from a utility token model to a security token model – an asset-backed framework that complies with regulations,” said Salas.
It is not hard to create a security token. However, there are hardly any places to list them while complying with securities regulations. “When firms do a licensed Security Token Offering (STO) and create these legal, asset-backed tokens, what can investors do with them? We became a founding partner of CEZEX so that we could create liquidity for security tokens,” said Lynch.
CEZEX is located in the Philippines and based in the Cagayan Special Economic Zone (CEZA), a semi-autonomous region that can issue its own regulations. CEZEX was able to work with local authorities to help craft regulations for their unique exchange while maintaining high safety standards for investors and issuers.
What can you trade on CEZEX?
CEZEX will do more than list the security tokens of blockchain startups. The exchange will eventually allow most asset classes (e.g. securities or commodities) to be tokenized and traded. The tokens will represent a claim on the underlying asset or derivative.
The following tokenized assets should be available for trade when the exchange launches at the end of 2018:
- Derivatives: tokenized securities (stocks traded in conventional exchanges and private equity), CFDs, and tokenized commodity derivatives based on gold and silver, for example.
- Currencies: conventional (fiat) currencies and cryptocurrencies including Bitcoin, Bitcoin Cash, Ethereum and the top 10 cryptocurrencies.
- Security tokens issued by blockchain companies. CEZEX will enable the primary listing of STOs as well as secondary trading of security tokens
Trade in physical commodities such as contracts linked to physical gold and silver are planned for Q2-Q3 2019. Other asset classes may follow later.
Because CEZEX can list any tokenized asset class, the exchange is positioning itself to solve a few problems of traditional investments:
- Create liquidity for illiquid assets: Real estate, for example, takes years to appreciate and it is hard to find the right buyer and exit at maximum profitability. Tokenizing real estate and enabling fractional ownership creates liquidity, allows for wider investor participation, and arguably maximizes value.
- Allow regular investors access to specialized investments: Venture Capital (VC), for example, is traditionally accessible only to wealthy accredited investors and locked up for 6-7 years. Tokenizing allows smaller investors (token holders) to exit more freely by selling tokens on an exchange.
Security token listing standards
CEZEX will apply rigorous listing standards for companies that want to issue security tokens on the exchange. They look for companies that:
- Have an edge in their asset class and provide investment value
- Have a track record of profitability or even dividends
- Have a solid team in place
- Are not early stage start-ups
Companies listing their security tokens on CEZEX should ideally allow exchange users to participate in securities that have a track record of profitability.
Inbase Partners, in its role as nominated advisor to CEZEX, may also suggest candidates for listing.
Open to retail and institutional investors
CEZEX will be open to both retail and institutional investors. They can either sign up directly with CEZEX or trade via broker dealers that are linked to CEZEX.
CEZEX is partnering with liquidity providers to attract investors to the exchange, such as Singapore-based crypto exchange Coinhako. They are also partnering with broker dealers that can bring retail and institutional investors.
CEZEX is open to individuals from most countries (except US citizens and countries the US Department of State imposes sanctions on), provided that they pass KYC.
Competition with Binance
CEZEX is not worried about competition from Binance’s upcoming security token exchange in Malta. Said Salas, “Binance has done a joint venture with the Malta stock exchange under EU regulations. Therefore, Binance has to comply with EU regulations.”
This could potentially be a lengthy process. According to Salas, since CEZEX has helped the regulator in the Philippines craft the required regulations, they will be able to launch before Binance and attract users while offering a high level of protection for investors and issuers.
The future for security tokens
Salas believes that in order for security tokens to gain widespread acceptance among regulators and investors, they need to see evidence of a functioning and vibrant exchange. They need to see evidence of investor protection in terms of custodianship and legal protection of investors and issuers.
CEZEX has engaged a prominent crypto custodian and well-regarded fiat currency custodians. Tokens and currencies held by these custodians are insured.
“We are lucky to have found this jurisdiction [CEZA] where we can showcase CEZEX and potentially go to other jurisdictions and use our success as a case study on how to protect investors and issuers,” said Salas.
“I think raising money using security tokens is going to be the future,” says Lynch. “We are probably going to see security tokens accelerate in the next six to twelve months, especially when there are more exchanges that can list security tokens.”