It took some time before Fundament Securities got the approval from the German Financial Market Supervisory Authority (BaFin), but when they eventually received the green light from regulators back in July, the startup became the first to offer blockchain-based real estate bonds.
Robin Matzke, the co-founder of Fundament Securities, explained how they utilize the power of blockchain to develop a new asset out of an age-old financial product. What the team at the Berlin-based company did is they took the traditional "bearer bond" and converted it to a token running on the Ethereum blockchain.
The tokenized bond, which is issued by a company called FUND Real Estate Token, gives investors access to the real estate market of Germany and exhibits roughly the same characteristics of the bearer instrument.
To Matzke, there is nothing innovative about the financial product, but what he considers is a breakthrough is that they were able to remove the central depository of the bond's physical deed.
"There's really no innovation on that end like on the financial product itself. What is innovative is we do not have a physical deed of the bond itself with the central depository -- we got rid of that. And, we can make the whole issuance process much leaner than it is right now," said Matzke.
The token that is priced at €1 each produces an estimated annual return of 4% to the holder.
Crypto and Real Estate Token
A lawyer by profession, Matzke underscored that the token has a legal claim to it, whereas a cryptocurrency has not. Matzke days of reading through ICO white papers led him to say that most terms of ICOs were vague disclaimers like "like telling you that you wouldn't receive any right or claim whatsoever."
Tokenized vs. Traditional
Matzke explained that by tokenizing the security, the investor is afforded better liquidity since it can be traded and will be available to secondary markets and control because it cuts off the middle man -- the central depository.
"You can self-custody securities, and this is something that hasn't been possible for decades now since it's compulsory to use central depository, but that would be possible. So, I have regained full control over my investment and over my funds and over my securities."
The company also wants a level playing field for all classes of investors where institutional-grade products are made available to retail investors who can't put up at least €100,000 as capital.
"So, in our vision in the near future, it wouldn't make any difference if you can invest €1 or €100 million, you'll be treated the same and the effort of the asset manager will be the same, and it wouldn't matter if you have five investors or five hundred thousand investors."
Fundament Securities is also open to global markets as the company emphasizes the accessibility of its token to the rest of the world. Their limitation to extending their reach on a global scale, however, is the local laws and different jurisdictions that they are in current talks to streamline the approval process.
Full Interview Transcript
Ron Mendoza: So, hello to everyone tuning in. I'm Ron, and I'm with Robin Matzke. He is one of the co-founders of Fundament Securities, which is a company based in Berlin that offers the first blockchain-based real estate bond. So, Robin, from what I understood about what Fundament Securities does is it offers real estate tokens that in your podcast, you liken it to a bearer bond. Can you please expound a little bit more about this?
Robin Matzke: Sure. Just one thing that's kind of important is Fundament Securities is a company like a service provider for digital securities, and for digitizing securities, the issuer of the bond itself is a different company -- it's called FUND Real Estate Token, just to be clear on that.
So, at Fundament Securities, we have developed a legal and technical framework in order to issue and manage digital securities, tokenize securities. So, they are running on a blockchain decentralized infrastructure. Therefore, they are very transparent and enable investments basically all over the world in an instant.
Ron: Can these assets be traded like regular bonds?
Robin: Yes. It's a regular financial instrument. There's really no innovation there. It's a bearer instrument that means whoever holds token is deemed to be entitled to the claim it represents. So, each token is denominated at €1, and you can buy each token for €1, and that means that at the end of the term, you'll get back this €1 and any dividend that has been realized or generated.
And, whoever holds the token is basically entitled to that claim. So, it's a very classical financial instrument. It's been recognized in the capital markets of Germany for decades, if not, more than a hundred years. There's really no innovation on that end like on the financial product itself. What is innovative is we do not have a physical deed of the bond itself with the central depository -- we got rid of that. And, we can make the whole issuance process much leaner than it is right now.
Ron: So, for someone who favors something more traditional. What are the benefits of a tokenized asset that you can offer to these kinds of investors?
Robin: So, first of all, the real estate bond is designed for rather a conservative investment approach -- it's not a very high-risk bond. The benefits are to be seen very quick very soon. Basically, by standardizing the securities, it's possible to integrate them into secondary markets easily. At the moment, there are no secondary markets that are already able to list tokenized securities, but there will be very soon like in January, there will be secondary markets coming up, and we are expecting, even more, to come in 2020.
And, by these secondary markets, it's possible to get liquidity if you need it and this is something that is new to the classical, traditional fund industry because usually, many funds are closed-end funds -- that means you pay in your investment, and then you have to wait a couple of years when the money is locked-in. Then, at the end of the term, you get your money back and the dividends and the capital gain.
And, by securitizing them, it's possible to treat them like stocks, so there will be a market price, and you can buy so you can enter and sell the securities at any point in time.
Ron: So, what it basically does is it provides more liquidity.
Robin: Yeah. Liquidity and full control. As I said, in the beginning, we are getting rid of a central depository, and as we do so, holding the token is the same as holding a physical deed of a security or a share certificate -- it's the same in theory.
So, you can self-custody securities and this is something that hasn't been possible for decades now since it's compulsory to use central depository, but that would be possible. So, I have regained full control over my investment and over my funds and over my securities.
Ron: And, how about accessibility? So, I believe investors from all over the world can also participate in investing in the real estate market of Germany.
Robin: Yes, and this is very important for us. Accessibility is an issue in the most recent capital markets. There is a divide between professional investors and retail investors. Professional investors are those who can invest more than €100,000, at least -- or may be called, semi-professional investors.
But many products are not available for investors that cannot invest €100K plus and we want to really open up. We want to structure products that attract professional investors, but open them up for retail investors, so they have the same accessibility to institutional-grade products. That's our vision, and we are working hard to achieve that.
So, in our vision in the near future, it wouldn't make any difference if you can invest €1 or €100 million, you'll be treated the same and the effort of the asset manager will be the same and it wouldn't matter if you have five investors or five hundred thousand investors. And, we think that this would, at the end of the day, benefit not only the retail investors who can actually grow sustainable wealth over time but would truly democratize the capital markets that are just now very divided between these two worlds.
Ron: How does this differ from cryptocurrencies because I understand that security tokens are a bit different.
Robin: Yeah. I'm a lawyer, so from a legal perspective, there's a huge difference, and the difference is the token has actually a legal claim attached to it. The token basically represents and is a legal claim against the issuer. So, back in the days, when I got into ICOs, and I read all the white papers and the terms. The terms were usually just vague disclaimers like telling you that you wouldn't receive any right or claim whatsoever. With security tokens, it's different -- you get a claim.
You get something that is legally valuable. And obviously, if you do so if you promise something and this would be a regular activity, and therefore, we had to apply for BaFin regulation first. And, frankly speaking, we did the full prospectus, that means we can onboard any class of investor, and we can accept investments from €1, and there's no upside limitation -- so you can invest €1 to 250 million. It's usually attached to higher costs, but as we have the expertise in-house to be able to draft the prospectuses and have the legal expertise, we could do it in an economical fashion.
Ron: I've heard Florian mentioned in his podcast that security tokens could represent a fund, a portfolio of real estate assets, metals, gold, commodities. But what do you think is an asset that would be difficult to tokenize?
Robin: Like legally speaking or from a business perspective?
Ron: Yes, legally speaking.
Robin: Well, legally speaking, I think everything, in theory, is possible. I believe that as a lawyer, the question is just how. But, in theory, everything is possible, and it all depends on the structuring, and then very little things are not possible. But what doesn't make sense from a business perspective is small volumes because the costs attached to setting up a security and the management cost attached to a security offering are significant so it doesn't make any sense for smaller investments because then the costs would just eat up the dividends.
Ron: Fundament Securities is the first company to get approval from BaFin for a blockchain that Florian said that I think took about eight months to get the approval, but BaFin wasn't exactly dismissive of your prospectus. I also read about a report last week from Handelsblatt that banks are going to start offering bitcoin by 2020. So, what do you see as the future of blockchain-based assets or blockchain in general, particularly next year?
Robin: Yeah. So let me just give you some background on that development. We have a new law that's coming into force in January, and it requires everyone who's offering custody services for others to get a license with BaFin. Banks could always hold Bitcoin -- there was never really a problem. The only thing is it's now regulated. So, time will tell if this leads to the point where the banks adopt crypto assets, but as they could've done so before, I doubt that this regulation would have such a huge impact on banks entering the market.
On the other hand, some other services that are commonly used in the crypto sphere may face difficulties because they cannot address the German market anymore without this regulation. I'm thinking about any kind of crypto exchange that is not fully decentralized, and any kind of centralized exchange would require this license in Germany. And it is yet unclear what kind of requirements have to be met if you need, for example, a German corporation or a German e-corporation of the exchange, and it may lead to some companies shutting down their services for German customers.
This is, I think, something that is rather threatening than a chance, especially if the banks don't pick it up and don't offer these kinds of services. From what I've heard in the market is that some are looking into it, but it has to be proven that they actually go into the market and offer services that are necessary, and if they did, this could lead to bigger adoption. What's very important though is even though our security is tokenized or is a token basically, or is living as a token on the blockchain, it is totally different from the cryptocurrencies, and the license that we are talking about would not address custody service or custodial services for securities -- that's a different license. For us, we use cryptocurrencies as a means of payment.
Ron: Was it Ether?
Robin: Yes, Ether exactly. I mean, you could also use Bitcoin as an OTC transaction, and we will add more cryptocurrencies soon, for example, Tezos, but we are just revamping the dashboard. It's going to launch probably at the beginning of January. But, you can always invest using classic bank transfer. I hope that if the banks come into the market, I think it would maybe provide services that would give you an easy on and off-ramp from crypto to Euro or any other currency that you may want to have, and that could be very very important to bring the market forward into the next level basically.
Ron: And, how do you plan on expanding to other markets. For example, if you want to expand in the middle east, how are you going to sign up the real estate developers from here.
Robin: We are open to global markets. The beauty of having a securities prospectus is that you can have it passported throughout the European economic area. You can solicit investments from all over the European economic area. You can also accept investments from all over the world, but whether or not you can solicit there depends on the local laws. But the vision of a truly global capital market is there, and we are working hard to enable that. We are talking with different regulators in different countries in different jurisdictions and explore possibilities of having a prospectus approval process on fast-track because it has been approved already by the German Financial Market regulator. And, we are taking that process of regulators with regulators, and we hope that this would set kind of a global standard overtime for digital security offerings.