Private securities – traditionally existing only on paper – are increasingly undergoing a digital transformation that promises to bring greater efficiencies, access, and liquidity options for trillions of dollars of traditionally illiquid assets, such as real estate, private equity, debt, and venture capital, among others.
The alternative assets market is estimated at nearly $9 trillion. Enhancing liquidity options has the potential to unlock tremendous value and opportunities for issuers, investors and placement agents. Private securities are almost completely illiquid today, not because investors do not value liquidity, but in large part because there is too much friction, cost, delay and risk in the current, manual transfer processes. Violating the regulations can result in severe penalties for issuers and brokers. As a result, fund managers simply impose prohibitions on secondary transfers, making it extremely difficult for investors to liquidate early if the need arises.
Harbor provides a platform and compliance protocol that checks the compliance rules and qualifications of buyer and seller before a transfer is allowed. The ability to automate the transfer of ownership and automatically enforce compliant transfers between buyers and sellers removes friction, cost and risk from the process, allowing issuers/sponsors to relax transfer restrictions and introduce levels of liquidity.
Private digital securities will not have the deep liquidity of public markets. However, digital securities can bring some level of liquidity to asset classes that have virtually no liquidity today and help reduce the illiquidity risks for sponsors and investors.
The underlying legal ownership structure of a digital security and a paper security are the same – a share in a private company, an LP interest in a private fund. However, instead of recording the ownership in a paper ledger, spreadsheet or SaaS-based ledger system, the ownership is recorded on a new type of database technology (distributed ledger technology) called blockchain, which can be programmed to introduce additional functionality into ownership rights.
Other key benefits of digital securities issued on blockchain technology include:
- One Source of Truth – Blockchain technology serves as an immutable record of ownership. In the world of private securities this means streamlining the ownership records from many intermediaries into one source of truth. Open source public blockchain technology offers a more secure ledger than other proprietary technology options.
- Syndicate More Widely – Leveraging blockchain technology, Harbor’s software platform allows issuers and broker-dealers to raise capital more efficiently and cost-effectively from a larger, potentially global, base of investors. This allows investments to be divided into smaller increments, lowering the minimum investment amount and broadening access to different profiles of investors.
- Unlock Liquidity Options – Whether facilitated through a broker or placement agent or directly between investors, ownership can now be transferred digitally with near-instantaneous settlement and no counterparty risk. Issuers can set specific rules, then allow secondary transfers to take place directly without having to approve trades manually. Harbor’s compliance protocol checks each request against the issuer and regulatory requirements, allowing only compliant transfers to happen.
- Tap an Ecosystem of Enabling Technologies – Public open source blockchains, like Ethereum, have large and expanding ecosystems of other enabling technologies. Using public blockchains, like using public internet protocols, ensures interoperability with this wider ecosystem of custodians, exchanges, portfolio management tools, credit facility technologies, and many others. Harbor uses ERC-20 standard token technology, which is compatible with core technologies like 0x, dYdX, Dharma, Set, Open Finance, Bitgo, Anchorage, and many others.