For the crypto market to become attractive to institutional investors, companies and their investors need to ensure that tokenized securities — digital assets subject to federal security regulations — can be as easily tracked and traded and exchanged as traditional stock shares.
Abacus, a young company that passed through Y Combinator this past summer, think its technology can make it so.
According to the picture painted by Abacus founder and CEO Pradyuman Vig, Abacus can both automate compliance for tokenized security transactions, and keep track of the chain of custody of private securities, making it simple for the SEC, among other parties, to audit the entire history of these securities transactions. Indeed, using the blockchain and its proprietary software, Vig says that Abacus can facilitate the issuance, administration, and settlement of tokenized financial instruments on the blockchain through smart contracts that it keeps track of via an on-chain storage layer.
The company’s goal, ultimately, is to make it easier to buy and sell private securities, as well as to make the process far more transparent. If it works, it could be a big deal, too. Consider that traditionally, funds and companies have experienced liquidity events either when they get acquired or sold or go public (or get liquidated). Meanwhile, because so much money has poured into the private market over the last decade, companies have pushed off all of these types of events for longer periods of time. That shift has given rise to secondary sales as we know them today, but Abacus thinks it can help usher in yet another way for startups and funds to exit their holdings: through secondary markets for tokenized securities.
Right now, of course, the mere idea of a secondary market for tokenized securities feels like a very distant possibility. As TC columnist Jon Evans noted over the weekend, Bitcoin — priced at $19,000 apiece at this time last year — is now trading at $3,500, and other cryptocurrencies have cratered even more dramatically. What’s left of the crypto space right now, writes Evans, is a “giant casino of penny stocks, with little to no utility outside of financial speculation.”
It could be a painfully long period before that changes, but true believers in digital assets are covering their bases in the meantime, and betting on Abacus is seemingly one way to do that. In fact, the company just closed on $2 million in funding, including $1 million from serial entrepreneur and investor Justin Kan. Other investors in the round include YC and Coinbase, which has been plain about its ambitions to some day offer crypto securities trading, and that last month took another step toward that end when it launched over-the-counter trading for institutional customers that allows them to direct trades between each other.
Coinbase, perhaps unsurprisingly, is also among Abacus’s first “exchange” partners, or it will be, once it goes live with new offering that will first be made to customers outside the U.S. that allows them to trade hundreds of tokens directly from their wallets.
Vig says that Abacus is also working with a Chicago-based exchange called OpenFinance, which says that it’s about to begin trading its first security token. A third customer is New York-based AirSwap, which is a peer-to-peer trading platform.
Presumably, the technology that Abacus is developing is of burgeoning interest, but one assumes that investors are also putting stock — no pun intended — in Vig and his cofounder, Ian Macalinao. The young software engineers originally met in 2012 through the Texas Academy of Mathematics, a college entrance residential program for gifted high school students. After they headed off to different colleges — they graduated from Purdue and the University of Texas, respectively — they came together to form an analytics platform, and more recently, to create Abacus.
It’s still a very small operation. The two have just two other employees as of this writing. Vig insists that Abacus doesn’t need an army of engineers, though. “We’re programmatic and automatic, so if we got a lot of interest, we could spin out new issuances pretty quickly,” he says. “It’s all API-based, so four people doesn’t seem like much but we’ve accomplished a lot.”
They’re already seeing some revenue, too, they say, including from SpaceFund, a new, Texas-based venture capital firm focused on using blockchain technology to fund “frontier enabling” space startups by selling its own security tokens to accredited investors to fund them. (These same investors will be able to sell their SpaceFund tokens to other investors as their value rises, is the idea.) As far out as it all sounds, SpaceFund is paying Abacus a subscription fee, after paying a set-up fee. And Vig expects such fees to add up over time as it attracts more customers, even if it’s too nascent to know what to charge just yet.
“We don’t have a formula yet for our SaaS Model,” says Vig. “It depends on the number of people involved in a particular offering, and how complicated compliance is.”
Of course, what it really depends on is whether and when enough startups and investors gravitate toward tokenized securities. If it happens sooner rather than later, Abacus will be ready and waiting.