Security Tokens And STOs Are The Next Big Front For The Crypto Industry
Security token offerings (STOs) are quickly becoming ‘the next big thing’ in crypto as regulators tighten the screws on initial coin offerings (ICOs) and recently decentralized exchanges (DEXs).
Those seeking to raise funds for projects have realized that regulators are not sold on the idea of merely referring to crowd sales as “token generation events” (TGEs) or promises of having Simple Agreements for Future Tokens (SAFTs).
According to Daniel Masters, the chairman of the U.K-based CoinShares, means that STOs are going to be a big hit in a crypto industry that is ready for its next wave after Bitcoin and Ethereum ushered in the first and second waves respectively.
Security token offerings
A security token is a digital asset that represents ownership of an underlying stock, bond, etc. For example, if any stock you own in your brokerage account, say shares of Netflix or Amazon would be tokenized, it would be a security token.
Security tokens operate like traditional cryptos / tokens in that they move through a blockchain. Security tokens can be used by private companies that wish to create secondary markets for the equity of their company, which was only possible in the past via IPO’s and stock markets.
In his view, Masters sees STOs as crucial in the next chapter of crypto growth, bringing onto the market “assets that have historically remained in private hands.”
These and more were comments made during a panel discussion organized by Dow Jones and sponsored by CoinShares.
The event follows September’s decision by the US Securities and Exchange Commission (SEC) to temporarily suspend trading in exchange-traded notes (ETNs), due to concerns consumers could confuse them with exchange-traded funds (ETFs).
Tokenization wave is the next big thing
Most privately held companies continue to value the freedom that remaining private accords them, despite some of them having valuations that run into billions of dollars.
Though most would prefer staying under the private hood, a move towards the public capital markets would substantially impact their value, with benefits coming from access to massive liquidity.
These privately held assets would benefit a lot from tokenization, which in one way or another, would help enhance their value. And that would mean things like classic cars, gold, art, and stamps that have traditionally been shrouded in private equity or venture capital would be opened up to the public.
When this happens, Masters said at the breakfast briefing; financial institutions would have to toe the line because a “magnificent force” would compel them.
He added that traditional financial institutions will struggle in their efforts to dodge the tokenization wave.
Exit ICOs, enter STOs
Initial coin offerings blazed the crypto market in 2017 and a large part of 2018, helping to raise an estimated $13.3 billion since 2015, with $6.2 billion coming from last year alone.
However, as much as the projects managed to raise billions from investors, most of the projects have not lived up to expectation or failed to launch completely. The scenario has left most of the participants nursing losses.
Apart from the fact that some projects have turned out to be scams, a big problem facing the ICO wave has been the fact that the SEC views most ICO tokens as securities, especially regarding the Howey Test.
The ever-tightening regulatory demands and clampdown against ICOs mean that projects developers in need of funds would have to look elsewhere, and that is the force behind the security offerings.
Instead of fighting the regulators, project promoters and teams have recognized that offering security tokens (STOs) could provide a regulatory safe harbor, something that could “make securities liquid, transferable and transparent.”
Other than that, it could open up space and see more participants return to the crypto fundraising platform.
Securities on the blockchain
The STO industry is up and running, with two of the largest so far being Overstock.com’s tZERO that raised $134 million and SPIN ($125 million). Securitize was the first firm to transfer security over the blockchain utilizing the Airswap DEX.
Recently, the SEC imposed a $400,000 fine on EtherDelta for operating an unregistered ‘securities exchange.’ it highlights the harsh compliance environments that firms offering token services must navigate, something that could affect crypto growth.
STOs offer the added advantage of attracting greater liquidity as well as helping projects not worry about regulatory clampdowns.
Milston Myles, the CEO of Globocap said that the STO space would experience huge growth as companies begin to put securities on the blockchain. According to him:
“There is a huge amount of money in private assets that is currently untapped. In 10 to 12 months we will see an explosion.”
Globacap is a U.K based firm that seeks to create securities on the blockchain, thereby “simplifying and widening” public access to global capital.
Milston added that the company’s efforts are in line with existing securities legislation, with the potential for the industry to benefit from a security framework that loops in the regulators.
So, as many investors continue grappling with portfolios filled with utility tokens that are almost worthless and do not generate any dividends, perhaps it’s appropriate that the next wave of crypto is securities tokenization.