Last week our theme was “Lightning Network Gaining Traction”
Our theme for this week is “Security Tokens take center stage.“
Despite the collapse of cryptocurrencies prices in 2018, dropping by more than 80%, for Initial Coin Offerings (ICOs) it was a good year. Indeed it was a very good year. We saw more money being raised by more projects.
According to a report published by ICOBench, in 2018, 2,517 ICOs raised $11.5 billion, a 13% increase, compared to 2017. The country leading the pack was Singapore with 228 ICOs, followed by the US with 195, the UK with 165, and Estonia with 112.
In 2017, we saw the rise of utility tokens. Utility tokens were meant to be used to access some kind of service or utility. When the ICO market took off, everyone was issuing some kind of utility token, sold during an ICO, that allowed users of a blockchain platform to pay with tokens for a decentralized service, or earn tokens for providing value to the ecosystem. Utility tokens are very similar to loyalty points, just like those given by credit cards.
Bloomberg’s Matt Levine compares utility tokens to the Starbucks card: “A Starbucks gift card is probably not a security, even though you pay money to a corporation for the card and expect to get back something in the future, because you are not investing the money in the expectation of profit: You’re investing it in the expectation of coffee.”
The fact is that backers of utility tokens are purchasers of a service, and not investors in it. There are many examples of utility tokens in the market. For example, BAT (Basic Attention Token) rewards users with tokens for using the BRAVE browser and viewing ads. Filecoin, which raised a record of $257 million with its ICO, provides a decentralized cloud storage service that takes advantage of unused computer hard drive space. Users that need storage, pay other users that provide storage with tokens.
But in recent months, we’ve been seeing the market shift, with “utility” being replaced by “security” and ICOs by STOs. The increase for tokenized securities has many saying that 2019 will be the the year of the STO. A recent article on Forbes boldly stated, 2017 was the year of the utility token, 2018 was the year of realizing the mistake of the utility token, and 2019 will be the year of tokenized securities.
Asset tokenization and security tokens are not a new idea. But with the unregulated ICO model crashing, STOs (Security Token Offerings) and security tokens have taken center stage. Security tokens have the potential to disrupt the way investors and securities issuers operate today.
Security tokens are digital, liquid assets, fractions of any real asset. Security tokens can be real estate, funds, equity in a company, derivatives, hotels, licensing, restaurant chains, anything with monetary value. A security token’s value is derived from a real, tradable asset. Security tokens can be used to grant ownership rights or shares of the company, to pay dividends, share profits, pay interest or invest in other tokens or assets to generate profits for the token holders.
This quote sums it up well: “If cryptocurrencies like Bitcoin are considered programmable money then you can consider Security Tokens a version of programmable ownership.” Anthony Pompliano
ICOs still represent the lion’s share of crypto and blockchain fundraising, but we’ve been reading more and more news about STOs in the past months, as more companies are leaning towards launching an STO.
According to an article on MarketWatch, tZERO announced a partnership with Dinosaur Financial Group to facilitate customer trading for the tZERO tokens. In August, tZERO, the security token exchange arm of e-commerce and retail company Overstock, raised $134 million with its STO. tZERO issued to investors tokens in October with a three-month lockup and now the first trades of their security token are already happening.
In July 2018, SPIN an electric scooter company launched an STO to raise $125 million for its start-up. In September, the Malta Stock Exchange signed an agreement with Binance to launch a security token trading platform.
In October, a luxury Manhattan condo was tokenized on the Ethereum blockchain. The property was appraised at more than $30 million, with the real estate developer turning to tokenization as a new and alternative way of financing.
There are already a number of companies helping to build the infrastructure to support the growth of the token economy. Various platforms have emerged to assist start-ups with their STOs, like StartEngine, Harbor, Polymath, Dusk Network, TokenSoft, Republic, and Atomic Capital.
We have many countries in the world that are looking to start regulating security tokens. But with the ecosystem in its early stage, there is still a certain lack of legal practices. As security tokens are investment contracts, in most places around the world they are covered by securities laws. Some argue that cryptocurrency tokens are an entirely new asset class, which deserve their own laws. Abu Dhabi has already passed a framework to create a free zone for creating STO’s from Arab regions. Malta released their license for exchanges with the possibility to list security tokens on exchanges in November. While strict regulations concerning securities could pose obstacles, they could also be a blessing in disguise, legitimizing security token offerings and ensuring compliance from the start.
Security tokens have the potential to attract additional capital from new investors who previously haven’t been interested in this kind of investment. STOs are projected to have a market cap of $10 trillion by 2020. Also, STOs and security tokens could prove to be the answer be the answer to the government’s woes of protecting investors and ensuring operations within the law.
There is no doubt that cryptocurrencies and ICOs have paved the way forward for a more decentralized and inclusive financial ecosystem. STOs provide a more regulated, intelligent and innovative approach to capital funding, making it accessible, cheaper, faster and easier, and possibly unlocking trillions of dollars in currently illiquid assets. STOs will most likely overtake ICOs. They will do it in a legal and regulated way, so when one invests in them, they can expect genuine returns.
For more about the Front Page Weekly CXO Briefing, please click here.