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) 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, 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.
Asset tokenization and security tokens are not a new idea. But with the 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.
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.
Various platforms have emerged to assist start-ups with their STOs, like StartEngine, Harbor, Polymath, Dusk Network, TokenSoft, Republic, and Atomic Capital.
The ecosystem of security tokens is in its early stage and there is a certain lack of legal practices. As security tokens are investment contracts, in most places around the world they are covered by securities laws. There are people who argue that cryptocurrency tokens are an entirely new asset class which deserve their own laws outside of the existing ones, but this is not reality, at least not as of now. For now, strict regulations concerning securities could pose obstacles, but 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, protecting investors and ensuring operations within the law.
STOs provide a more intelligent and innovative approach to capital funding that frees access to both investment and capital ways, while providing transparency to all of the services in question. The security token ecosystem could lead to the emergence of a new equity ecosystem separate from the public stock exchange, as security tokens allow for compliance, automation, and interoperability all across the securities stack.
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Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday.