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Security Token Offerings: A Reality Check To Manage Expectations

As part of our Digital Securities Week, Pierre Lavaux of SGH Capital offers a little caution.

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Exactly how much ICOs raised in 2018 is unclear, with estimates up to $22 billion – almost double what they did the previous year. During the summer of 2017, ICO financing even surpassed angel and seed funding for early stage technology companies, fueling a narrative of disruption regarding the future of venture capital.

Yet, recent research from Diar finds that 7 out of 10 ICOs are now valued under what they raised within the last 20 months, with an estimated $6 billion loss in market capitalization. Adding to that, over a third of the tokens sold remain to be listed on an exchange according to the same study. Arguably, coin offerings haven’t lived up to their promises and many investors got pennies on their dollars.

Fortunately, we now see through the U.S. Securities and Exchange Commission latest enforcement actions against Airfox and Paragon that promoters and issuers have run out of options: investment contracts, whether tokenized or not, must be registered as securities.

Exchanges, as well, must comply and properly register or qualify for an exemption, as we’ve seen with the EtherDelta settlement. These are sobering news items since the regulated nature of securities should help to establish tokens as a great portfolio diversification option.


Are Security Tokens the Future?

Security tokens are now being touted as the future of ownership and the democratization of alternative investment, with the potential to digitize or “tokenize” all types of assets such as debt and equity in private companies, or even physical property like real estate and art.

But the tokenization process of existing assets raises new questions and technical challenges. Critical features such as proof of ownership of the underlying assets and restricted transfers in a global environment are still quite experimental.

In theory, thanks to on-chain securities lifecycles and secure wallets, clearing houses and central securities depositories may become obsolete. However, securities laws worldwide are complex and to some extent unfit for blockchain technology because they’ve been designed around a heavily intermediated space.

Thus, Security Tokens Offerings are a two-fold challenge:

  1. Issuers will look for jurisdictions that recognize tokenized securities, but…
  2. Trading platforms and service providers can only build up the necessary infrastructure where the proper legal framework exists.

In all likelihood, due to the wide spectrum of use cases; zero tolerance for shaky legal grounds; and limited pool of addressable investors; we won’t see mega STO rounds in the coming months. Instead, in our minds, smaller private placements backed by thorough disclosures will become the norm.

By borrowing best practices from the private markets and relying on widely recognized fair valuation methodologies, the up-and-coming class of fully compliant security tokens might finally set reasonable expectations for digital assets.

 


This article is presented as part of the Crypto Briefing focus on Security Tokens and Digital Assets.

Crypto Briefing does not accept any payment or financial benefit from expert guest authors.

 

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1 Comment
  1. Christian Kameir says

    In the context of public blockchains, tokens — including security tokens — are based on established protocols that allow the transfer of these assets from and to wallets and exchanges, which support these standards without the need of a third party. As of today, no public blockchain offers a “security token standard” or “security token protocol.” Due to this lack of a security token protocol on any existing public blockchain, any exchange of assets created through these systems will necessarily require these platforms to provide access to the data stored in their databases for identity and asset validation. Claims by providers using the aforementioned terms are aspirational and are limited to databases and, in some instances, application programming interfaces
    maintained by these platforms.

    While some authors define security tokens as “any blockchain-based representation of value that is subject to regulation under security laws,” they fail to address the nuances between blockchain-secured transaction systems and blockchain-based standards that create new transfer protocols. The later implementations provide a revolutionary advancement over previous marketplaces, enabling a peer-to-peer exchange of the underlying asset. The former is an incremental improvement over existing securities exchanges and — since all new entrants are startups — carry the risks associated of untested systems and companies.

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