The Boring Future of Security Tokens
Trustless payment methods were the first disruption blockchain brought to the financial industry. The second wave of disruption came about when the ICO boomed in 2017 as a way to reach a larger market of investors through crowdfunding smart contracts on Ethereum. In 2017 alone, ICOs raised around $7 billion.
As Bitcoin continues to fluctuate greatly, going through boom and bust cycles much faster than traditional markets, speculation around crypto protection continues. President Donald Trump opposed cryptocurrency making some reasonable comments. First of all, cryptocurrency is largely unregulated, and efforts to regulate pseudonymous cryptocurrencies almost inevitably fail. This message led to a drop in the price of Bitcoin from about $ 10,500 to $ 9,500 in just a few minutes. A 10% drop in the value of the US dollar during this period can have dramatic consequences, but fluctuations of 10% are common in cryptography.
In fact, we have a volatile and hard-to-manage digital asset. This is hardly the basis for the global currency or for the future of the financial industry. However, in response to the 2017 ICO fraud and the 2018 crypto crash, more recently, we’re seeing the IEO (Initial Exchange Offering) — a very similar construct but with the token offering done by the exchange instead of the project itself. We’re finally starting to see the rise of the STO (Security Token Offering), which are securities on the blockchain. Blockchain is the underlying encryption technology that is used to distribute trust and remove intermediaries, while securities are tradable financial assets - everything from capital, debts, real assets and much more.
The meaning of many cryptocurrencies is to evade the regulation and taxation of intermediaries such as governments, while the essence of security tokens is to simplify and increase the efficiency of compliance with state standards. This is important in a world that relies on the stability and protection provided by authorities such as governments.
Key industry leaders are starting to see the benefits of security tokens that are centered around greater operational efficiency. Because security tokens act as a digital wrapper for securities, they can speed up the usually slow and expensive procedures of KYC / AML and accredited investors. Now you can create legal digital assets and raise capital on the blockchain. However, compliance with the law does not mean cryptocurrency for several technical reasons. Most importantly, typical cryptocurrencies do not have built-in functionality for “transfer restrictions”, which means that cryptocurrencies can be sent to anyone, anywhere.
Security tokens are designed to solve problems and provide real, legal and reliable scenarios for using blockchains.
However, the industry is clearly fragmented and is emerging. The crypto industry prefers ICOs and IEOs, which still dominate in terms of attracted amounts. Crypto investors invest their money where their mouth is tokens.
As for traditional securities, they are even more one-sided, as tokenization has not yet managed to affect the global securities market, having less than one billion dollars of tokenized securities and hundreds of trillions of dollars of securities. Market penetration is about 1%.
Instead of productive tensions between the cryptocurrency and securities markets, causing a joint movement towards security tokens, this trend is more like the way several players in each market make a leap, rather than as many followers.
Security tokens face many barriers to mass adoption, not least of which is that the financial industry is usually wary of new technologies that promise a breakdown. In addition, industry professionals burned out in the ICO industry may not dare to give a “second chance” to the blockchain. It is also important to remember that STO is not for everyone - if the company has money for an IPO, this may be the best option at the moment.
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In 2018, ICOs raised nearly $8 billion. But as many know too well, the ICO wave has since come crashing down. ICOs now raise about 58 times less than they did just a little more than one year ago.