Programmable securities have been under discussion for the past 6 months in diverse media outlets.
While some experts are already proclaiming that the so called Security Token Offering (STO) is the future of corporate funding, others fear that the highly regulated U.S. security market might be a great hurdle for getting the ball rolling. As the debate continues, a handful start-ups like tZero and Aboveboard are already a step ahead and actually started issuing their very own security tokens. As Anthony Pompliano so often puts it when talking about cryptocurrencies and security tokens: The virus is spreading, and in this brief article we will explore why and how fast.
First things first, why blockchain?
Cryptocurrencies already gained a reputation for being an innovative and potentially feasible idea for revolutionising the future of money. However, recent developments have shown that the underlying technology of most cryptocurrencies, blockchains, can do so much more than just serving as a platform for payments. After banking, it looks like the next industry prime for disruption by Blockchain technology is Wall Street. By distributing stocks in the form of a security token, companies benefit from countless new features including improved liquidity, distribution, control and investor relations.
On the one hand, board members and directors will be content with the possibilities of customizable trading settings, automated whitelisting processes and the tracking of their shareholders. Especially the last point is undoubtedly a great enrichment for the management side, as it provides enhanced opportunities to nurture relationships with their investors and to get an improved overview over them.
Elseway, shareholders benefit from eased and more transparent stock market classics like dividend payouts, votes and reports, but also blockchain related formats like an additional utility. Possible utilities could be memberships, access to products and discounts, among others.
STOs as a replacement for ICOs
Interest in ICOs over time.
During the past two years, Initial Coin Offerings (ICOs) have proven to be an excellent tool for early stage start-ups to raise large sums in funding, often in just seconds. Although this non-dilutive fundraising method has captured the attention of many, it has also been exposed to a lot of criticism. In an effort to make the issued token look like a utility and not a security in eyes of the SEC, issuers removed conventional features like voting, dividend and liquidation rights.
In fact, in most ICOs, investors are not granted any rights at all. Consequently, the introduction of STOs seems like the next logical step in this maturing industry where regulators are starting to catch up.
In most ICOs, investors are not granted any rights at all.
With an estimated global value north of $15 trillion, the global security market trumps the ICO market by miles, which is estimated to be worth less than $20 billion.
STOs might not only become a radically more efficient fundraiser method than ICOs, but they might also elevate the entire blockchain space to an entire new dimension.
Some hurdles that are still being solved
There are still a handful known, and probably hundreds of currently unknown obstacles that still need to be solved before major companies start issuing their stock on blockchains. A critical problem is the whitelisting process of investors, for which there are very strict regulations in many jurisdictions. Aboveboard, who recently became the first company to issue corporate stock on the blockchain, is a notable company that is working towards solving this problem through the development of a registry software that tracks security token holders on the Ethereum blockchain, and provides additional features like the management of shareholder rights, governance and trading rules.
Due to strict regulations, another big problem is the trading of securities. One of the main promises of security tokens is the potential to unlock additional liquidity for assets, thus making them more valuable. Although there are no existing security token marketplaces yet, Overstock backed project tZero might be a good candidate to become the first one. The project recently held a security token offering to raise funds for building the first security token exchange ever, which is currently scheduled to go live in late 2018.
What’s next?
Just like cryptocurrencies changed the way that we think about money and might make banks redundant in the long-term, security tokens have the potential to forever change the way that we think about asset transfer and ownership. With many major players entering this space to aim to get a piece of the pie, it will definitely be an interesting area to keep an eye on.