Jesus Rodriguez

Chief Scientist, Managing Partner at Invector Labs. CTO at IntoTheBlock. Angel Investor, Writer, Boa

20 Controversial Observations(Not Predictions) About Security Tokens in 2019: Part I

December 26th 2018

We are near the end of the year which is the time in which people go crazy making predictions about technology markets on the next year. I try to stay away from predictions because 1) I believe they create too much noise in tech markets and 2) I suck at them 😉. In the case of security tokens, the space clearly doesn’t lack prophets that venture to make claims about the space without any data or technological rigor to back them. Having said that, its obvious that there are many expectations for security tokens in 2019. With that in mind (and considering that most people are on vacations and are not likely to read this anyways 😉), I’ve decided to outline 20 observations that might be relevant to security tokens in 2019. These are not intended to be predictions but rather some not-very-obvious ideas about how the next logical steps for the security token market in the next twelve months. These observations are based on the current dynamics in the security token space and don’t reflect any long-term visions about the market.

1)Many Security Token Vendors Are Forced to Shutdown Due to the Lack of Capital

Access to capital is likely to become a key focus of security token startups in 2019 Recently, I wrote about the series A crunch facing security token startups and I believe we are going to see the effects of this phenomenon in the upcoming year. From my vantage point, most security token startups are undercapitalized to survive a long and slow development of the market. It’s also not clear whether venture capital markets are going to be open to security token startups in the near future. The recent turmoil in public markets and a potential slowdown in the world leading economies might be negative influence in venture financing. Factoring all those elements, it is possible that many security token startups close their doors in 2019 based on capital constraints.

2)B2B Security Tokens Become a Relevant Segment in the Market

Contrary to common wisdom, the first wave of large tokenized assets might not come from rich markets like real estate but from the enterprise market. Bonds or derivative products that are often traded within a small set of financial vendors are an ideal asset to tokenize. The settlement of many of these products is already taking place on blockchains so tokenization is a short leap away. From that perspective, there is a relevant chance that we will see tokenized corporate bonds or derivative products traded in consortium blockchains in 2019.

3)Security Token Platforms on Permissioned Blockchains

Complementing the previous point, I think at least one of the major security token platforms might venture into permissioned blockchains in 2019. The opportunity of capitalize on relatively-safe B2B issuances is too tempting to ignore in these early days of the security token market. Additionally, Ethereum variations like Quorum or Parity offer a relatively trivial migration path for the current security token platforms into permissioned models. Paradoxically, the major friction point for security token platforms might be to create sales and marketing models that work well for both consumer and enterprise markets.

4)Tokenized Debt Protocols Emerge

Security token issuances in 2018 were exclusively focused on equity. There is a growing interest within the security token community and financial vendors to explored tokenized debt vehicles and there some initial efforts underway. While the initial tokenized debt products are likely to be ad-hoc implementations, I believe some of those efforts will result on the creation of a tokenized debt protocol that can be adapted across different platforms.

4)Security Token Exchanges Disappoint

There is a lot of hype and inflated expectations about the influence that security token exchanges will play in the market. 2019 might be a bizarre year for security token exchanges. In one hand, I believe we should see the quite a few of new exchanges supporting security tokens. On the other hand, I am afraid we might realize that some of the expectations in terms of liquidity or tradeability for crypto-securities won’t materialize in the short term.

5)Specialized Security Token Marketplaces Gain Traction

In the same way security token exchanges are disappoint based on the overinflated expectations created around them, the crypto-securities market might see the emergence of specialized marketplaces for passive investment and trading of digitized assets. For instance, we might marketplaces specialized on verticals such as real estate or even on specific financial models such as tokenized debt.

6)Non-Ethereum Blockchains Launch Security Token Frameworks

Security token represent a blank canvas in which other blockchain platforms can challenge the dominance of Ethereum. Additionally, the technological capabilities of the current generation of security token platforms is simple enough that the models can be adapted to other blockchains. Factoring those elements, I think is probable that we will see other blockchains launch security token frameworks to enable the creation of digital securities on their runtimes. Currently, I think Stellar and EOS on public blockchains side and Hyperledger Fabric on permissioned blockchains are the most likely candidates to unveil security token platforms.

7)Plasma Chains for Security Tokens

The limitations of Ethereum as the main runtime for crypto-securities are becoming more obvious every day. As security tokens require more sophisticated capabilities such as disclosures or privacy, platforms might be forced to enable some of those features outside the core Ethereum runtime. Sidechains, specifically those based on the Plasma protocol, seem like a very viable option to enable some of these tier2 capabilities. From that perspective, we might see some initial efforts of Plasma chains focused on security tokens in 2019.

8)The Beginning and the End of the Line for Security Token Blockchains

There are enough efforts around security token blockchains to think that they are going to be part of the conversation in 2019. In my opinion, 2019 represents both an opportunity and the end of the line for security token blockchain projects. Launching a new blockchain specialized in security tokens in a year might be almost irresponsible. However, if this doesn’t happen, the market might be developed to a point on which a new blockchain will be irrelevant.

9)Stock Exchanges Get Serious Into Security Tokens

The number of global stock exchanges evaluating security tokens is increasing to the point that we are likely to see one of those players launch a pilot in the space in 2019. I am not talking about the current efforts taking place on geographies like Gibraltar or Malta but global stock operators that can legitimize the entire space. At the moment, my frontrunner candidates are NASDAQ and BATS but there are plenty of players that have a chance to take the lead in this area.

10)Open Source Reclaims Center Stage in the Security Token Market

Open source was a central ingredient of the blockchain and cryptocurrencies movement but has been relatively ignored in the security token space to focus on other areas such as compliance or the first group of issuances. Open source does not only mean transparency, foments trust but it’s the catalyzer to build developer communities and partner ecosystems. Without those elements, the security token market is too vulnerable to big players like financial institutions or large enterprise software vendors. In 2019, I believe and certainly hope to see more open source efforts in security tokens and start seeing the initial steps towards building true networks and developer communities.

I will continue with more observations in the second part of this article.

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