Some experts believe that the STO market will die soon, but in this article we’ll try to overlook the STO market and its trends from 2017 to 2020. But first, let’s define what an STO actually is. An STO (which stands for “Security Token Offering”) is a method of raising funds in a way similar to an ICO, but unlike the latter an STO is legally compliant with all regulations, making token issuers responsible for all their actions. I've asked 6 best STO experts on the market - one of them is Marvin Steinberg.
The first STOs were offered in 2017, and five of them raised over $65.59 million in that year alone. The following year was a lot more successful; 35 STOs collected $434.95 million. And last year was nearly the same; $452.54 million for 55 new projects. The largest STO was tZERO, a project by overstock.com, which raised $134 million in 2018. 2018 and 2019 weren’t great years for the overall crypto market, but things look much more promising this year, as there’s the chance for altcoins to surge again and spark renewed interest amongst investors. It’s normal to assume that this year will see the value of the market double compared to the previous capitalization.
The main difference between 2017 and 2020
In 2017, the market was still very young and regulations were practically non-existent. The countries of the G8 were talking about crypto and it’s possible regulation while China banned crypto and ICOs entirely, but the overall existence of crypto was ignored by the laws and over time, crypto got better. In 2018, the Polymath platform was launched. It allowed for the issuance of ST-20 tokens, which were partly compliant with general regulations - at least it required passing a KYC procedure. Unlike ERC20, ST20 tokens were not transferable between all accounts on the blockchain; only the addresses authorized with KYC could transfer them.
Every STO has four ingredients:
- A blockchain protocol - Some of the issuance platforms have their own blockchains, such as Polymath, while some still use Ethereum. Their Ethereum solution is the most universal one.
- A smart contract - It’s the programming language for the blockchain protocol that defines the rules for the issued token.
- An issuance platform - We’ll talk about this more a bit later, but these are the platforms that make the issuance and distribution process easier.
- An exchange - Oftentimes, an exchange is coupled with an issuance platform, as the ordinary exchange allows trading with everyone, and the STO tokens can be transferred only to other accredited investors.
Following this recipe, many new STO platforms were launched:
All of them have features such as whitelisting, AML, and KYC, as these are the necessary steps that must be done in order to avoid problems with financial regulators. Still, most countries don’t have any regulatory framework regarding tokensales. In 2018, the SEC released a few statements, regarding tokensales, warning investors about potential risks because:
- ICOs can be securities offerings.
- They may need to be registered.
- Tokens sold in ICOs can be called many things.
- ICOs may pose substantial risks.
“While some ICOs may be attempts at honest investment opportunities, many may be frauds, separating you from your hard-earned money with promises of guaranteed returns and future fortunes. They may also present substantial risks for loss or manipulation, including through hacking, with little recourse for victims after the fact.”
This stance by the SEC is related to the high amount of scams in the sector. Security token offerings fixed this problem by always registering their tokens with regulators. Every security token is an investment contract that represents the legal ownership of physical or digital assets like real estate, ETFs, etc.
According to Anthony Pompliano, every project that wants to register its tokens is obliged to follow these regulations:
- Regulation D
- Regulation A+
- Regulation S
Regulation D will allow a particular offering to avoid being registered by the SEC provided “Form D” has been filled by the creators after the securities have been sold. The individual who is offering this security may solicit offerings from investors in compliance with Section 506C.
So what does Section 506C require?
It requires verification that the investors are indeed accredited and that the information provided during the solicitation is “free from false or misleading statements.”
This exemption will allow the creator to offer SEC-approved securities to non-accredited investors through a general solicitation for up to $50 million in investments.
In order for the requirement to register the security, the issuance of Regulation A+ can take a lot more time compared to other options. For the same reason, Regulation A+ issuance will be more expensive than any other option.
This happens when a security offering is executed in a country apart from the US and is therefore not subjected to the registration requirement under Section 5 of the 1993 Act. The creators are still required to follow all security regulations of the country where they are supposed to be executed.
As we can see, it’s pretty clear that the regulated market will continue to grow and that the amount of registered projects will continue to increase. But how do the popular experts feel about it?
Crypto experts see the bright future ahead
Marvin Steinberg. Steinberg is one of the leading STO experts in the industry. He’s the founder of SteinbergInvest (which holds various subsidiaries including CPI Technologies), the only company providing white-label STO solutions.Currently, he’s leading the $700M Time Square tokenization project, which may greatly increase the adoption of tokenized securities. More about Marvin on wikipedia.
“STO is the future of asset tokenization. The year 2020 will be impactful, because the bear market for cryptocurrency is over, many giants such as Facebook and Walmart are exploring it, Bakkt and CME futures are growing, and according to State Street surveys, 38% of their clients will buy more digital assets in 2020. This leads us to a conclusion that many more institutional investors will join the show. And as a regulated type of asset, STO tokens will get the most out of it.”
Sam Bourgi, Financial Editor of CCN.com. Sam Bourgi has spent the past nine years focused on economics, markets, and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE, Yahoo Finance, and Forbes. He firmly believes that STOs will have a massive impact:
“Whereas so-called ‘utility tokens’ were meant to give investors future access to a product or service, a security token represents actual ownership of an underlying asset. If you invest in a real estate STO, your holdings represent actual shares in physical property rather than an IOU for a future date. Blockchain technology has reduced the need for an expensive middleman and has passed on those savings to investors. The emergence of low-fee investing will only strengthen under the STO model given its programmable compliance and ownership features.”
Roger Aitken. He has written for a number of trade titles and magazines, such as Futures & Options World (FOW), the FT’s Investors Chronicle, and UK national newspapers like The Independent.
“STOs are said to operate with greater trust (than ICOs), as the tokens they distribute come with more rights for investors (see above).
Companies can offer digital security tokens for a variety of otherwise illiquid assets, while investors can purchase securities in their preferred investments with lower risk.
The companies are already starting to round out the new ecosystem. Take Overstock’s tZERO, for instance. It looks to provide a more open digital securities market and provide a fully SEC and FINRA regulated ecosystem for traders and prospective projects alike - a big mission that only time will tell how long it will take for the company to complete.”
Frederik Bussler. CEO at bitgrit, Founder at the Security Token Alliance, Chairman at the World Data Science Forum, and he serves on several advisory boards.
“Major industry leaders are starting to see the benefits of security tokens, which center around greater operational efficiency. Because security tokens act as a digital wrapper for securities, they can speed up the typically slow and expensive KYC/AML and accredited investor procedures. You can now create legal digital assets and raise capital on the blockchain. However, being compliant with the law is by no means a given with cryptocurrencies, for several technical reasons. Most importantly, typical cryptocurrencies have no functionality built-in for "transfer restrictions", which means that cryptocurrencies can be sent to anyone, anywhere.”
Saum Noursalehi, tZERO CEO. tZERO is one of the leading security token issuance platforms.
“While digital securities are still in their early stages, we are seeing an increased level of interest and acceptance among both issuers and investors. It is important to keep in mind that many of the issuers intending to trade on the tZERO ATS are doing so in conjunction with a new capital raise. As a result, the timing for when these new securities trade depends on broader corporate strategies, the speed of the capital raise process, and regulatory considerations. Lastly, our long-term pipeline of potential issuers now exceeds 200. These issuers are diverse in nature, spanning real estate, investment funds, technology, film, and pharmaceutical companies. In the near term we expect real estate to be a leading asset class, followed by funds and other private companies.”
Dan Doney, CEO of Securrency, another leading STO issuance platform
“We believe that 2020 will see an acceleration of the trend that links incumbent financial service providers with emerging security token firms to tokenize institutional grade assets. We should see tokenization platforms emerge provided by some of the largest technology firms (like Microsoft and Facebook) and issuances from highly trusted investment firms and asset managers. We’re excited about the tokenization of publicly traded assets. The disclosure requirements, strong pricing signal, and existing liquidity of these assets will bring much-needed liquidity to the security token market. These assets, backed by some of the most known and trusted financial service providers, will create the liquidity and trust needed for the foundation of the security token industry.”
Many experts from the financial industry believe that security token offerings are the future of the crypto market and the financial markets overall. Issuing tokens is cheaper, faster, and they cut out the middleman and own assets directly. It’s the financial revolution. Of course, nowadays, revolutions don’t happen overnight. It takes time. But according to the rule of the market, the solution with most advantages always wins. And security tokens have these advantages. That’s why they’ll win in the long run.