Security Tokens: The Rise of A New Industry

By Roy Gil
On 1 Jan., 2019

We embark on a journey to another model for issuing Tokens and raising funds, the Security Token Offering seems to be all the noise of late. Security tokens are digital assets that grant the token owner claim over company rights, dividends, revenue and everything you could possibly get from conventional securities, only faster cheaper, and simpler and requires fewer if any intermediaries.

Security Tokens: The Rise of A New Industry

2018 has been arguably one of the toughest years for capturing price gains in the Crypto market since the boom of late 2017, in one year we lost 80% of the total market cap, however, a completely opposite trend is obvious to folks who are actively working to develop the space. VC’s increased investments, start-ups, and existing companies are planting roots in the new financial ecosystem.

 

It seems, feels and thought up that this new field is not going away and better yet it is expanding and growing to possibly merge with all other industries. Like the hardcore crypto fanatics will tell you “Crypto is here to consume the world”. So, we’ve seen the effects of the ICO the new freeing financial instrument that allows companies and project runners to raise funds with the promise to solve complex and until now “unsolvable” problems in the world, and on the other hand a tool for fraud and deception of the uneducated investor, giving crooks the ability to fiction a cause simply for the purpose of taking funds from their supporters while taking advantage of these early technologies steep learning curve to their advantage.

Taming the Wild West

While this new innovative model for raising funds is groundbreaking on it’s on own, there is a clear need for regulatory actions in order to make this model sustainable long-term on all fronts. With the SEC cracking down on some bad apples, they are looking to protect investors from the many “Non-Kosher deals” out there and stop any dangerous activities that may lead to investors losing money/ terror funding/ money laundering etc. The SEC has also stated that they want to unburden companies with unnecessary regulation and reporting duties, thus making it easier for companies who want to set up shop in the US and raise funds from US investors. The goals according to Chairman Jay Clayton are to make thoughtful regulation that won’t hinder innovation, yet make sure Americans are safe from fraud and other bad practices the SEC is looking to enforce heavily.

 

A New Industry Emerges

We embark on a journey to another model for issuing Tokens and raising funds, the Security Token Offering seems to be all the noise of late. Security tokens are digital assets that grant the token owner claim over company rights, dividends, revenue and everything you could possibly get from conventional securities, only faster cheaper, and simpler and requires fewer if any intermediaries. It is also important to note that as an investor in a digital securities fund, for example, you receive an LPA ( Limited Partner Agreement), Private placement memorandum and a subscription agreement, so in terms of investor rights and documentation, there is little to no concern as the only thing that’s really new here is the far better ownership structure being offered. The digital securities issuance mania is about to go live, as we can read between the narrow lines of the rapid market development we can clearly see a few developments of note:

- Companies and decentralized projects are not slowing down and more are constantly being created.

- Jobs that never existed before are being created by the hundreds and more are coming.

- Preparations for the next boom are underway as more and more platforms for issuing digital securities are being formed, all of which are making sure they are compliant with current securities laws.

- Custody, Market surveillance and other investor protection services regulators and large investors need to feel more confident about the crypto market are rising and are taking the necessary steps to operate under the current standards and practices.

- Exchanges like Tzero are on the verge of approval and operation start. Sharespost has been the first to receive regulatory approval so far, yet, the smartest, most active figures in the space are repeatably stating there are over 60 ATS’s they know of, are coming into the market.

So what is missing to jump-start the next boom?

One answer is players in the ecosystem starting to emerge and answer the call. Let’s breakdown the security tokens industry into six necessary categories:

1. Issuers

2. Custody & Trust

3. Broker-dealers

4. Trading

5. Legal

6. Compliance

With regulatory hardships on every turn it’s hard to see the industry go on the explosive run we foresee anytime soon, as the infrastructure is still being built and regulators are still holding licenses requests from players such as tZERO with no clue as to when that approval will happen.

Key necessities for increased liquidity are high-frequency trading and derivatives markets, however before we have those, we need to understand what do the regulators need to see in order to allow these new players to operate. From the statements and reports, the SEC and other regulatory entities have made we can deduce that there is still much to be hashed out and thought of before setting any new standards ( which Chairman Jay Clayton has stated they are not going to do anytime soon) or amending any current laws. The main issues regulators want solved are ranging from Traceability of funds in international markets, Visibility and enforcement capabilities on the international level, no trusted central body that collects data on the actors operating in the space, the ability to freeze/restore accounts, wallets, tokens, and essentially the ability to control certain critical aspects of some networks. In addition, the SEC has mentioned the lack of surveillance in the crypto market as a major issue, and for the integration of services like SMARTS who is providing technological tools for market surveillance, real-time solutions, oversight, and keeping the security/safety standards that are required to protect investors from market manipulation. We can see Trading services such as Bitfinex integrates with Irisiums Surveillance platform on their exchange, and while the hardcore crypto users don’t like these kinds of actions, to say the least, these actions might be imperative for the healthy growth of the market and the massive opportunities true adoption will deliver.

What can we expect in 2019?

- Companies will start qualifying and getting approved by the SEC to embark on Reg A+ offerings that will drive a massive bull run for STs

- Security Tokens exchanges are gonna start showing up out of the woodwork and receive regulatory approval as well, providing that 24/7 liquidity solution we need

- Sovereign aspirations will cause more countries to adopt convenient regulations for entrepreneurs in the blockchain space to feel comfortable and willing to set up shop in their jurisdictions.

BITSME has a list of great learning sources and educators in the Security Tokens industry we believe are crucial to check out and gain knowledge from:

Security Token Academy (BITSME’s pick for best educators in the growing STO market )

STO Filter ( learn about new projects)

Strategic Coin ( Market + Tokens research)

The Block ( The latest and greatest of the Crypto space)

OneAlpha ( One of the top newsletters in the space)

We appreciate these folks amazing work, and hope more quality services like them will emerge in 2019.

BITSME is an Investment banking firm for blockchain based ventures who are looking to create something special and need the funds & knowledge & experience to succeed in their venture. experience executing ICO’s, STO’s, RICO’s to date, and provide extensive services, essentially from taking the raw idea and turning it to a true business using the solutions a decentralized system can provide.

Conclusions

We believe mass adoption will be reached only after we have the big institutional players Involved in the space, however that will not happen if the regulators “checklist” is not addressed, governments & companies working together to achieve the best outcomes for investors and entrepreneurs. As it stands now we are not there yet, there is still a lot of work to be done for the massive wave of investments to flood into the space. With the rate of progress in the market it’s tough to know when we can overcome these hurdles to adoption. The linear thinkers ( which is the vast majority of folks) will say 4-6 years, however, the progression rate of the technologies and market generally speaking has been exponential since the moment Satoshi posted the Bitcoin Whitepaper, and the investments currently flowing to the space are designed to accelerate the progress even more. Given that, we can estimate with relative confidence that in the next 1-2 years, we will overcome the regulatory hardships through the growth of the technology, and market leaders taking on initiatives working closely with regulators to promote the safe use of these technologies.

Read more...