Tokenized securities were set to be the next evolution for digital currencies, though still it seems like the security token offering (STO) hype is deflating.
Throughout 2018, as the bear market ensued for cryptocurrencies, including ICO tokens, the attention shifted towards security and asset tokenization – the process of digitizing real-world assets. The tokenization process promises to bring more liquidity and overall improve accessibility for investors to assets that otherwise would be off-limits.
The New Paradigm for Fundraising
While this looks like an ideal use case for digital tokens, STOs haven’t necessarily made headlines in the media. Is there limited demand? Is the infrastructure for such offerings not ready yet?
When Ethereum launched in 2015, Initial Coin Offerings (ICOs) quickly became a popular way to raise money for projects. Even though teams claimed that their issued tokens are utility tokens, most of them would fall under security laws and end up non-compliant. Still, this new form of financing paved the way for the idea of using blockchains to offer digital securities that could represent an ownership stake in a real-world asset and simultaneously be as easily transferable as cryptocurrency.
In 2018, the market for ICOs reached a peak, with $5.6 billion and $6.3 billion raised in 2017 and 2018 respectively. Proponents thought these tokens were an innovation similar to the joint-stock corporation. While tokens don’t represent a claim on cash flows, participants had the expectation of capturing the inherent value in network effects.
STOs Side by Side to ICOs
As the bear market unfolded and ICO tokens’ performance had been crushed, the sudden emergence of the security token was undoubtedly perceived as another way for cash grabs. However, there is a use case for tokenized securities that is worth considering. Bitcoin showed how asset ownership could be digitally transferred without intermediaries. A tokenized security could do the same for investment contracts, real estate or other existing value-generating assets.
There is reason to be optimistic that this form of digital ownership can bring efficiency, transparency, liquidity, and access to the small and mid-sized capital markets. By utilizing programmatic digital assets for ownership rights, the cost of compliance in primary issuance and secondary trading is set to be significantly reduced.
Issuers benefit by reduced liquidity premiums and more buyers to compete for their offering. Investors, on the other side, benefit by gaining more access to opportunities for growth-stage investment. This is a compelling story in capital markets, but STOs have only managed to raise close to $400 million until now.
The Bullish Case for STOs
This is a drop in the bucket compared to how much ICOs have raised over the last couple of years. There is certainly a demand for tokenized securities and STOs, however, investors might still have an irrational wariness that was caused by the ICO crash.
The fortune of STOs could change soon, as the SEC in the U.S. has started to clear some token offerings under the Reg A+ regulation, with Blockstack (STX) being the first one. With a clearer regulatory framework, more growth-stage companies might look to raise capital via security token offerings.
The return of bullish sentiment in the digital asset markets could make a compelling case for STOs to start garner investor attention in the near future.
What do you think of STOs and tokenized securities? Will these get a foothold in the markets or has the trend fizzled out?
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