Mass Adoption of STO Part One: Utility

Despite the general hype around STO in the crypto industry, wide-scale implementation of security tokens will remain a steep uphill battle.

Most of the dialogue on obstacles focuses on regulatory uncertainty over security tokens, as if clarity on regulatory concerns is the only issue holding back the industry.


The difficulties in achieving mass adoption will not only be regulatory.
Like any other technology the question will revolve around whether security tokens solve a problem that the end user finds painful enough.


So other than regulation, what will it take for STO mass adoption?

Utility in Token Governance

With a background in VC, we know that for any technology to gain traction, it must have very specific use cases. The more relevant the use case, the greater utility the technology has in solving a problem.


Private companies can employ the mechanics and governance models of security tokens to decrease administrative costs and increase transaction speeds.


If private companies can issue equity in the form of tokens, they can greatly streamline time-draining corporate processes for any corporate event ranging from board meetings to even incoming investor negotiations.


Fundraising negotiations, for example, can be dramatically shortened. Rather than emailing investors in separate threads to sign off on fundraising documents, companies can digitally publish decision requests to previous investors.


The outcomes of these decisions can be recorded immutably on the blockchain layer, protecting voting outcomes. This immutable record which can automatically detect conflicts and contradictions in fundraising agreements will be invaluable at the company’s next fundraise or acquisition event.

Utility in Liquidity

For investors, liquidity is the name of the game. Venture capital investments are characterized as the least liquid type of investment available to investors. This liquidity risk is a major barrier to entry for investors. It can also skew investment appetite from companies that truly have long-term potential towards companies that can secure a quick exit.

 

Illiquidity in VC investments has come to be accepted as a given, despite its clear disadvantages. It does not have to be this way.

 

By creating a ledger system that is easy to update and keep track of, security tokens can allow VC investors to fluidly buy and sell ownership in private companies before any acquisition or IPO.

 

There’s a running joke in the VC industry that a cap table (company ownership ledger) is only correct at two points in time: when the company is freshly incorporated and when the company is sold. Anything in between is simply a mess of unreconciled paper contracts and spreadsheets. In other words, the administrative aspects of updating cap tables is a major bottleneck preventing the liquidity of private shares.

 

It does not have to be this way. Security token governance models and mechanics are designed to solve exactly this issue. They are designed to do so transparently and immutably. Any dispute around ownership in a company can employ the blockchain ledger to assist in resolution. If faulty logic resulted in an incorrect cap table at any time, the mistake can be clearly tracked to its point of origin and subsequently amended in the ledger.


This capability will allows investors who want to shed their liquidity risk to sell their equity tokens to investors who have an appetite for longer term risk. There is tremendous demand for this type of transaction.

Utility is Only Part of the Equation

Read Part II to learn more about what the security token industry requires for mass adoption.

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