Security Tokens, The Story So Far

Blockchain: Bitcoin, Ethereum, and ICOs

This article gives readers an understanding of Security Token Offerings (STO), the context through which they evolved, and their potential as the next great financial innovation.

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Bitcoin

The blockchain creates an immutable and provable source of ownership, with its most successful application so far being Bitcoin. Bitcoin solved one big problem, allowing for the transfer of ownership on the internet without a centralised authority, like a bank.

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Ethereum

Then along came Ethereum, a decentralized computer that allows software code to be run transparently with no central control. The most successful application on Ethereum has been the creation of ERC20 crypto-coins through ICO’s (token sales).

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ICO

ICO’s created a new way of raising funding, threatening to disrupt VC’s and angel networks. To date (August 2018), $16bn has been raised through ICO’s, yet recently major structural challenges to the ICO model have precipitated an accelerated descent in the value of ETH and other alt-coins.

Initial Coin Offerings

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Raised in ICO's

With as much as 81% of ICOs being scams, the general sentiment is that the ICO bubble has burst with the bottom dropping out of the alt-coin market.

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The structural challenges to the ICO model which we allude to include overemphasis of PR hype, a lack of business fundamentals, the avoidance of regulatory responsibilities around securities offerings, and the prevalence of ICO scams.

Ultimately, it is our view that the current ICO model is founded on a series of irresolvable conflicts of interest between investors, projects and customers. Investors cumulatively purchase large numbers of coins that they have no intention of using, creating unreasonable token price volatilities.

ICO projects often make dubious (even speculative) claims that mislead investors and customers. In the end, customers receive tokens that (in the best case) they will be unable to use for years (if ever).  

Enter the Security Token

Technically, there is very little difference between a utility coin and a security token. The big difference is that security tokens are linked to existing underlying assets and backed by established legal and regulatory frameworks.

 

Rather than issuing paper certificates for equity, a small business, startup, or even corporation can tokenize their equity and make fractional ownership of the organization available to the mass public. This promotes a much deeper pool of liquidity, enabling micro-ownership and creating whole new business models.

Crowdfunding v2.0

Crowdfunding is nothing new. Some of the first companies to obtain household recognition from the crowdfunding model include Kickstarter and Indiegogo.

Go Team!

The challenge they face is that contributors on their platform do not benefit if the project they support is successful. In fact contributors may not receive much at all in return, prompting articles such as:

 

 

Companies like CrowdCube and Seedrs somewhat addressed this and built custodial frameworks to allow large pools of investors to easily invest online, however with limited liquidity.

 

ICO’s entered the market and created something new; liquidity with the ability to trade on exchanges, and massive upside

The Potential for STO

Raising Debt & Equity

While financial markets have become increasingly complex, security token offerings give companies an alternative to traditional institutional investment. Their compliance with SEC regulations reduces the trust barrier that traditional ICOs and online crowdfunding struggle with.

 

Start-ups raised $84 billion via traditional US markets in 2017. This is a huge amount of capital, but is dwarfed by the potential STO market. Firms will be able to receive investment from the global community; potential investors outside of or with limited access to financial markets can expose their assets to emergent businesses.

Commercial Real Estate

Similar to fine art, commercial real estate involves the changing of ownership of an illiquid asset that is expected to appreciate. These assets may also generate revenue for themselves.

 

Security tokens allow for individual, non-institutional owners of real estate to sell shares of their property and convert it to cash. Token holders earn capital gains and a percentage of the property’s future cash flows.

Art Ownership

Ownership of fine art and other collector assets (i.e. vintage cars) are a status symbol of wealth and luxury, reflecting the owner’s ability to spend a large lump sum of money. In 2016, $56.6 billion was auctioned in art markets.

 

Security tokens open the door for smaller investors to those markets through micro-ownership of the world’s most valuable works of art. Both token issuers and holders benefit from liquidating art assets without going through institutional auction houses and an expanded marketplace.

Fundraising for Musicians and Artists

The music industry is dominated by a select group of record labels that create 80% of the market. Their concentration of power is a disadvantage to smaller artists subject to the firms’ sole discretion.

 

STOs allow individual musicians to fund their projects and tours, essentially becoming their own record label. Artists can offer tokens to their brand through platforms like Musereum. The token holder secures their right to shares of royalties, intellectual property licenses and access to music.

Fundraising for Charity

Despite well-intentions, charities struggle to gain the public’s trust to allocate their capital honestly; only 57% of people give charities their vote of confidence. Blockchain’s transparency and ability to accurately track funds will allow charities to operate more openly.

 

Charities are able to offer security tokens through platforms like Lottery.com, guaranteeing honest distribution of their member’s donations. Token holders can be constantly updated with how their funds are being used at the project level.

Betting Markets

Every year gambling companies rake in billions of dollars, gambled on a variety of sports across the globe. By using decentralized blockchain technology, companies can offer security tokens to secure their profits.

 

The market for sports betting is already huge: $4.9 billion was spent on sports betting in Nevada in 2017 alone. Companies like WinFlow seek to redistribute 80% of its profits to token holders. They also intend to offer a token backed by the euro. By adopting this emerging digital technology, betting markets can dramatically reduce fees, better structure reward hierarchies, and protect against fraud.

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Security Tokens, The Story So Far

From Bitcoin and blockchain to ICO’s. Understand Security Token Offerings (STO), how tokenized assets are evolving, and the potential to drive the next great financial innovation.

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Equity Evolution or Revolution

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Sadly most ICO’s have been scams or failures, most have questionable business models, and they are a thorn in the side of regulators. STO’s could deliver the true promise of blockchain.

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Should you Launch an STO?

Building upon the foundations and lessons learnt from token sales, this article introduces Security Token Offerings and whether you should launch one.

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