Protos Blockchain Summit – For Security Tokens, Stability is the Objective

As the market grows, what’s needed are solid blockchains, exchanges, custody and networks – much more as well: institutional investors, companies willing to STO, regulatory approvals and processes.

The demand for security token offerings is rising, but slowly, and the reasons for the hold up are some issues around stability, experts agree.

At the Protos Blockchain Summit in Zurich on January 19th 2019, experts found that there are a number of issues which deter mainstream institutions from entering the market. 

Eva (Cremer) Willers of Protos Management names one of these issues: “There are wrong expectations on how long it will take for projects to go live:  as blockchain is a technology that is designed to build trust, it can only be deployed when it works 100 per cent. This is in sharp contrast to today’s apps on the Internet. Investors were probably not expecting that.”

Willers adds that there are many exceptional teams building effective and secure blockchains, and when these projects are completed, the gap will be filled.

Blockchain summits have changed. Suits, ties, and regulation are the norm.

Need for Stablecoins

Another issue to be addressed, according to Richard Foster of Security Token Network, is the lack of stablecoins for payments. “Crypto hasn’t worked out for payments yet, largely due to the extreme volatility, as well as continuing changes like hard forks, revaluations, etc. The crypto community itself is fragmented, and there have been issues like market manipulation, scams, untrustworthy exchanges – although bitcoin is in existence for more than 10 years, none of these issues have ever been resolved.”

There are at least 57 stablecoins in development, according to a recent report. What’s more, there are two, the Paxos Standard (PAX) and Gemini Dollar (GUSD); these are two USD-backed stablecoins that have been approved by the New York State Department of Financial Services.

Need for Effective and Reliable Exchanges

“Then there is the lack of an effective and reliable exchange for security tokens,” Willersremarks. “Institutional investors cannot place trades with the kind of depth they require, nor can they find the liquidity they need, nor is there reliable execution at the institutional level” a senior executive at the conference noted.

Wash trading is also a continuing problem, the kind of basic safeguards that equities exchanges have are largely lacking on even major crypto exchanges. 
This is a major roadblock, but there are several projects underway for exchanges that will seek approval from the national securities regulator for their operations.

Compliance on Lightning, Mastercoin Networks

There is a compliance issue facing the tokenisation of securities which could then be traded on lightning networks and Mastercoin platforms – the issue here is that the structure for making exchanges is managed by the parties who help operate the networks themselves.

“Does a node on a lightning network become a money remitter, as they are part of the transaction? Does this mean they are no longer a central party in the transaction? These are the kind of compliance issues that would not occur in traditional securities trading, and therefore must be addressed by regulators.”

Adapting the Custody Concept to Tokens

The same type of conundrum arises as the traditional concept of custody is adapted to tokenized securities.

“In the UK, the record of allocation of shares in a company is maintained by a government agency, Companies House. At the same time, a custodian must hold paper copies of shares.

With security tokens, all of this can be kept in electronic form. “A government agency like Companies House could simply keep an electronic record of shareholdings, and this record would be integrated into the security tokens as well.  The need for physical custody would be permanently obviated.”

Concerns about Insider Trading

There is yet a kind of cultural issue that should be an industry concern.

“Professionals from traditional equities trading are trained to prudence about insider trading. They know that even a casual remark can take a dangerous turn – look what happened to Elon Musk recently (The Tesla chief executive remarked that he  was ‘taking the company private,’ and when share prices jumped, the SEC stepped in and fined him $20 million). Many
 in the blockchain community haven’t been trained to be conscious of insider trading.

“People come into the community from all walks of life, and they aren’t aware of compliance issues. It’s something all security token professionals should be aware of – perhaps such training should be considered throughout the industry.”

While the number of issues that were brought up may seem daunting, there is a major transition on the way towards security token adoption, fuelled by the considerable advantages that tokenizing securities offers. The demand for security tokens will drive the industry to resolve all these issues – and indeed many of them are already nearing resolution.