How STOs will democratize capital markets globally, starting with emerging markets, with Charles Hoskinson, CEO of IOHK (Cardano)

While Fintech innovations have promised to democratize financial services and access to capital, the truth is that many of these projects are being launched in already developed markets with mature financial services infrastructure. The STO industry follows the larger fintech trend, where as of Q1 2019 more than 90% of STOs were based in North America or Europe.

While STOs can potentially unlock trillions of dollars of capital, the question remains if funds will flow into emerging markets to promote development where they are most needed most to achieve the goal of democratization.

Security Token Network caught up with Charles Hoskinson, CEO of IOHK (the software development firm behind the Cardano blockchain) at the
Frontier Fintech conference in Ulaanbaatar, Mongolia to hear his views about the potential of security tokens to democratize capital markets.

Security Tokens best of both worlds

According to Hoskinson, Security Tokens are a marriage of two worlds. The traditional world of finance is characterized by regulation, compliance, meta data, broker dealers, and closed systems, while the world of blockchain focuses on open source software, borderless transactions, and no central authority. From the outside they both look incompatible, however security tokens are a hybrid product that leverages the global reach of blockchain with the stability that is inherent to hard assets.

The flexibility that security tokens bring to the marketplace could be used to bring small and medium sized businesses in developing markets to the global investment public, and connect value creators with small, retail investors around the world. You can take the best of both worlds and hybridize them to deliver cross border settlement of securities instruments and embed regulation within the transaction itself to automate compliance.


Security Tokens on Cardano

Charles Hoskinson and his company IOHK have been working on Cardano since its debut in 2015. Cardano has a dense research agenda, with core principles being scalability, interoperability, and sustainability. The goal is to build a blockchain infrastructure that could be the financial software stack for the developing world. Part of this goal could be to help fund and grow projects in emerging markets as Charles says “The best use case we see (that can run on the Cardano platform) is the security token.”


STOs to unlock cross border investment opportunities

Gaining access to capital in developing markets is difficult. Hoskinson used the example of the Mongolian cashmere trade to illustrate how lack of capital removes revenue from an economy.


Mongolia produces some of the best cashmere in the world, but most of it is exported in its raw state. There simply isn’t anyone there to invest in companies that loom raw cashmere into fine fabric, which represents money lost to the Mongolian economy. Instead, the raw cashmere is shipped to China, where it is turned into soft, luxurious fabric. The Chinese looms make the money, simply because Mongolians have a far smaller capital market to tap for badly needed funds.

While the Mongolian cashmere producers could benefit greatly from foreign investment to build the necessary infrastructure to process the cashmere locally, unlocking new economic opportunities in Mongolia, and new investment opportunities, access to capital is currently restricted. If small investors in Peru wanted to help fund a Mongolian cashmere factory, the existing financial system isn’t going to make it easy. One major hurdle for STOs to open up these types of opportunities is how local governments craft regulations around this emerging trend.

During the interview Darren of Security Token Network commented that, “STOs could be some sort of technological leapfrogging for capital markets in emerging countries” and Charles Hoskinson replied, “Absolutely, and not only can they leapfrog, they can innovate the entire sector of financial products.” Emerging market opportunities where capital market infrastructure is less developed could be a green fields opportunity for experimentation with new financial products around security tokens, and potentially with a new class of investors.


Evolution of STOs

Hoskinson thinks that everything that has happened in the world of security tokens so far is simply a prelude to a much larger trend. The STOs that have been concentrated in the US and EU have simply been the “proof-of-concept” phase for security tokens. Security tokens can be used to attract capital to existing businesses, and help them grow. Much in the same way that an IPO can create a virtuous cycle for a company, capital raised via an STO could help companies in emerging markets grow rapidly.

Hoskinson thinks that we might be five years away from a STO market that resembles the ICO market we just saw in 2017. Early ICOs started out in 2014 and 2015, while real momentum came about in 2017.

While countries with established capital markets are currently leading the charge, Hoskinson believes that STOs will revolutionize cross border investment opportunities for emerging markets in places such as Mongolia and Ethiopia where IOHK has signed MOUs with local governments.

According to Hoskinson, though it may take a few years to develop the market to the point where it can facilitate global capital formation, the STO market will make the ICO business look like “small potatoes.”