The World of Security Tokens
16th of October 2018
Utility Versus Security Tokens
As our world becomes more complicated, we begin to realise the need for innovation to create efficiencies and assurance in how we transact and invest. There has already been a lot of light shone upon ICOs and utility tokens, so we here at Huobi Australia got to work in collaboration with Nugget’s News, to organise an event which showcased the World of Security Tokens to crypto and blockchain enthusiasts.
The event began with our CEO Adrian Harrison welcoming the space and introducing speakers for the night which included:
- Jason Lee — Expansion Director at NEM.io Foundation for Australia and New Zealand
- Alex Saunders — CEO and Founder of Nugget’s News
- Rick Klink — Executive Chairman at Malta Digital Exchange
- John Bassilios — Special Counsel at Hall & Wilcox and
- Dr. Prash P — CEO and Founder of Caleb & Brown who joined the four speakers in a QA a panel.
Some key insights from our speakers can be found below.
The Current State of the Blockchain Space — Jason Lee, NEM Expansion Director
Jason deconstructs the current state of the blockchain space.
Jason began by referring to the times of innovation during industrialisation in the 1800s. He highlights how the people of that time were encouraged to be more inventive. With the analogy that people of that time were able to recognise the potential of electricity as a source of energy, is the same with security tokens having the same potential to electrify us in the same way industrialisation has made for us.
Overall, people are now proactively looking into security tokens from a legal and regulation perspective.
He defined security tokens with a blanket statement: security tokens offering are cryptographic token within a regulatory framework which is fractional ownership of an underlying asset. Security tokens are going to be a big part of our world. There are many security tokens offerings that have raised a lot.
This space in Australia is growing. There are companies across Australia who are looking to conduct STOs. We have seen:
- Over 90% of ICOs failed in 2016 and almost a quarter are scams.
- Tim Draper believes that the crypto market is going to be an 80 trillion dollar market in the 15 years.
- Moves in developing a national blockchain under Data61.
Some may ask, in regards to the development of STOs, what stage are we at? Opinions range from “it’s a baby” and from “we’re not even pregnant yet”. The truth is, the overall crypto and blockchain space is so new and it is developing rapidly with people brimming with ideas. The moment that the security tokens become available on the secondary market and we can all play with it, then that is when it actually works and we know that we have made it.
Jason believes that security tokens are going to be in the course of the future. It’s fast, global, 24/7 and rapid adoption. The only potential negative highlighted by Jason is the limitation in which regulators place upon security tokens. There are many platforms who are looking into this, New Economy Movement (NEM) is one of them. It is important to observe trends and conduct own due diligence. If we can fractionalise a number of assets and properties, it will provide a lot more liquidity in our personal life. Instead of banks giving us loans, we can imagine a world where we can have peer to peer business loans.
The most important thing is that we properly define what is a security token and how can we provide access to everyone.
Introduction to Security Tokens — Alex Saunders, Nugget’s News
Alex believes that the cryptocurrency space always needs a form of regulation.
The idea of investing, trading and staking cryptocurrency would not be as easy as one thinks. It is believed that a lot of blockchain projects will fail, not necessarily because they are scams, but because that they are facing real life issues. Thus, having more regulation in this space will allow for more accountability and will help mitigate the issues faced in this space. The issue of raising money in Australia, is that there are not a lot of venture capitalists. And where there are, they tend to want to have a lot in the say and many of these startups do not like this idea. The balance between who owns the funds needs to be agreed upon. Having the regulation in place will be a very important next step.
Alex suggests that if we move back to the model of only getting funds from VCs and banks, then the questions that we will get a lot from the community are:
- whether they can participate?
- And, why can’t projects just conduct an original IPO?
Alex emphasises that we need to remember the fundamental items that comes along with using blockchain technology — which is decentralisation.
Overall, Alex holds that it is important that we have nice balance between regulation and decentralisation. Even though people want a shift away from centralisation, it is still vital to create that balance. Alex believes that security tokens have a natural maturation in the cryptocurrency space.
Security Exchanges and Potential of Security Tokens — Rick Klink
Rick explores the role of a traditional exchange. Exchanges were meant to help companies raise capital. If one desires for a company to grow, then there needs to be a good capital market. The utopian goal would be to raise money with the lowest possible price, utilise this fund to create more innovations and to feed back the ecosystem. He highlights that this is how a group of strong companies builds a strong economy.
However, Rick believes that this is not the case at the moment. He concludes that today’s traditional securities exchange is broken because there’s little innovation for the past 30 years and it is overall very expensive and inefficient. Rick underlined the centralisation in our current world by referring to the 13 public exchanges that are essentially owned by three public companies. Another problem he referred to was that it costs five times more to settle a trade than to place it in Australia.
Rick trusts that there has to be a better way with stock broking.
Rick defines the stock trading problem of today: the money that should have come around and be invested back to keep the ecosystem running, is not happening. He believes that the whole process needs to be reengineered in order for the whole process to be sustainable and fair. Rick emphasises how blockchain technology has the potential to do that. The smart contracts enabled by blockchain technology could facilitate the voting and trades. There are a lot of innovations and potential to make this space fair and efficient.
Overall, Rick believes we are making good moves in this space as he outlines the US’ jobs act having many similarities with Australia’s equity crowdfunding (i.e., we can raise money without going public). But the problem is that we need a solid secondary market to trade.
We want to make sure the system is regulated, transparent and more efficient. Rick believes that we need to return to our premise: we are here to raise money from exchanges, help investors raise money and help companies to grow. But the current ecosystem is very complex since we have to move fiat around with central banks.
A lot of these processes can be made more efficient with the aforementioned blockchain technology and security tokens.
The Law of Security Tokens — John Bassilios
John provides a general overview of the Australian law surrounding STOs.
He outlines the key differences between ICOs and STOs. ICOs refers to the selling of tokens without selling the company’s equity. However, STOs allow a certain amount of equity to be purchased via Security Tokens which may or may not provide rights to voting and dividends.
John also touched on the origination and the need of security tokens. Since the inception of ICOs, a majority of blockchain projects have ultimately failed. Which is a problem for investors since it is argued that regular utility tokens have no intrinsic value and investors do not have rights even if they have bought and held these tokens. Thus, the need for security tokens. STO can be viewed as being more secure since it is necessary for it to comply with the overall regulatory framework and provides clarity to investors’ rights.
A brief overview of the Australian law is given.
The messages that our audience took away was that it is important that we properly define security tokens and make the process efficient and transparent. That the cryptocurrency space will always need a form of regulation to keep a right balance of security, accountability and responsibility. And although this regulation means that it will dwarf the speed of security token offerings available compared to its ICO counterpart, it may just be the thing that makes it more appetising for investors as a legitimate investment option as their rights are more defined.
To view the full session, jump onto: https://youtu.be/ZfyjrUl-aLw