Looking at the world of token sales, we can see the crypto community has expressed divergent opinions on regulations stepping in the blockchain space. Some have taken it as an attempt to seize the decentralized core of the blockchain technology, others have already accepted it and wait for the regulators to adapt to the technology.
At first glance, security tokens may appear as a different creature when they’re really the intersection between blockchain and traditional assets. In this post, we’re going to shed light on some of the common misconceptions that have created the most noise in the cryptoshere.
I. Regulation is ruining the crypto space
The tokenization phenomenon is one of the factors that can cause the blockchain industry to mature and experience new heights in terms of market capitalization. A prerequisite for this is institutional level support, which always requires clear rules to make sure the risk is properly managed.
While some may view regulations as an inhibiting factor that stifles innovation, it actually instills and restores credibility in the blockchain space and paves the way for the compliant trading of tokenized assets.
Moreover, regulated tokenized securities will have a great impact on the perception of people outside the blockchain, making them feel safe & interested enough to dabble in the new technology.
Security tokens will yield a safer foundation that truly enables investors and companies to focus on innovating the industry. After all, none other than billionaire legend Warren Buffet has stated numerous times that the first rule of making money is capital preservation.
II. STOs guarantee success
Unfortunately, death and taxes are still the only guarantees in life. Conducting an STO is not a prerequisite for success, many companies outside the blockchain space have never seen the light of the day despite being legally compliant. The profitability of the company is still dictated by the ability of the team to deliver the promised returns.
From this point of view, investors can still be subject to scams and fraudulent business practices (although their rate will significantly decrease). As always, due diligence remains the cornerstone for every investment decision. Here too, investors should look for companies with proven track-records, solid business cases and live products.
III. Security Tokens have limited potential
This is a misconception that could not be further from the truth. The advantage of security tokens over traditional securities is the broader market exposure they will ultimately have.
SPiCE Venture Capital founder Carlos Domingo claims that security tokens “afford the owner the most direct and liquid economic interest” and “expedite the delivery of proceeds”. In this sense, every type of ownership or equitable interest can be tokenized. This has the potential to bloom into a multi-trillion dollar addressable market, as indicated earlier.
Security tokens have the potential to solve the problem of liquidity for both issuing companies, as well as investors, by making the process more streamlined. They will also address how stocks will be held around the world and address custody issues centered around ownership, opening up endless possibilities.
IV. Direct fractional ownership constitutes a security
A lot of people find it challenging to cross the line between what tokens are (and how they work) and what securities are. The fact that something is a token doesn’t change it at all, whether it’s a security or not
People buy comic books. They buy art. They buy rare cars. None of those things are securities, and the tokenization of something and splitting it into fractions doesn’t make it a security.
What makes it a security is the agreement between people. One of the key components of the Howey Test is whether a person’s work, as in CEOs, CFOs or COOs, is going to do something that will make someone else (the shareholder or the instrument holder) money.
For example, if you have a fractional Picasso and you believe it goes up, that alone doesn’t make it a security, and that would not be subject to the Howey Test. Collectibles are allowed, they’re not considered securities, you can trade them freely. You could certainly tokenize them and trade them, there’s no reason you couldn’t.
Just because something’s anticipated to go up in value doesn’t make it a security.
What the lawmakers are mainly concerned about is when someone is asking for money for something they are presenting as an instrument that yields a return. That’s where it really comes down to it.
V. The goal of Security Tokens is to decentralize company ownership
There are some administrative efficiencies using blockchain technology in the public markets. Settlement becomes faster & easier and cap table management is more accurate, but for shares in a public company, tokenization doesn’t offer transformative value.
Where it does offer however is the tokenization of private security interests, which today exist only on paper and very low liquidity. The purpose of security tokens is to take some of that liquidity from the public markets and bring it to private securities, unlocking tremendous value.
Tokenization is a great solution if:
- you’re sensitive to the cost of capital ✅
- you’re looking at a global investor base ✅
If you really care about the identity of the owner or if you’re not interested in a lot of liquidity, tokenization provides some of the incremental administrative advantages mentioned above, but it doesn’t bring transformative value because transformative value comes from liquidity.
Coinhatch is a state of the art token sale investor dashboard, whose goal is to make sure your investors benefit from a fully compliant solution that just works, with battle-tested security and uncompromising flexibility.
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