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Current state of STO market: notes on the sidelines of Security Token Industry Launch event in NYC

“Watching panels on STOs is like eavesdropping on a group of 9th graders talking about sex. A lot of talk, very little real experience, but a lot of enthusiasm about it happening in the near future”, — Dave Hendricks (Vertalo)

Special thanks to Jor Law (VerifyInvestor.com), Rika Khurdayan (Dilendorf & Khurdayan), Ivan Podmasko (Scrypta) for helping prepare this article

On 5th October, the bell rang to mark the official Security Token Industry Launch in NYC. The high level event, taking place in Conrad Hotel NYC and sponsored by Merrill Lynch (Bank of America group) among others, brought together leading Wall Street finance & legal professionals and visionaries, united by (a bit mystical) ideas of security tokenisation.

The event was opened a night before by a networking cruise around Manhattan: a metaphor clear enough to say “we’re all in the same boat”.

Security Token Industry Launch was one of the most attended events in NYC crypto space recently, with such excitement only otherwise seen at the Consensus conference in May. Consensus, however, failed to meet general to-the-moon expectations. For the past few months, the industry has obviously lacked enthusiasm as ICOs lost their rock star status. Now, security tokens seem determined to get the party going.

The event organiser — Security Token Academy — has done excellent job bringing in industry experts and organising informative panels on all aspects of the new intriguing STO market: regulation, technical foundations, issuance and secondary market.

The official part was opened by a Wall Street perspective from a former NASDAQ Vice Chairman David Wield, who covered the current state of the technology adoption. Among other highlights, Fabian Vogelsteller (creator of ERC-20 standard) presented technical foundation and liquidity promises of security tokens. Other speakers included CEOs and founders of the most advanced industry players: Securitize, Polymath, tZero, Swarm Fund, Neufund and others.

Investor panel with Ryan Alfred (Framework), Stephen McKeon (Security Token Academy), Carlos Domingo (Securitize), Gregory Keough (Finova)

All panels agreed on one thing: Security Tokens might still be in their early days, but they are here to stay.

Lately, Wall Street whales have been showing close interest in the topic, which resulted in some serious institutional acquisitions. For example, Goldman Sach-back Circle (whose founder Jeremy Allaire also gave a speech on the event) this month announced acquisition of SeedInvest to focus on security token issuance & trading.

However, despite the growing global hype around the topic and sincere enthusiasm of the participants, a question rose in almost every discussion: what exactly is a Security Token? For now, everybody has their own perspective. However, not for long as the industry will soon gain consensus on this point.

Battlefield US: a Saga of the Year 2018

United States took up on the role of the main STO battlefield, as the market seems to be mature enough to embrace security tokens as a rightful fundraising method. The whole ecosystem is now standing still waiting for signals from the regulator.

While SEC has almost zero tolerance to the concept of utility tokens, significant lobbyist battles are now taking place in Senate and other legislative battlegrounds. The nation is trying to make up its mind on what a security token is, after all, — and what to do with it.

What promises STOs hold for democratisation of the market?

  • For those unfamiliar with financial markets, who never had a broker or a terminal in Saxo Bank, it’s hard to imagine how bureaucratised and complex the current market is. Blockchain allows the decrease in the number of intermediaries and simplifies market access to people with small funds: imagine being able to buy 1/100 of Apple’s stock.
  • Blockchain and its distributed ledger attributes make it possible to migrate the record of dealings to a more transparent and credible basis. Some experts believe that in three years’ time we will see a massive shift from traditional off-chain electronic book-entry, to a recording of ownership entirely on the distributed ledger.
  • Smart contracts and their combinations in protocols will enable automated trading and other operations with securities. Such exchanges will be open 24/7. No more 9 to 6 on workdays.
  • Cost reduction: a recent research shows the cost benefits of an STO in comparison with traditional private placement.
  • Stablecoins also provide an exceptional opportunity to create instruments to protect investors from fiat & crypto volatility.

Participation of such heavy-weight entities as NASDAQ subsidiaries alongside with colossal advantages of the technology leave no doubts that we will sooner or later see STO market growth.

To make it sooner, we have to be efficient in overcoming multiple issues.

Waking up from the utility token dream

Security Token Offering (STO) differs from already the notorious initial coin offering (ICO) concept in several core features:

  • Essence

Utility tokens issued via ICOs are designed to serve as an internal currency to pay for particular services within an app.

Security tokens are explicitly an investment instrument (equity, debt, other).

However, few ICO investors have purchased a project’s tokens to benefit from its future services. They do so for short to mid-term profits (surprise!). This has lead many projects to inventing a contrived functionality for their tokens, while in fact not needing blockchain at all.

  • Investor rights

Utility tokens do not provide investors with any rights (except for use within an app). At the end of the day they can only be traded on a crypto exchange.

Security tokens represent particular ownership & revenue distribution rights, defined by smart contracts. Investors know for sure, what they get for their money.

  • Legal

Utility tokens are not regulated (at least not by typical securities regulation) — the best a project can do is to try and convince everybody that people buy its tokens just to use them within an app. True story.

Security tokens are intended to be fully compliant with existings securities legislation, which eliminates the unpleasant possibility to be crashed by SEC or a corresponding institution.

That is not the full list — but the dominance of STO advantages over ICOs is obvious. Like The Eye of Sauron, financial world is waking up from its utility token dream and turning its gaze towards security token offerings.

Marrying Wall Street legacy with new technologies

Right now we are witnessing how STOs merge with traditional financial instruments, bringing in accredited investors only and limited secondary trading, multiple KYC / AML / Terrorist / Sanctions checks.

Right now, VerifyInvestor.com’s platform (one of the conference headliners, recently acquired by Overstock’s subsidiary tZero) is one of the few companies who already provides these actual services.

After multiple talks with Wall Street & blockchain leaders, we have come to point out three key approaches to security tokenisation:

  1. Security Token is a digital security

Adepts of this approach regard security tokens traditional securities, but issued on distributed ledger.

It was supported on legislative level by Delaware law back in 2017, which has allowed companies to maintain their list of shareholders and other corporate records using blockchain technology. It is currently applicable for private offerings, but there are some yet unsolved problems connected with entering a secondary market. There are still questions to be answered (how to maintain a list, and who will register changes) and a need for professional compliant services.

Professional SEC-registered market players are starting to emerge from traditional financial industry to provide compliant tokenization services. A recent successful case of ownership stake in St Regis Aspen resort being tokenized by Elevated Returns and sold via Templum Markets represent an example of structuring the deal as a traditional single asset real estate investment trust (REIT).

2. Security Token is a digital asset with limited properties of tradition securities.

3) Security and utility tokens both have their own role in the financial world of the future.

The third approach suggests that we cannot ignore utility tokens — they still exist, even though in reality only 2% of all token offerings constituted true utilities. SEC has already acknowledged the two top cryptocurrencies Bitcoin and Ethereum as non-securities.

Two of Evercity’s projects are utilities by all parameters, and they are more than real.

Technology foundations panel moderated by Jor Law (VerifyInvestor.com) with Mason Borda (TokenSoft), Rachel Lam (Hedera Hashgraph), Alec 0age (Zeppelin)

Applying STO today

Today security token offerings can be applied for:

  • Tokenized funds

This is one of the most popular cases by far: tokenization introduces unprecedented liquidity promises for venture funds, which in traditional format require 7–12 years before the exit alongside with high entry barriers for investors.

SPiCE VC fund, whose co-founder Carlos Domingo was a speaker on the Security Token Industry Launch event, implements blockchain into fund management. One of SPiCE portfolio companies is Securitize — advanced platform for security tokenization.

By the matter of fact, Carlos suggested that “digital securities” term should be applied instead of “security tokens”.

  • Equity

At the moment, there is no precedent of security tokens being 100% equal to equity. Almost all countries require a stock issuer to keep a registry of shareholders, which includes real name and address, rather than simply a cryptocurrency wallet.

If blockchain is accepted as a legal way of shareholders’ personal data storage, soon we might witness an example of a security token being equal to real equity. But at the moment, we are still not there.

  • Debt

In September 2018 Austrian government has announced its intentions to issue $1,3 billion worth of bonds on Ethereum public blockchain.

  • Real estate

Real estate community is excited (maybe even more than everyone else) about the advantages of asset tokenization. Imagine being able to “short Manhattan” and “long Brooklyn”, — example suggested by Stephen McKeon in his Security Token Thesis.

Last week Fluidity/AirSwap and Propellr teams announced that they will tokenize $30 million worth of luxury real estate on Manhattan.

Elevated Returns (invest-management firm with a focus on real estate) has closed a $18 million deal for Aspen Digital — offering of tokens that provide investors with a small ownership stake in St. Regis Aspen Resort.

There are multiple potential opportunities around being able to own a small chuck of commercial real estate, for example, — but even being so seducing, they are still meeting some obstacles.

  • Migrating traditional stocks to blockchain

This instruments allows to democratize access to existing stocks via selling fractions of a stock for any sum.

  • Fine art

Last month 31,5% of Andy Warhol’s masterpiece «14 small electric chairs» was tokenized and sold to 100 accredited investors.

Art context is another good example for how security tokens provide liquidity to previously illiquid assets, enabling smaller investors to participate in sales.

The technology potential is not limited to these examples.

We are still at the very early stage of security tokens adoption by the industry, and the perspective are immense.

Security Token Industry Launch participants agreed: we should not wait for SEC to change regulations — we have to convince big players and move the market.

Conclusions

We have met multiple platforms and early technology adepts on Security Token Industry Launch event. Sailing on a boat around Manhattan, the industry convinced us once again: security tokens are rad. And they are here to stay.

Communication with investors and funds from both sides of the ocean lead us to a clear verdict: security tokens and stable coins are the hottest financial topics right now. The majority of investors is still waiting for markets to stabilize — but they are ready to invest in real projects. And yes, equity — not utility tokens.

Other markets, such as China, Japan, South Korea are showing a live interest to the US expertise. United States already do have tokenization experience, but it is still not grown up enough to be called an industry. The role of legal providers and other partners is yet too significant, costs are yet too high.

However, current leaders took into consideration the diverse (and not always successful) experience of the first project wave, and have put protection of issuers & investors on the pedestal.

Because at the end of the day, what we are all looking for is…security.

Authors

Alexey Shadrin, CEO and Founder Evercity

Masha Vyazemskaya, Communications at Evercity

Evercity carefully selects best blockchain, IoT, Artificial Intelligence, cleantech, biotech projects in alignment with UN Sustainable development goals helping them to find further investments and deployment in smart cities mainly in Asia- Pacific region and the rest of the world.

Security Token Accelerator is an Evercity portfolio company, an end-to-end platform for compliant issuance and investment in tokenized assets (equity/debt) of smart sustainable city startups with a multi-layer investor protection.

Security Token Club (International): https://t.me/stoaccelerator

Security Token Club (Russian): https://t.me/stoclub

To invest in tokenized assets of smart city innovations, contact us at sto@evercity.io

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