The past 10 years on global financial markets were marked by nothing more exciting than the blockchain frenzy. What has first started as a geek game is now giving us a key to bring the hundred-year-old financial system to a whole new level. Today, blockchain gives us an opportunity to democratize capital markets and to reverse the financial pyramid. But whether blockchain tech will help us build a more fair distributed world, or the Wall Street pharaohs are going to win again — this is yet to be decided.
Gold fever of XXI century
The world still can’t get over the ICO supernova blast of 2017 with all its multiple fundraising success stories and to-the-moon 100x investment returns. Since the fundraising method inception in 2014, over 1400 ICO campaigns were held in total, having cumulatively attracted $20 billion by the end of July 2018, according to CoinDesk. On average, ICOs brought the token holders 12,8x returns from their initial investment versus (only) 7,7x in ETH and 4,9x in BTC.
Let’s be honest: it did sound too good to be true. And it is now long gone, as regulators showed up to the party with more or less strict regulations and even ban schemes. Unlucky startupers who haven’t managed to wisely use (or hide) the attracted sums of money now find themselves under the risk of investigation.
Despite the obsessive intentions of certain actors to restrict crypto in the first place, neither state authorities nor first-league market players failed to notice the ground-breaking (and money-saving) potential of the blockchain technology.
It’s still early days for the blockchain to become a full-fledged part of financial landscape, as many regulatory aspects are yet unclear; but one thing absolutely is. Blockchain has come to stay, and we are about to see its first steps on the long journey to reverse traditional financial markets. This first step already has its name: security token offering.
Security tokens are, basically, securities: traditional debt and equity instruments, issued in a digital form and accounted in a distributed (to one or other extent depending on the protocol) ledger.
Imagine you are a small (let’s say, cannabis) farm owner in the States, and you want to expand your business by acquiring another field. Before the security token offering, you would have two basic options:
- announce your ICO and try hard to invent the higher meaning for your issued “utility” token to make the whole fundraising campaign sound legit. Tokens can be exchanged for a fixed amount of weed via special application? One token represents one cannabis patch? Or it is considered as ownership rights already? Euh…
- go all the way through the traditional IPO process, which usually takes no less than 1,5 years of preparation and a lot of money. Like, A LOT.
With security token offering, the whole process is brought down to several compliance procedures, several buttons on your laptop — and people from all around the world can buy digital shares of your startup.
According to various estimations, the newly created security token offering (STO) market has all chances to reach $10 trillion capitalization in the next few years, significantly democratizing and simplifying the fundraising process for tech and other startups. In the longer perspective, it is aimed to forever change the way we attract investments. Even NASDAQ, third biggest American stock market, lately shared an opinion at their website that security tokens are set to take center stage in 2019.
The upcoming episodes of this article will provide an independent review of the existing fundraising markets — ICO, IPO and VC — and the way they will evolve with the introduction and mass adoption of the “next big thing in crypto”: security tokens. We will compare traditional fundraising methods with STO and come up with an outlook on whether this new instrument has the potential to truly become a game changer for the financial industry — and who might be against it.