Security Tokens: How Wall Street and Blockchain Will Collide
Traditional and institutional investors continue to sit on the sidelines as blockchain tech scrambles to prepare for their supposedly impending arrival; but while some traders from traditional markets may personally dabble in the crypto-sphere, several factors strongly imply that we are still nowhere near Blackrock putting their clients’ money into Dogecoin.
As the blockchain tech industry matures, regulatory guidance looms enigmatically on the horizon. Until clarification surfaces, most investors are weary of investing into cryptocurrencies and tokens. An interesting new trend, however, could point to a different direction that traditional capital could be heading towards:
Venture Capital Surges Into Crypto Startups —
— Bloomberg (https://www.bloomberg.com/news/articles/2018-03-26/icos-can-wait-venture-capital-surges-into-crypto-startups )
Venture capital has been flowing into blockchain startups at an accelerating rate, seemingly showing that investors are more interested in owning a stake of the companies who come up with these technical innovations than speculating on the value of the utility of new tokens. Morgan Creek, a hedge fund managing more than a billion dollars worth of assets, has recently acquired Full Tilt Capital, a firm that has pledged to create a fund exclusively for investment into blockchain related startups. Only one of many such deals surfacing, the flow of money into blockchain tech seems to be happening in parallel with a similar flow of talent into the sector.
This idea of wanting equity is even becoming a subsector of the cryptocurrency market via tokenized securities, or “security tokens”, which replace stocks, real estate, and other securities with tokens on the blockchain; thus improving efficiency, liquidity, and transparency. These asset-backed tokens aren’t limited to blockchain related ideas, and could even prove to be a better way of doing business on wallstreet than the means available today. It seems fitting that this development in fintech could grow to improve fintech itself.
One proponent of this idea is Bruce Fenton. Bruce is a former stock broker of 20 years, served as Executive Director of The Bitcoin Foundation in 2013, is a core contributor to open source project “Ravencoin”, and is the CEO of Chainstone Labs, a company that specializes in tokenized securities. He argues that publically traded securities are riddled with inadequacies having to do with an overabundance of third parties and inefficient systems.
He also argues that while you will always have to trust the issuer, security tokens could eliminate the needlessly entangled infrastructure of these systems. He has even gone so far as to prove that it is already possible to create legally recognized securities on Bitcoin’s blockchain, creating a compliant share using his own company via livestream:
The benefits of tokenized securities are immediately apparent as they can be easily moved and independently controlled, whereas with traditional securities you are restricted due to verifications and bureaucratic hangups involving third parties. As it currently stands, it can take days to move assets, and an entire system of administration exists just to tell you what you do or don’t own. Could blockchain technology really be the answer to these issues?
Considering that investors seem more interested in equity than speculative utilities, it might not be a surprise that even traditional investors like Kevin O’ Leary, of Softkey and Shark Tank acclaim, think it might be possible. He hopes to help negotiate the sale of equity in a well-known New York City hotel via a coin offering:
“I’m a believer that asset-based coins will replace small-cap stocks,” O’Leary said. He added that ICOs backed by real assets would allow companies to circumvent much of the Wall Street middleman apparatuses, such as the army of investment bankers and venture capitalists, and sell directly to would-be stakeholders.
— CNBC (https://www.cnbc.com/2018/03/19/kevin-oleary-new-york-city-hotel-hopes-to-launch-400-million-dollar-coin-offering.html )
The idea of a security token offering, or “STO” , is also something that Polymath, a security tokenization platform, is betting big on. Initial coin offerings, or “ICOs” have already begun to eclipse conventional means of fundraising, and it is their hope that the regulated, securitized equivalent to those offerings will be even bigger than that:
“The next mega trend in crypto will be assets migrating to the blockchain in the form of tokens…pretty much any security is better denominated as a token than traditional forms of ownership…This is the future, not share certificates in filing cabinets.”
— Trevor Koverko, CEO of Polymath Inc. (https://www.icoinvestor.tv/info/polymath-ceo-trevor-koverko-security-tokens-are-the-future-1440/ )
Trevor predicts that by the end of the year security tokens will have already dwarfed the current cryptocurrency market cap, positing that it would only take one major fund to overshadow the market entirely. There are a slew of security tokens being built on Polymath’s ST-20 protocol that are expected to become available throughout the summer.
The first major wave of security token offerings has already begun; starting with the launch of Nexo, a crypto-backed instant loan platform by Credissimo; a decade-old fintech company that has already processed over one million loan applications. The asset-backed NEXO tokens are filed as Reg-D securities (*), pay dividends to holders from profits of the Nexo platform, and offer several utilities; including discounts and the ability to use them as collateral for loans on their platform. Nexo launched their security token this week, and is expected to list on regulated exchanges soon. They also seem to share the vision of blockchain-based fundraising disrupting wallstreet, estimating that tokenized assets will account for 80% of the entire “digital assets market” by 2025.
Other upcoming security token offerings include that of tZero, subsidiary of Overstock (OSTK), which will support the listing and trading of security tokens in addition to software-based securities lending. tZero tokens will act as equity in the exchange itself. As security tokens like tZero, Nexo, and those built on Polymath’s platform become more widely available, we will finally be able to get an idea of exactly how disruptive this new paradigm could be.
As the blockchain tech industry and wallstreet do collide, some things that we accept as daily convention could very well change fundamentally. Not only could security tokens attract traditional investors via regulatory compliance and the offering of real assets, it might even offer a new way for trading and settlement to work altogether. As for whether or not these things will actually pan out as planned is the subject of heated debate, and while the concept is still theoretical, we are nearing the point of realization; and we won’t have to wonder for much longer.
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(*) — Verbiage has been changed; where Nexo was previously referred to as “SEC compliant”, it now more accurately specifies their SEC filing. Regulation D filing does not necessarily mean that all required compliance processes have been properly executed. Investors should be weary of any claims of “SEC compliance” as to date, no offerings have been directly approved by the SEC, and it is a common misleading claim that could be used to entice inexperienced investors.