Security Token Exchange: The Holy Grail?
We believe that Security Tokens, if fully-regulated, could completely resize and reshape the financial industry.
A regulated exchange that facilitates transparent and secure ownership in the primary market (Issuance) combined with instant, frictionless and anonymised transactions in the secondary market (exchange) is a game-changer of seismic proportions. Some industry insiders have already commented that a regulated exchange for security tokens would be like finding the ‘Holy Grail’ of blockchain.
Clearly there is plenty of paid-for hype surrounding security tokens on the belief that the first fully-regulated exchange would be the gorilla. History would argue differently and we would contend that the market potential is so large that even a 100 more players would not be able to dent the long-term demand for a multi-trillion dollar business opportunity.
At the same time our poor friends in the financial industry are not just hanging around waiting for some upstart to eat their lunch. On the contrary, this industry is like no other, as it is uniquely positioned — benefiting from built-in legal, audit, regulation and even technology. The lunch looks off-limits — only hors d’oeuvres on offer today I am afraid.
We predict that only a handful of first generation marketplaces will survive with the lion’s share remaining firmly within a re-crafted financial industry
As of yet, no regulator from a leading financial jurisdiction has approved a single firm to carry out the business of exchange services for security tokens
In this frontier landscape of blockchain technologies there are a growing number of platforms that purport to be regulated or indicate they have some regulation behind them — when in fact their regulatory permissions may be unrelated or they are merely part of a self-regulatory organisation which equally has no consequence.
Arguably, first generation security token platforms do a better job in selling the vision than actually building a functioning exchange — but that does not matter at this stage, because educating the masses, even with snake oil has a value. And as far as timing is concerned, it is not too late as the market appears to be polarised between technology and financial players. The former lacks operational experience to build and run an exchange and the latter is not known for their time-critical deployments. The main difference comes down to priorities —whereas technology contenders look to automate the automation, the financial contenders tend to be absorbed with legal and existing process minutia.
Enormous opportunity for security tokens with most of the competition still in the little leagues, it is far from being too late to join this party
Some early contenders include: Tzero, TokenFunder, The elephant, VRBex, Securitize, TrustToken, Harbor and Polymath — so far we are long on promises and short on substance. You tend to see simple processes (with nice colours and 3-D graphics) that explain away problems with diagram labels such as KYC process, legal validation or regulatory compliance. In reality, primary and secondary operational processes are complex and require a deep learning curve for the uninitiated. One needs to understand the language of the regulator and not the other way round.
Whether you integrate blockchain plumbing or not, managing a securities exchange is a scary business, as it comes with inclusive features, such as jail sentences and eye-popping fines. Building a blockchain-enabled exchange requires both financial and technology expertise and even then the road to success will be long and bumpy.
A simple overview of the end-to-end value chain would look closer to the following diagram.
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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the position of Kambio Ventures.