The State of U.S. Securities Tokens, Q4 2018

Cheat Sheet: It’s the end of summer. What is the state of the U.S. tokenized securities market?

So far in our STO Primer Series, we have explained “how we got here” with respect to blockchain technology, the historical context of tokenized securities, why you should “even bother” with STOs and what they could do for real estate. This week, we’re finally ready to talk about the here and now for the security token ecosystem. In this broad overview, research lead for New Alchemy Capital Seline Jung describes the current state of the Security Token market for US investors.

If you attended any blockchain conferences this summer or subscribe to a crypto newsletter, you may have noticed that “Security Tokens” are starting to take the center stage of discussions and debates related to blockchain technology, the tool that made Security Tokens possible. How to trade tokenized securities and what they can be used for (such as real estate) are some of the popular topics of conversation — and that is predominantly the realm in which Security Tokens exist today: Just talk.

That is because this year was construction time for the security token ecosystem, with it still being very much underway. Traffic is not flowing yet, and we still do not know exactly what this ecosystem will look like once all the roads, highways and bridges are built. There are many opinions on what it should look like, including some which contradict each other, so it’s prudent to expect that not everyone will get the tokenized future they want. The emerging Alternative Trading System (ATS) space, for example, may end up being a head-to-head situation between tech teams and traditional finance players.

The system may be in the process of being built, but that doesn’t mean there aren’t active opportunities for investors willing to bear the risk. Understanding that risk requires a broad view of those varying opinions and the infrastructure being built. To help, here’s a cheat sheet for the current state of the US tokenized securities market:

Opinion Roundup: The Bullish vs. the Bearish on Security Tokens

BULLISH:

  • Trevor Koverko, the founder of the security token platform Polymath, told Coindesk that “security tokens will save crypto” by decoupling from “risky” assets like Bitcoin that are not backed by a physical asset. “It’s about yielding to the man,” Koverko said.
  • Darren Marble of CrowdfundX published a post on LinkedIn in early August 2018 stating his observations on the market, including that there is a big need for full-service investment banking around security token offerings (STO). Marble however does note that in his opinion the majority of Reg A+ STOs may fail due to the exemption not being fit for startups with no customer base.

BEARISH:

  • Meltem Demirors, strategist at CoinShares, said in an episode of Laura Shin’s podcast “Unchained” that although she’ll be advising many firms on them, she doesn’t find security tokens particularly exciting. She tweeted that institutional investors are not interested in investing in assets that are “possibly worse than” what they already have. Demirors says she doesn’t see any asset classes that will be displaced in order to invest in security tokens.
  • There’s plenty of general security token skepticism out there. Angus Champion de Crespigny, a blockchain advisor and investor, wrote in a blog post that enterprise technology cannot support the needed infrastructure and gives the increased liquidity thesis the side eye.

Recent Security Token Offerings

  • Indiegogo announced in late August that it is issuing a token that will entitle investors to an ownership stake in the St. Regis Aspen Resort in Colorado. “Aspen Coin” owners — who must be an active user of Indiegogo — will own tokens that represent a share of common stock in the resort, and will be able to purchase that investment using bitcoin, ether or U.S. dollars. This is one project moving towards tokenizing securities in real property, as we covered in this piece on how tokenizing real estate can create wealth by destroying fees.
  • An electric scooter startup called Spin announced in late June that it is “finishing up” a security token offering of 125 million USD to entitle investors to a portion of company revenue.
  • Investment crowdfunding platform StartEngine has filed a Reg A+ form with the SEC to conduct an STO of up to 10 million USD in bitcoin and ether. StartEngine is one of several companies looking to Reg A+ for their STOs. So far none have received SEC approval. Not all are fit to do so, however: the difference may be made in whether the filing company is already an established one, armed with an underwriter and auditor.
  • CoinMint announced a partnership at the end of August with Securitize.io to tokenize fractions of Bitcoin mining power. While Coinmint builds a new 1,300-acre mining site in upstate New York, investors are expected to receive daily payouts.
  • And this week, Blackmoon Financial Group launched its “Prime Meridian Capital token (BMxPMR),” a token which tracks Prime Meridian Capital Management’s real estate lending fund.
  • New York-based real estate fund Leaseum Partners announced Sep. 5 that it is teaming up with Tokeny to launch a $250 million tokenized real estate portfolio.

Security Token Offerings: In Charts

Based on total numbers of token projects filing Form D exemptions for their sales, it is clear that there is burgeoning interest from issuers and investors in securities offerings for blockchain projects.

Concurrently, the rate of blockchain- or cryptocurrency-related regulatory actions around the world related is accelerating, such as the amount of countries with explicit bans on the use of cryptocurrencies.

A Regulation D notice filing with the SEC provides information regarding an exempt private placement offering of securities. Form D filings related to crypto or blockchain startups spiked in December 2017 during the Bitcoin boom, and have steadily risen since. This data is complete up to June 2018. Source: EDGAR
The vast majority of projects filing the Form D notice with the SEC are incorporated in the state of California, followed by New York and then the Cayman Islands. This data is complete up to June 2018. Source: EDGAR
The legal status of cryptocurrencies around the world based on implicit or absolute bans. Countries not shaded either blue or brown do not have laws that ban cryptocurrency. The chart shows that most countries do not have an implicit or absolute ban of any sort on cryptocurrencies. Source: The Law Library of Congress.

The State of Alternative Trading Systems

What is an ATS?

An alternative trading system (ATS) is a trading venue approved by the SEC for trading without having to register as a national securities exchange. In theory, an ATS is important for investors in security tokens due to the fact that it can provide access to an immense amount of liquidity — or so they say. One type of ATSes are colloquially known as “dark pools,” which just means that users can place orders without publicly displaying the size and price of the order to other participants. All ATSes comply with SEC and FINRA requirements, including that it must register as a broker-dealer first and file an initial operation report before beginning operations. ATSes must also be approved by FINRA.

The Summer 2018 ATS News Roundup (USA and Elsewhere)

  • Coinbase in June announced that it is on the path to operating a regulated broker-dealer and receiving approval to implement an ATS
  • SharesPost (broker-dealer and ATS) and OKCoin announced a partnership in late July in which OKCoin will provide access to U.S. investors for SharesPost’s security token offerings through OKCoin’s registered liquidity and settlement network.
  • Bittrex and RIALTO.AI announced in late August a partnership to expand Rialto’s ATS to support digital securities (pending approval).
  • The Gibraltar Stock Exchange is applying for a new license that would enable it to list and trade security tokens.
  • OpenFinance soft-launched its ATS for security tokens in August. It says it is currently conducting trades on its platform.
  • Switzerland’s stock exchange in early July announced that it’s building a fully-integrated platform for trading, settlement and custody of digital assets.

And undoubtedly more to come…

The Future of the ATS landscape

The main reason behind the excitement surrounding ATSes is the prospect of fast trading and large volume. However, it may take a significant period for the market to mature. For instance, most security tokens which have already been sold were issued under Regulation D exemptions, which generally require a 12-month lock-up period before trading may occur.

Even after such trade restrictions pass, what the trading habits of security token purchasers and demand is from other investors is (are?) not yet known, so some of these services which are now in development may face liquidity or operating capital issues in the long term.

What is certain about the burgeoning ATS market is variety. Some services might require the use of a proprietary token for paying fees; some may be directly affiliated with brokerages like E*Trade. Some will attempt to be “one-stop shops”, firms that offer end-to-end trading, settlement, custody services, investments, and even issuance advisory for security tokens.

Because of the range of services these ATS projects aim to provide, it is incumbent upon investors to do their own due-diligence into the capabilities, reliability and credentials of any system they use; this includes checking if the proper registrations with regulators have been filed, reviewing terms of services, and sometimes reviewing code. If you have any questions about the ATS and tokenized security landscape, we’d love to help! Reach out to hello@newalchemy.io.


This is Part 5 of a Security Token Primer series.

At New Alchemy, a leading blockchain strategy and technology group, we are preparing for the tokenized future of securities by partnering with a cutting-edge securities broker-dealer, Entoro Capital. Get in touch with us at Hello@NewAlchemy.io or contact us to learn how our token technology and services suite can work for you.