Recap from OST LIVE with Christian Kameir, Managing Partner of Sustany Capital — The State of Security Tokens

Christian Kameir, managing partner of Sustany Capital, joined us on OST LIVE to discuss the current state of security tokens. Kameir is an official member of the Forbes Finance Council and has been a tech entrepreneur since the dial-up days, leading the merger of two of the earliest internet service providers as general counsel for Nikoma, today part of the largest European ISP. His current focus includes tokenization strategies, smart contracts, and virtual asset investing.

Is 2019 the year of the security token offering? After the ICO boom in 2017, regulation began to emerge and there have been many debates over the classification of cryptocurrencies. In June 2018, the SEC officially declared that Ether is not a security. Division of Corporate Finance Director William Hinman has stated that “the Ethereum network and its decentralized structure, current offers, and sales of Ether are not securities transactions.” Ethereum aside, there have been many instances of utility tokens being classified as securities by the U.S. SEC.

In this post, we discuss security tokens in the context of the United States.

Utility Tokens vs Security Tokens

In its most basic form, a token is an object (tangible or intangible) serving as a representation of value that can be exchanged. A blockchain token is a token whose transactions are recorded on the blockchain. There is no consensus over a common definition for utility and security tokens, so theis definitions may change over time.

The state of Wyoming defines a utility token as a new form of property and a new asset class different from a security or commodity. In March 2018, Wyoming passed House Bill 70, the “Utility Token Bill,” that exempts specific cryptocurrencies from state money-transmission laws. Utility tokens may not be offered as an investment and have a specific use in a project’s ecosystem. One need not be an accredited investor to purchase, use, or hold a utility token. The most common types of utility tokens are Ethereum-based ERC-20 tokens. coinmarketcap.com currently lists more than 300 Ethereum-based tokens, including OST.

A security is a tradable financial asset such as debt instruments, derivatives, and equity. The legal definition of a security varies by jurisdiction. A security token is a tradable financial asset (most commonly equity) that is traded, verified, and recorded on the blockchain. The same regulations that apply to securities also apply to security tokens. The Howey Test, a 1946 Supreme Court case that resulted in a standard test to determine if something is classified as a security, also applies to cryptocurrencies.

Security Token Standards

There are many efforts to establish a security token standard, including ERC-1400 led by Polymath, EIP-1450 led by StartEngine, and SRC-20 led by Swarm. There have also been reports about a security token standard on EOS.

ERC-1400 is an ERC-20 and ERC-777 compatible security token standard intended to better enable regulatory compliance.

• The tokens are partially fungible.
• It allows forced transfers for legal action or fund recovery.
• It requires an issuer or a trusted third party to retain the power to transfer tokens on behalf of investors.
• It can deny transactions based on a set of requirements.

EIP-1450 is an ERC-20 compatible security token for issuing and trading SEC-compliant securities.

• It complies with SEC crowdfunding regulations.
• Registered transfer agents must be able to re-issue securities to investors.
• Lost access to an investor’s address or private keys can be recovered.
• Registered transfer agents can mint the lost securities to the new investor address and burn the old investor address.

SRC-20 is a standard for security tokens built on TokenD and the Stellar blockchain.

• Tokenized objects become assets that can be easily managed, governed, and traded.
• SWM, Swarm’s ERC-20, token must be used to pay for transactions.
• SRC-20 allows holders to manage assets through voting.
• It secures a right to any revenue streams from the asset.
• It complies with regulations.

Like the widely adopted Ethereum ERC-20 standard, a security token standard would allow all security tokens to run a uniform protocol function, making it possible for security tokens to be exchanged, providing liquidity. Kameir states that in technical terms, security tokens do not exist as of yet because there is no protocol live on mainnet today.

ICOs vs STOs

In cryptocurrencies early days, ICOs involved the sale of tokens to retail (non-accredited) and institutional (accredited) investors. Some projects sold tokens as a financial investment and other projects sold tokens to be used within the project ecosystem. The SEC now considers nearly all ICOs to be securities sales, and they are illegal unless registered and compliant with SEC regulations. It is possible for a token offering to be exempt from being a security, however, it may be limited to only selling to investors outside the U.S., or selling only to accredited investors.

A security token offering is the sale of securities in the form of blockchain tokens that can be purchased only by accredited investors. An ICO is usually the sale of a utility token that is exempt from SEC regulations and which anyone can buy, sell, hold, or spend. However, some utility token are classified as securities and have to comply with SEC regulations. Confusing, right?

Why Security Tokens?

any regulations and compliance requirements come into play when selling a security, including Know Your Customer, Anti-Money Laundering, Counter Terrorist Financing, and accreditation. A blockchain-based security token can allow for a transparent, verifiable, and reliable record to track ownership. In addition, a security token can provide divisibility and liquidity via secondary market exchanges. Security tokens have potential in many industries, such as real estate, in which a property can be owned by several token holders. The next milestone for security tokens will be a fully compliant protocol standard on mainnet.

Coming Up Next on OST LIVE: Nicolas Van Hoorde

Nicolas Van Hoorde is the CEO of Delta, a free Bitcoin and cryptocurrency portfolio tracker app. The app tracks coin prices and market charts, providing alerts from several blockchain projects, including OST. Van Hoorde will discuss trends in crypto, his success with Delta, and growth strategies for blockchain-based projects. Be sure to subscribe to our YouTube channel to watch live and meet community members in the live chat. You can also find OST LIVE on your favorite podcast app, including: iTunes, Alexa, Spotify, CastBox, Google Play, TuneIn, Stitcher, PodBean, Overcast, and Player FM.

About OST

OST blockchain infrastructure empowers new economies for mainstream businesses and emerging DApps. OST leads development of the OpenST Protocol, a framework for tokenizing businesses. In September 2018 OST introduced the OpenST Mosaic Protocol for running meta-blockchains to scale Ethereum applications to billions of users. OST KIT is a full-stack suite of developer tools, APIs, and SDKs for managing blockchain economies. OST partners reach more than 300 million users. OST has offices in Berlin, New York, Hong Kong, and Pune. OST is backed by leading institutional equity investors including Tencent, Greycroft, Vectr Ventures, and 500 Startups.