Analysis Suggests 94% Chance That Security Tokens Will Take Off

Problems in the financial industry (such as operational and compliance inefficiency, cost of capital raising, exclusivity, and illiquidity) that could be solved by Security Tokens create three sources of uncertainty:

1. How fast will tech provide better solutions?

Worldwide spending on blockchain is expected to grow to $11.7 billion by 2022 and the financial sector accounts for 60% of the market value of blockchain. Further, around 90% of European and North American banks were exploring blockchain in 2018.

Clearly, it’s well-known that blockchain will provide better solutions for the financial industry, but it’s uncertain how fast this will reach mass adoption.

2. Will consumer behavior change?

Another uncertainty is how consumer behavior will be affected. Many users care about speed and trust but we cannot assume they’re willing to take a hit to User Experience for new types of financial products. Will that change?

3. Will governments act?

Finally, with billions of dollars of value in dis-intermediated, government-less technologies, regulators are pressured to respond. Will governments attempt to regulate blockchain and Security Tokens? Can they?

Let’s map out these uncertainties. Traditional financial players see two major uncertainties:

1. Will Security Token protocols and liquidity reach maturity?
2. Will Security Tokens be favorably regulated (as securities) or unfavorably regulated (as crypto)?

Here, we define each as axis as one of these two uncertainties:

The intersections define four possible futures:

• Business as usual is self-explanatory —Security Tokens remain immature and the regulations are unfavorable. In this future, traditional securities will reign king.
• Security Token Paradise describes a world in which Security Tokens are regulated as securities and protocols and liquidity reach maturity. In this world, companies must enter the space to remain competitive.
• Security Tokens are a serious threat speaks to a future where liquidity and protocols reach maturity: it makes sense for traditional companies to enter the space.
• Regulation A Plus for tokenization depicts a scenario where security tokens are favorably regulated as securities.

Now let’s assign probabilities to each dimension, by asking a few questions:

What are the odds that Security Tokens will be competitive with securities in the next five years? My subjective opinion is 60%. Currently, the main problems are a lack of liquidity as we are still in an infrastructure-building and adoption phase, and a lack of agreed upon protocols, which international standardization bodies are working to solve.

What are the odds that Security Tokens will be regulated as securities? My subjective opinion is 85%. This is actually a conservative estimate. Think about it: Would governments let billions of dollars fly under the radar?

With these numbers, let’s crunch the probabilities for each outcome:

• Business as usual comes out to 6% (1–0.6 * 1–0.85)
• Security Token Paradise is 51% (60% * 85%)
• Security Tokens are a serious threat is predicted to be 9% (0.6 * 0.15)
• Regulation a plus for tokenization is 34% (0.85 * 0.4)

Three of these outcomes are more favorable than not for Security Tokens, with a cumulative probability of 94%:

• Security Token Paradise — Both Security Tokens and regulations reach maturity
• Security Tokens are a serious threat — Security Tokens reach maturity, but regulations don’t catch up
• Regulation a plus for tokenization — Security Token regulations meet the industry before it has had time to mature