Security Token Predictions (in 2020)
By: Derek Edward Schloss | STA Director of Strategy
In the past, colleagues and friends outside the blockchain space have asked about my work researching the intersection of securities laws, digital assets, and distributed networks. It’s a question I struggle to answer—mostly, because I’d like my response to be anchored to something relatable (to them and their work), and I find this difficult to do at our industry’s current stage.
Instead I find myself reciting a summary of the topics I’m writing about at that moment — bleeding edge stuff like sufficient decentralization or advancements across the regulated token economy. Areas that are timely and important today.
Like clockwork — their eyes start to glaze.
Take my parents for example. Sure, they’ll nod and smile. But I know my father would prefer not to hear about security token base layer tradeoffs for the seventh time. My mother has a tendency of circling the conversation back to healthy eating (or if I’m still taking a daily multivitamin).
Security tokens and digital assets are topics my parents should care about — my father’s been a real estate attorney for over 35 years, a paper-based industry itching for a digital disruption. My mother, having emigrated from the Philippines to the U.S. when she was nineteen, understands too well the difficulties of asset ownership and management for many non-U.S. individuals.
So, I find myself asking more and more these days:
What challenges still need to be solved for these conversations to become relatable?
In the coming years, I believe security tokens will radically transform how humans own and coordinate the movement of our value. At a minimum, I think the combination of digitized assets and trustless ledgers will reorganize our private and public markets — removing many of the inefficiencies that plague value transfer today. And once that infrastructure is properly built, I see that same combination leading to more trustworthy (and accessible) systems for individual asset ownership, wherever unrestrained access to the internet exists.
We’re not quite there today. Today, projects across the security token industry are focused on building the foundation for that kind of future — not necessarily the future we like to talk about when we talk about digital securities. At least not yet.
No hype, no fanfare, no leaderboards — just building.
Even if the mainstream hasn’t arrived, the conviction I see from projects across the space is at an all-time high. I hear it each week when I interview guests on the Security Token Stories podcast, and see it when I write The Security Token Edge newsletter each weekend.
A few weeks ago, our team at Security Token Academy reached out to our Corporate Members, a group that includes many of the teams and projects helping build out the digital securities industry. In the paragraphs that follow below, you’ll find their latest thoughts, ideas, and predictions around the future of security tokens— in 2020 and beyond.
The infrastructure build-out continues. Onward.
Question #1— Now that we have a greater information set about how the industry is evolving, what do you imagine the security token industry will look like in 2020?
Dave Hendricks (Vertalo): In 2020, the security token industry will appear — and be — more connected, more compliant, and thus more accessible. The elusive quest for ‘clarity’, with respect to securities law, should mostly come to an end by the close of 2020. The first half of 2020 is going to be dominated by discussions between leading platforms and the regulatory bodies that have maintained their focus on investor protection. As increasingly less skeptical regulators start to provide clear guidance in 2H20 to technology providers and issuers, data management platforms with compliant APIs and attendant data handling mechanisms will come to the forefront. These data management platforms, cleanly integrated with broker-dealers, custodians, and trading platforms, will drive the market forward while providing their joint issuer and investor clients with the confidence to choose a digital path.
Mason Borda (TokenSoft): With SEC registered offerings maturing into the market, we expect that regulatory certainty will provide for greater comfort in entering the market. We have our fingers crossed for FINRA approving a custodian which would provide greater comfort to companies small and large leveraging the blockchain to power their assets.
Jor Law (Verify Investor): I expect that 2020 will see greater momentum of security tokens as early players in the space refine their security token technology. Financial institutions will also have a greater impact in the space as they conduct further test offerings using the technology. The smaller, earlier players risk being left behind if they are unable to work with financial institutions in 2020 and 2021. 2020 will also be a battleground for various blockchains, including blockchains designed primarily for the securities industry. It'll be interesting to see the trends that develop in that regard.
Oscar Jofre (KoreConX): 2020 has to be the year of building TRUST. To gain TRUST, the key will be to bring everyone together and not leave anyone out. The current incumbents in the ecosystem will be in a reactive mode as more providers realize they need to be regulated. They are becoming broker-dealers or transfer agents. The current global incumbents in the private capital markets will begin to emerge with their own solutions, and look to work with providers who are not threatening to take them out of the process — this will be the key to mass adoption globally.
Luc Falempin (Tokeny): We believe financial institutions are now all convinced tokenization will happen. There is mounting pressure on margins for these players, and regulation is becoming stricter and more difficult to follow for these firms. Change is needed and central banks announcing digital currencies will encourage the adoption. We believe it will happen faster than previously expected, and financial institutions will go past the testing phase and roll out some of the initiatives.
Jamie Finn (Securitize): In 2020, the security token industry will continue its march to become a fundamental enabler of more liquid financial markets that are truly global.
Dan Doney (Securrency): We believe that 2020 will see an acceleration of the trend that links incumbent financial service providers with emerging security token firms to tokenize institutional grade assets. We should see tokenization platforms emerge provided by some of the largest technology firms (like Microsoft and Facebook) and issuances from highly trusted investment firms and asset managers.
Saum Noursalehi (tZERO): We believe that you will see an increase in the number of assets that are tokenized as issuers seek to reduce their cost of capital. Tokenization simplifies distribution to investors (globally) and with greater investor participation, more favorable primary issuance terms can be achieved. Additionally, as the liquidity on trading platforms continue to grow, traditionally illiquid assets will benefit from having a trading venue. Moreover, I anticipate investors will increase their holdings of digital assets in 2020. In fact, State Street recently conducted a survey of U.S. asset managers and asset owners, and 38% said that they planned to increase their holdings of digital assets next year. I also believe you will see more partnerships between traditional Wall Street institutions and those that are leading the adoption of digital assets. For example, our partnership with Box Digital Markets (BOX). And lastly, I believe we will have more regulatory clarity on the security token industry as a whole.
Question #2 — What challenges still need to be overcome for security tokens to thrive?
Jamie Finn (Securitize): The key items are having players that everyone is comfortable with from the institutional point of view — specifically you need a way to get digital securities into the dashboards of major banks’ private banking clients. I don’t believe these products are really ready for retail yet for the most part, as they are part of the alternative investment schemes and are less liquid and so they probably don’t suit a retail investor right now.
Dan Doney (Securrency): The biggest challenge is the gap between traditional financial services and the yet-to-develop tokenization markets. The gap remains in terms of market liquidity, user experience, cost structures, availability of high quality assets, and the convenience and trustworthiness of retail investment options. As issuance costs fall to a few basis points and back office reconciliation costs are eliminated, tokenization will compete on price with mature and trusted institutional models — bringing new, trustworthy assets into tokenized markets. In turn, institutional assets that can be easily priced will bring market liquidity. Market liquidity begets convenient transactions. Without these fundamentals, the tokenization industry has yet to achieve exit velocity — but the conditions are right for the breakthrough to begin this year.
Luc Falempin (Tokeny): The distribution side is still a work in progress — there is no exchange or marketplace that has a good number of quality assets listed. Once the distribution side is in place, we will see adoption accelerate across retail and institutional investors.
Jor Law (Verify Investor): We are already seeing adoption in both retail and institutional. It’s important to note the difference between the sell side and buy side. Retail “sell” side is seeing a fair amount of adoption, but retail “buy” side is lacking. Institutional quality deals will see a more balanced adoption of both the sell side and buy side. 2020 will see increased interest across the board, but will not likely be the breakout year.
Oscar Jofre (KoreConX): Our focus should be on infrastructure. We need to include everyone (lawyers, auditors, transfer agents, broker-dealers, media, marketing firms, newswire, incorporation providers, secondary markets, researcher) who are already providing these capital activities to companies.
Saum Noursalehi (tZERO): We are a proponent for progress and change in capital markets, and we are pushing to advance regulatory laws. However, this change will be incremental until it tips and will require complying with existing laws and regulations, while in parallel working on regulatory reform. It is assuring to see that the regulatory landscape is progressing with the recent announcement that the SEC is proposing to update the definition of what qualifies as an accredited investor, which will increase investor access to new investments.
Mason Borda (TokenSoft): We believe there needs to be an FINRA registered custodian that is compatible with blockchain-enabled securities. We see that as the final piece of infrastructure that needs to come into place to allow the market to flourish.
Dave Hendricks (Vertalo): Only four things are holding back the security token industry — regulatory clarity, interfaces, issuance cost, and offering quality. Just those things. Most participants will agree that regulatory clarity has been the greatest challenge to overcome, and that won’t change in January. Even once the regulators agree on standards and acceptable approaches, the security token technology providers will still need to refactor themselves and their APIs to comply with the current POV of regulators. User interfaces and experiences are a major deterrent to adoption. In order for this industry to take off, it needs to stop asking new participants to master arcane wallet technologies and private keys. Security tokens need to be as simple as email, Facebook, or Coinbase. The cost/benefit ratio related to issuance needs to improve — asking an early stage company to spend $100k to produce a token prior to a fundraise makes absolutely no sense when that same startup can spend $25k or less on a Reg D 506(c) offering. Asking that same issuer to spend $30k a year to manage their stakeholder registry when Carta can handle most of the same data for $10k is also a major deterrent. Total cost of ownership cannot exceed the benefits from any technology if it expects to scale and gain mass adoption. So issuers and offerings need to improve dramatically if security token technology platforms are to survive on revenues — and not investors’ funding. Once we can solve for regulatory, interface, and economics, the issuers and the revenue will follow.
Question #3 — Let’s talk assets. What category of tokenized assets will have the most traction this year?
Jamie Finn (Securitize): Real estate.
Luc Falempin (Tokeny): Real estate will continue to be the most popular asset tokenized in 2020 — debt instruments and investment funds do not lag far behind.
Mason Borda (TokenSoft): We expect every traditionally serviced asset to move onto the blockchain, and the category that will gain the most traction might be the simplest — such as tokenized equity or LP interest in a fund.
Dan Doney (Securrency): We’re excited about the tokenization of publicly traded assets. The disclosure requirements, strong pricing signal, and existing liquidity of these assets will bring much needed liquidity to the security token markets. These assets, backed by some of the most known and trusted financial service providers, will create the liquidity and trust needed for the foundation of the security token industry.
Saum Noursalehi (tZERO): In the near term we expect real estate to be a leading asset class — followed by funds and other private companies.
Dave Hendricks (Vertalo): The asset class that makes the most sense for regulated tokenization is real estate — not only is real estate the largest asset class by category, it is also suffers the biggest problems related to data management and liquidity. The team at Vertalo is very excited to focus on the real estate vertical in 2020 and will be announcing some big initiatives in this arena including a close partnership with Prime Trust where we will be digitizing billions of dollars of private REITs using a new platform that we are jointly developing called TREATs.
Oscar Jofre (KoreConX): Tokenized equity and debt — more complicated derivatives may soon follow. There is a well-established (though complex) securities regulation and corporate law in almost all jurisdictions. Tokenization of other assets — such as fine art — may take longer because the questions of trust, custody, and protection need to be answered first.
Jor Law (Verify Investor): Real estate has already established itself as a category with significant traction and should continue to see increased traction in 2020. Institutional debt and bond offerings will also see greater 2020 traction.
Question #4— Zooming out, what are you most excited for this year?
Oscar Jofre (KoreConX): Building trust, educating, and providing clarity to the market — the global landscape is highly fragmented, and looking to be glued together where no company or provider is left out.
Luc Falempin (Tokeny): We’re looking forward to discovering what happens with digital currencies — as these will help drive the industry forward.
Jor Law (Verify Investor): A greater amount of use cases in tokenization across the board — with closer integration between different market participants.
Dave Hendricks (Vertalo): I’m looking forward to working with all of our partners across this industry, and the regulators, to bring user friendly, cost-efficient, compliant, and reliable technology to the issuers and investors who have been waiting on the sidelines while we got our collective act together.
Mason Borda (TokenSoft): We’re very excited to raise awareness and participation to help move the world’s assets on to the blockchain — we will continue to educate the market and regulators domestically and internationally.
Jamie Finn (Securitize): Starting to see high quality deals move to become tokenized without the tokenization being a feature. In 2020, we will see growth in great assets being on-chain all over the world, and we will see increased liquidity as the current asset pools age and have more of a vintage.
Saum Noursalehi (tZERO): We are excited about the launch of the first regulated national security token exchange through our joint venture, the BSTX, in partnership with BOX. With BOX’s experience in building and operating a sophisticated securities exchange and tZERO’s industry leading blockchain technology, we have brought together our organizations’ combined expertise to fundamentally improve the marketplace for digital securities.
Dan Doney (Securrency): We’re excited to work with regulators who are embracing participants in the industry who seek to augment regulatory compliance rather than avoid it. We’re also excited for intuitive user interfaces that demystify blockchain for investors, issuers, and everyday retail participants. Coupled with high quality yield bearing token issuances and efficient global transactions, 2020 will finally be the year we unlock the accessibility which fuels mass global adoption — the dream of blockchain enthusiasts for over a decade.
Derek Edward Schloss (@derekedws) is the Director of Strategy at Security Token Academy (@security_token), the leading educational platform for the security token industry.
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Security Token Academy is the leading platform for educational information about security tokens and digital securities. Security Token Academy is not a registered broker-dealer or investment advisor. You cannot purchase or invest in tokens through our website SecurityTokenAcademy.com. We do not offer investment or purchase advice, nor do we endorse or recommend purchases or investments in tokens of any kind (security tokens, utility tokens, network tokens, etc.). In addition, Security Token Academy does not tell you if any purchase or investment is suitable for you. All investments entail risk, and investments in start-ups as well as security tokens involve a potentially greater risk. This interview is not investment advice — it is strictly informational. Do not trade or invest in any tokens, companies, or entities based upon the information in this interview.
