Security Tokens — The New Trend In Crypto

Financial markets are heavily regulated throughout the world. You can’t open a simple bank account without completing rigorous KYC screening. In comparison, cryptocurrencies are like the Wild West of the financial world. While it might seem like there is a complete lack of regulation, the latest trend in coin categorisation could bring it in line with the rest of the financial markets.

What regulation is there now?

While cryptocurrencies are growing in popularity, the total market value is currently thought to be around $417 billion USD.

To put this in perspective, that’s less than a quarter of the assets of investment bank JPMorgan Chase. Due to the relatively small market share of crypto, governments have done little more than sit back and carefully watch its progression. As a new emerging technology, the playing field is constantly expanding to new areas and therefore shifting and legislative processes struggle to keep up. In the meantime, governments are content to watch as the market matures before taking action to regulate it.

For investors and token creators, this shouldn’t be taken as a sign that nothing is ever going to change. While it may be largely unregulated for the moment, a time will come when coins and tokens will be subject to the same rules and regulations that govern existing investments, including real estate and bonds.

The problem with crypto scams

The cryptocurrency space has been riddled with scams, fraud and manipulation. Through careful coordination, groups of investors are able to artificially inflate the price of a cryptocurrency, dump their coins at peak value and make a tidy profit. If an investor tried this sort of thing on the stock market, they would face jail time. Thankfully, cryptocurrencies are heading in the same direction in terms of regulation by demanding more transparency and accountability from coin issuers.

Security tokens increase protection

Security tokens are the latest trend in cryptocurrencies that will hopefully eradicate many of the issues plaguing the industry. Governments categorise cryptocurrencies by type and this helps them to decide what should and shouldn’t be regulated. The definitions vary by territory, but generally, there are three different types of cryptocurrencies: utility tokens, security tokens and payment tokens. Utility tokens can be exchanged for goods and services and derive their value from this. Security tokens are intended to retain value and are expected to derive a profit, much like more traditional investments like real estate or stocks.

Securities are regulated in the same way as any other financial investment and are subject to taxation. Although it might seem that cryptocurrencies have been evading regulation, there is a strong trend towards coin issuers voluntarily classifying their coins and tokens as securities. The SEC chairman Jay Clayton recently stated that, while most cryptocurrencies are utility coins, initial coin offerings, or ICOS, are securities. He made a statement in June 2018 to say that no allowances would be made for the emergence of new technology and the definition of securities would not be changed.

This is important for coin issuers as it means that ICOs can no longer operate without regulation. For investors, this is also good news as it means they can easily identify would-be scams and spot the ICOs to avoid. If a coin issuer is trying to operate an ICO for utility coins, investors can confidently steer clear.

Some coin issuers are going one step further with the securities trend and choosing to classify as securities on purpose. An example of this can be seen with Token issuer Silent which has chosen to undergo the added scrutiny and regulatory checks of a security, as this is both in the interest of Silent and future investors.

This is one of the strongest driving forces behind this latest trend for security tokens. Governments and regulatory bodies are likely to scrutinise any coin issuer that registers their coin as a utility token when it should really be a security.

Other token issuers are expected to follow suit as a way to ensure they are in line with whatever future legislation might unfold. After all, failure to do so could damage the reputation of their coin and hurt investors.