Why Tokenized Securities Will be Even More Disruptive than Cryptocurrencies and ICOs
The ability to tokenize any asset is going to change investing forever
Blockchain technology is already a disruptive force in the financial world.
But the impact we’ve seen so far from Bitcoin, Ethereum, and ICOs is just the beginning. The future of blockchain technology will be security token offerings (STOs).
In case you don’t know what an STO is, here’s a useful analogy: if cryptocurrency is digital money, tokenized securities (or security tokens) are digital ownership.
Like a security, a security token can represent ownership of shares in any asset, including real estate, a company, or even debt. However, they differ from securities in that they’re completely programmable: owners who issue security tokens can use blockchain technology to customize the terms of the sale.
And just to be clear: There are a lot of different terms floating around. STOs are sometimes called tokenized security offerings (TSOs) or tokenized asset offerings (TAOs).
Why STOs will have a bigger impact than Bitcoin
A quick look at the chart below provides a clue.
Clearly, the largest asset class in the world is real estate, with a global value of US$228 trillion. Add to that number the US$70 trillion in equities and US$100 trillion in securitized debt, and you get a total of about US$400 trillion.
Consider Bitcoin and other cryptocurrencies. Some analysts expect that one day it could supplant global fiat currencies. What, then, would be the total market cap of Bitcoin? Well, the total value of all the world’s coins and banknotes is about US$7.6 trillion. But if we include money market, savings, checking, and time accounts, that value goes up to US$90.4 trillion. A big number, but less than a quarter of the value of assets.
Some believe Bitcoin will also replace gold as a store of value. Even if you add the value of all the world’s gold (US$6.5 trillion), you only get to US$97 trillion — still far below the total value of the world’s assets.
So the potential growth of STOs is about 4-times larger than cryptocurrencies.
But what about ICOs?
The difference between STOs, ICOs, and IPOs
First of all, it’s important to note that STOs are NOT the same as ICOs.
ICOs were named after initial public offerings (IPOs). A company goes through an IPO to have its shares publicly traded on a major stock exchange like the NASDAQ. Most companies that undergo IPOs have been around for a while and have had some success. Many companies that have undergone ICOs, on the other hand, are very young startups.
Investors who participate in an IPO gain shares representing ownership of the company going public. Investors who participate in an ICO don’t. Instead, they either purchase a new cryptocurrency or a “utility token” that can only be used for a specific purpose on the company’s platform.
ICOs are mostly unregulated. Since ICO issuers don’t offer their investors shares in their company, they don’t have to follow security and exchange commission (SEC) regulations. This makes it easy for investors to get involved, but it also means less protection and more risk. Many tokens issued during ICOs have already become worthless. Many ICOs turned out to be complete scams.
IPOs are highly regulated. Companies that go public face the scrutiny of independent financial analysts, so investors can invest with much more clarity. But the disadvantage for individual investors is that the bar for participation is often much higher — brokers typically require investors to meet certain eligibility requirements.
The best of both worlds
So where do STOs fit in?
STOs combine the wider market access of ICOs with the regulatory transparency of IPOs.
STO issuers can expect to benefit from lower fees, a shorter launch period, a larger potential investor base, automated administrative functions (facilitated by smart contracts), and, of course, a simple track to regulatory compliance. STOs can be classified any kind of security offering under SEC regulations, including, for example, Rule 506(c) of Regulation D for selling to accredited investors, and Regulation A+, which allows companies to raise up to US$50M from the general public.
In the near term, STOs are poised to replace ICOs as investors digest the fact that many projects turn out to be scams or just bad companies. In the longer term, it’s possible that STOs will one day replace IPOs as the dominant way to raise money from the general public.
The Future of Investing
At SolidBlock, we use blockchain technology to create custom security tokens that represent ownership shares in real assets. Our clients sell these tokens to investors in an initial fundraising round. Once the initial sale is over, investors can trade their shares in a liquid secondary market, sometimes called an alternative trading system (ATS) — see Templum for example.
Our most-notable project to date is the Aspen Coin, which is now featured on the crowdfunding platform Indiegogo. Investors in this security token gain equity shares in the St. Regis Aspen Resort in Aspen, Colorado. But this story won’t end with the initial fundraise.
Once the lock-up period is over, Aspen Coin holders will be able to trade their tokens in a liquid secondary market. Or they can choose to hold onto their tokens and receive regular dividend distributions. Either way, there will be no need to go through the cumbersome process of dealing with a broker. Token holders can cash out (and hopefully make a profit) at any time.
The company that manages the resort, Elevated Returns, also benefits from this arrangement. For example, customized smart contracts and the standardization of labor-intensive processes helped reduce administrative burdens and allowed them to introduce the offering to the market (via Indiegogo) a lot faster.
And the STO creation and fundraising process is only going to get faster and more efficient. Stay tuned for STOs featured on cryptocurrency exchanges like Coinbase and Bittrex, who’ve already announced that they’re in the process of listing tokenized securities. Once that happens, it will boost the exposure of private security offerings beyond the usual accredited investor audience.
Real estate is just the beginning
Private asset owners now have access to the technology to securitize any asset. Asset owners and startups will increasingly adopt blockchain technology and issue security tokens to raise funds.
STOs are going to change investing forever. In the very near future, you’ll be able to log in to your favorite cryptocurrency exchange and buy shares of a world-renowned hotel, for example.
A little further into the future, it’s easy to imagine being able to own shares of infrastructure in your own city. Or, if you’re the speculative type, you could short real estate in an area you think is overdeveloped and go long on real estate in an up-and-coming market.
Individual investors will soon be able to allocate capital any way they see fit. I’m incredibly excited about the endless possibilities for tokenized securities.
I’m the CEO of SolidBlock, a leader in the development of asset-backed security tokens. Visit our website to learn how we’re using blockchain technology to revolutionize and democratize investing.
— Yuval Wirzberger
