Last night I participated in a London meetup called “ICO’s are Dead. Long live STOs” organized by US Capital Global. In the audience, some crypto investors, obviously shaken by recent events, argued passionately about what this all means for ICOs that already raised billions, about what they saw as the unfairness of the US regulators dictating terms, about the crash of the market, it was painful.
From the STO experts in the room, there was a clear “I told you so” vibe — as in, “we told you these are all securities”, and “we told you the SEC will come knocking”. And indeed for people in the STO space, none of this is a surprise, we have been advocating regulation-compliance from day one.
But all this is missing the really BIG picture. ICOs were a phase. an innovative phase, which opened the door to the understanding of tokens. STOs can now take what was learned (the good and the bad), and deliver an ecosystem that can be three orders of magnitude larger than the whole crypto market.
But let’s start first with what happened. I believe there are 3 main reasons for the demise of the ICO space, two of them “exploded” this week:
1. Securities Regulations.
Last week the SEC released two landmark statements. The first described action against two ICOs, which resulted in fines, but more importantly these ICOs were forced to register their tokens as securities and refund investors.
The second statement, finally gave more clarity on digital asset security issuance and trading. It is very important to note that the SEC chose to take action against two ICOs which were considered “good” ICOs, these were not scammers or fraudsters — they appear to be people trying to innovate in an unclear environment, and getting it wrong.
There is an important distinction here. I’m not getting into the discussion of “Utility tokens good or bad”, I still believe non-security tokens are very useful for specific use cases, such as to power blockchain protocols and networks. This is about the ICO process — raising money by selling such tokens to investors as an investment rather than for their use case.
It is also important to remember that the US is not the world, there are other jurisdictions that are much more open to the sale of tokens, but, the US still leads, and if it can’t be done there, it is likely game over for ICOs.
2. The crypto crash.
At the same time as the SEC statement, the crypto market crashed, and with it the vast majority of ICO tokens. These is a simple truth here. A truth that have been recited and ignored again and again. Most crypto and ICO tokens are not backed by any assets. They are backed by either (a) the belief in their value, or in some cases (b) the demand for tokens to power a networked use-case.
With real use-cases still few and far between (it is a very young industry, so this is natural), most tokens are traded on belief in their value, current or future. For such a token to be worth $1,000 is just as logical as being worth $10. Until there is a viable use-case that dictates REAL supply and demand, it’s all one big mass psychology experiment. And the experiment is not going well.
3. Trust. Lost.
Trust is like glass. It’s beautiful, but once shattered, you can’t put the pieces together again.
ICOs are now synonymous with scams. I will not go into the argument of weather this is mostly true or only true for some, because it doesn’t matter. For effectively everyone outside the ICO bubble, ICOs mean scams.
This IS the biggest lesson the new STO market must learn from the ICO pump and burn. We must create, maintain and protect trust at all costs.
Long live STOs.
For those of us who pioneered Security Tokens, advocated and evangelized them for a long time, this is all old news. At the beginning 2018 there were just a handful of companies in the space, now there are dozens. We at SPiCE VC are committed to investing in the ecosystem and making this industry a reality, we are invested in companies in the space, and we know the potential.
As a new industry are grateful for ICOs which opened the door to our understanding of the power (and limitations) of tokens, but we are really not in the same space at all. We are in the space of tokenizing rights in real assets. There are hundreds of trillions of dollars worth of assets and securities which can be tokenized, so I believe in a historic perspective, ICOs will be remembered as the catalyst, the spark that started something completely different, the digitization of securities and ownership.
So let’s look at the same 3 factors that brought ICOs down, what can we learn from them as we evolve to STOs:
1. Securities Regulations.
STOs are the exact opposite of ICOs, not only they can be regulation-compliant. They can actually be Regulation-enforcing.
In that regard, for regulators, STOs are a significant improvement of existing securities. Where as in existing securities, people can do whatever they want and regulators have to enforce. STO’s smart contract are built such that non-regulation-compliant transactions are blocked in real time by software. Not only that, the software is adapted to support multiple different regulations across all jurisdictions and apply each one of them in real time to the user based on the user profile.
If I was a regulator — I’d be looking at how I could review the code for these platform, because once the code is reviewed and approved, all transactions executed through it would be regulation-compliant.
2. Inherent value vs market volatility
Security Tokens represent the value of rights in real-world assets. The value of the token should therefore have an “Anchor”, in the estimated value of the assets it represent.
In SPiCE we love experiencing first-hand what we preach, so to understand this concept, let’s look at the SPiCE token. Simply put, SPiCE security tokens represent the right to receive money from exits in our portfolio companies. Therefore If you hold a SPiCE token, and someone offers to buy it from you at a price, you can look at SPiCE’s portfolio companies, and at its calculated NAV (Net Asset Value), and decide if you want to sell and get some liquidity now, or hold, and wait for potential future exits.
3. Trust. Won.
In the STOs emerging market, we have to work hard, together, to generate and maintain the market trust, and protect the “brand” of tokenized securities.
This is not to say that all STOs will be good or bad, STOs simply represent assets, and therefore the tokens of a great assets will be great, and the tokens of a poor asset will be weak, but what we have to make sure, helped by regulations, is that we distance ourselves from what investors saw in the ICO era.
How to do that? that’s in a separate post…