Beware of STO: Security Tokens Hoax
The closer the idea of ICO approaches bankruptcy, the denser is the media support of the STO narrative, i.e. sales of tokens that are meant to somehow bind issuers legally.
People tend to connect these two phenomena, implying they have a similar user base, both from investor and fundraiser sides. That narrative is pushed with the ICO-style irritating persistence and often by the same people.
Apparently, quite a few people, pressed by circumstances, scraped off IC from their business cards and penciled ST on top. These folks should be commended for creating something unique — a cargo cult of the cargo cult.
Billions of dollars were destroyed in ICOs by the viral myth that tokens have key properties of bitcoins. Why should we doubt now that, by removing exactly these properties and returning to good old plain equity with STOs, billions of dollars will be created?
If that is not funny enough, be amused by dozens of “STO platforms” which, before launching a single STO, are selling their own token which, in its turn, is not a security token at all.
Deliberately Complicated and Overpriced
STO is a deliberately complicated and overpriced regular placement of equity or debt. It can cut no corners and creates no additional demand.
STOs are not free. In addition to normal security placement expenses that largely vary from country to country ($100k — $500k), you’ll have to pay around $50k+ upfront for “compatible tokens”. There will also be $10k-ish monthly fees for many months.
You will need some extra stoicism because when you spend more money and time having your placement in a tokenized form, you will not receive any compensation for that. While STOs are totally based on old regulations, they have none of the key properties of ICOs:
- Fundraisers will not be able to solicit tokens to just anyone in an unregulated way so that bonus cascades and pre-pre-sales efficiently create Ponzi schemes.
- Crypto-exchanges will not list security tokens on their wonder-apparatuses of manipulation.
- Fundraisers will not avoid direct responsibility to investors.
- Idea-stage projects won’t get considerable traction just because they are being STO-ed.
Tokenisation Creates Little Added Value and Additional Demand
Tokenisation itself doesn’t add value to a stock, except for temporary and insignificant liquidity premium.
STO providers feed potential customers with promises of high demand. “There are whales out there who previously invested in ordinary tokens, and now, as they have no other alternatives in crypto, they can’t wait for you to pay for a round of tokenisation [to a fine platform provider like ourselves] and create your security token”. At the same time, of course, no discounted underwriter obligations are ever taken.
Perhaps, entry barriers to real legal capital markets will eventually decrease, and medium-sized and undeveloped business will come and issue digital securities available to everyone through some tokenisation platforms. However, is it NOT a fundamental innovation that could intensify an inflow of capital. Institutional and accredited investors rarely allow themselves to be fooled, while the eagerness of “ordinary people” to invest in questionable projects is greatly exaggerated, as the obvious apathy towards the JOBS act showed.
Without new liquidity, a tokenised stock isn’t any better than normal stock. Some current security token issuers try to fill the emptiness of the offer with “inventions”. For example, the assertion that: “we will not pay dividends, our tokens will appreciate in value because we will quarterly buyout and burn them”. I am not sure what is dominant here, the hint that “we are like Binance, and, you see, BNB performed the best” or the ignorance that there has to be a reason none of the successful public companies were clever enough to use the trick in the last hundred years.
Liquidity Is Years Away
Liquidity is years away. Cross-border liquidity is a myth.
As announcements of soon-to-open regulated security token exchanges became ubiquitous, I talked to many involved people. No one calls a specific date: the legend is that “everyone in this market is trying to jump on the train so no one will disclose such strategically important data to you”. Occam’s razor and basic facial expression recognition skills suggest no one has a clue.
The roadmaps are really blurry. For example, Malta, often named as the favorite in this race, put the law that legalizes conventional ICOs to force on November 1. Think of it: several of the largest Chinese exchanges, at their peak power, when ether was worth a thousand dollars, while burning their feet standing on the red-hot coals of the very unpleasant deadlines of being expelled from all established jurisdictions, lobbied, lobbied, and lobbied, but have not lobbied it in any way faster than seven or eight months.
Importantly, no one needed to be moved. Nobody’s interests were hurt. They created a new regulatory body and prescribed new rules for hitherto non-existent things. Unlike that, the stock market is already there. And there are concrete people with concrete deals and deeds. Moving them, changing their ways is not a free procedure.
A lobbyist is an enterprise, he needs to understand the revenue prospects and justify the costs. During the previous lobbying cycle to incorporate in Malta, the source of money was clear — everpresent gambling fools. Even that didn’t really work, as ICOs died off naturally. STO-based profits are much less certain. So why push security tokens?
So, we are probably talking years, not months, even for offshore and offshore-ish jurisdictions. What’s even worse, when it starts, the trade will remain local and shallow. Many islands were never too averse to shelter controversial business, but where have you ever seen such businesses freely operating in relation to the residents of normal countries?
With regard to the first-world jurisdictions, I would like to remind you that 33 years (!) have passed between the date of the first email and the date of Check 21 Act entry into force on October 28, 2004 (the Act defines truncated checks that use electronic means of communication and scanning in their life cycle). Time may be flying a bit faster today but not too much faster — neither the density of notifications cluttering your mobile screen, nor even Moore’s law determines the velocity of socio-economic processes. It can easily take a decade for securities to be naturally digitised. For many years to come, before becoming something truly revolutionary, digital securities will exist as a clumsy hybrid of old laws and new technology.
STO is pointless for your business.
- It doesn’t save money. To save money and time, fundraisers should look elsewhere. For example, base their offers on generally more liberal crowdfunding laws.
- It doesn’t free from responsibility. If you want to make an equity-like offer and avoid equity dilution (one truly good feature of utility tokens), simply sell revenue participation notes.
- It doesn’t make things easier. There are no legal tools, crypto or not, to circumvent the existing capital market barriers and there are no grounds for them to appear. STO is not such a tool either.
- It doesn’t provide liquidity avenues. Even when allowed, trading won’t attract crowds of speculators because security tokens have no mystical crypto growth potential and cannot be pumped as tokens on unregulated exchanges.
- It doesn’t create an investor or speculator demand.
What it will certainly create, though, is the risk of doing something untested.
Let pioneer cases not fool you, they are not organic. Take each one of the already conducted tokenizations and you will smell someone with a previously formed crypto interest: either pilot projects for tokenizer platforms or projects converting their old utility tokens into security tokens in an anticipation of the upcoming regulator raid.
And, after all, there’s no need to rush; you can’t be late. One needed to hurry up to run an ICO because it was always an obvious scam, soon to be unmasked. Securities are real and the market for them is stable.
Fundraisers can utilise blockchain technology to advance investor relations without selling equity and without having to pay to a tokenizer platform by deploying free community building tools, or by establishing a programmable legal entity.
P.S. Digital or Not, Securities are Pretty Dumb; True Forward-thinking is Elsewhere
By the time securities will be full, naturally digitised, by the time the regulation will be properly amended, securities may stop being securities as we know them. Stocks-on-blockchain is probably a short-term transition species, something like radio shows on TV or horseless carriages.
Stocks and bonds, although being major concepts, are, to large extent, a forced measure of standardization through primitivization. Liquid investment relations can be and should be more complex (current derivatives are still based on the same primitives). Unfortunately, available “computing power” of accounting has never grown faster than the amount of breeding ground for corruption and distrust that limits the complexity and variety.
True automation will bring complexity and variety as it did in all other fields. Programmable contracts will create obligations for programmable legal entities that will represent legacy legal entities and individuals. Although the invention of the calculator does not change arithmetic, it changes the range of tasks that can be solved by “ordinary” people and the emphasis on education.
As society develops, lower classes gradually gain access to the same things as the rich. Now poor and rich already eat essentially the same food and wear essentially the same clothes. Not too long ago, it wasn’t so. Modern financial instruments for poor are mostly inferior. Libraries of investment modules based on programmable legal entities will radically change this situation.