We have checked loads of data to set the record straight on Security Token Offers (STOs) and explain what’s new about Security tokens and STOs, how different they are from ICOs and what potential is hidden behind the disrupter of this industry.
The St. Regis Aspen Resort’s owner-operator concluded its Security Token Offering (STO) in October 2018, raising $18 million in the first Initial Coin Offering (ICO) stock hosted on the Indiegogo site.
Asset management firm Elevated Returns, owner of St. Regis Aspen, announced that accredited investors had bought all $18 million of Aspen Coins made available through the sale, bringing to a successful conclusion the first security token offered by Indiegogo.
Utility Tokens, Security Tokens… What’s All That About?
What Indiegogo did has brought up many questions. Firstly, what is a security token and what are its key benefits?
Unlike utility ICO tokens, which (at least supposedly) serve as coupons for a good or service, security tokens are contracts for investment. In this case, each Aspen Coin represents a share in a single-asset real estate investment trust (REIT) holding the $18 million equity made available via the STO/ICO in St. Regis Aspen. Since the SEC controls securities sales, the sale was restricted to approved buyers.
Security token is a modern financial instrument that has arisen mainly because of two needs: tighter supervision and to distinguish speculation from utility. Security tokens are, in more basic terms, cryptographic tokens that pay dividends, share profits, pay interest or invest in other tokens or assets to produce income for token holders. This takes care of the issues around liquidity.
Previously, liquidity was an issue for conventional paper backed up assets such as business shares or bonds or real estate. Cryptographic representation in a token form of all these things, however, can take care of the problem.
‘Security Tokens’ has been a topic of big debate and controversy in the crypto market since its inception. Security Token Offerings actually make up a very limited percentage of the crypto-funding activities. Some experts, however, assume that Security Tokens can help to cause potential participation by institutional investors.
Is STO the New ICO?
To simplify matters, a formula could be defined: “ICO + Legal Compliance = STO”
In a typical ICO, companies sell tokens or coins as a form of crowdfunding for purchase. Buyers may trade their crypto for a specified sum of the offered tokens. It’s a bit like buying shares except when you purchase a share in a company.
Voting rights would be a good example here, as would dividend payouts from shareholders. You don’t get any of those rights or responsibilities when purchasing tokens at an ICO. Your new “utility tokens” allow you to access a particular network, platform, or service.
Participating in a Security Token Offering is very much like taking part in an ICO. During the bid, you can buy tokens which you can then exchange, sell, or hold. Because security tokens are actual financial securities, however, the tokens are backed by something real like the company’s cash, income, or revenues.
Security Token Offerings (STOs): Regulatory Landscape
A lot of lawyers and financial specialists are cashing in on different security token projects simply because the securities laws are quite stringent and somehow unclear.
In 2019, the blockchain industry should find out if there is any way forward from the informal guidelines provided by the SEC that certain token offerings will have to be registered or released under a registration exemption. In addition, a wild card has been thrown into the regulatory mix with the recent implementation of a new bill amending the Securities Act to identify cryptocurrencies as not being securities as long as they are used on a network that works.
In February 2018 the Swiss Financial Market Supervisory Authority (FINMA) released a set of guidelines detailing how it would respond to Initial Coin Offering (ICO) organizers’ inquiries using financial market regulations, providing some guidance to those who wish to participate in ICOs.
Referring to the utmost importance of transparency, FINMA said it will respond to ICO inquiries on a case-by -case basis, as not all ICOs can always be subject to existing regulatory requirements. There is currently no clear ICO legislation, and there are no relevant legal precedents or jurisprudence unique to which ICOs are subject. Nevertheless, the regulatory framework for security token projects remains unclear despite Switzerland’s pole position as ‘Crypto Nation’.
In 2017, the People’s Bank of China banned ICOs, and then proceeded to ban security token offering (STO) companies as well. China’s Central Bank announced its decision on security token offerings in December 2018, noting they’re illegal in the country.
Deputy Governor of the bank Pan Gongsheng then appeared at a summit in Beijing and there, addressing the “illegal” financing activities that have been carried out with STOs and ICOs and that they are still rife in the mainland despite a nationwide clean-up of the cryptocurrency sector last year. He also added that without the involvement of the government, it would have had an effect on the economy of the nation.
The Thai Securities and Exchange Commission’s (Thai SEC) Deputy Secretary has also announced that Thai-related Security Token Offerings (STOs) launched in an foreign market breach the rule. They have not yet determined whether STOs come under the SEC Act or the Digital Asset Act at the moment, but it depends on the terms of the STO and the specifics in its white paper.
Best STO Destinations
Since the beginning of 2017, Swiss city Zug, also known as the “crypto valley,” has become a center for Blockchain developers. Swiss regulatories were among the first of any country in the world to explain how ICOs and STOs worked from a legal perspective. However, there are no current STOs in Switzerland, but given its already proven track record with well-established cryptocurrency ventures, the country seems likely to become a center for the tokenized security space in the coming years.
One of the best countries in the world today with the most hospitable legal environments for the security token industry is certainly Malta where many STOs are issuing and keeping their token offerings with Maltese exchanges such as LXDX preparing to launch their own STO compliantly.
Navigating the security token providing legislation can seem like a minefield in some jurisdictions. However, the Financial Services Authority in Malta (MFSA) provides transparent and advantageous security token offering regulation to crypto fund managers and token issuers, expediting the CIS licensing process for cryptofunds.
Another country to start its own platform offering security token is Estonia. As of 12 November 2018, the B2BX cryptocurrency exchange has been approved by the Estonian Financial Intelligence Unit (FIU) for a regulatory license. The license allows B2BX to sell compliant cryptos trading in Estonia including crypto-to-crypto trading and crypto-fiat pairings in the future.
Though there are still some pressing concerns surrounding security token offerings (STOs), Canada boasts a robust legal structure, and the prospects for licenses for exchanges dealing with tokenized securities appear to be just around the corner.
Compliance costs are currently very high in Canada, just like the States, and while it has some of the most stringent securities laws, it seems possible that STOs will come under the exemption clause of the existing crowdfunding laws.
Is it Security or the Utility Token: XRP Case
The tokens were broken down into two broad categories by the SEC and FINMA: utility tokens and security tokens.
Since most of the ICOs are investment opportunities in the company itself, most tokens classify as securities.
However, if the token does not qualify according to the Howey test (a test that will be used to determine whether or not a certain transaction is an investment contract), then it will classify it as tokens of utility. Those tokens simply provide a product and/or service to users. STOs as an alternative to utility token offerings combine conventional finance’s reliability with crypto-versatility. Aside from being a more secure way to prove ownership of equities, blockchain and now STOs are already starting to overhaul financial systems as we know them.
The words “utility token” acquired a sour taste, and for good reason. It has been badly misused by ICOs over the past year in quest for easy money.
The fallacy, as officials from the SEC have made clear since 2016, is that nearly every case the “use” is on an nonexistent platform.
Unlike most ‘utility tokens,’ XRP already has nearly all the necessary functionality. Unlike most ICOs, XRP’s not meant for anything other than a payment and settlement system — the platform is already functional. Anybody can use XRP for purchases or payments, and XRP is also used for cross-border liquidity after the xRapid launch.
In a study for the Lowell Milken Foundation, James Park refers to it as the ‘Hinman Paradox’, sayin it must be functional for a utility token to be freely circulated without intervention by the securities laws. But other utility tokens are only available if they are distributed largely enough to create a decentralized network. After many lawsuits filed against the company alleging that XRP is a security, the blockchain startup released a clarification on how its brand differs from its XRP digital tokens. The U.S. Securities and Exchange Commission has reviewed all investor claims, and the status of XRP remains uncertain.
Potential and Advantages of STOs
Security Token Offering, or STO, is projected to rise to $10 trillion by 2024. Compared to other forms of securities, the issuance of security tokens is much cheaper because they are operated on decentralized markets. That also means that, among other prices, they receive lower legal and accountancy fees.
Issue of securities via programmable code aka smart contracts on the blockchain comes with massive benefits for businesses planning tokenizing the equities of their company.
One downside of this is legality. Security tokens are financial instruments governed as much as stocks are. Securities dealers needn’t worry about transparency or regulations.
The other is functionality. Likewise, although conventional utility tokens can not act as securities, they may act as utilities. In other words, issuers can opt to use the security tokens on their platform as a payment mechanism with the aid of smart contracts, or use them on network gateway, voting rights, loyalty programs and more.
Liquidity is desirable too. With the security tokens, issuers have complete control over more liquidity creation. This can be achieved by not only having foreign investors but also listing the securities on exchanges.
One of the advantages is also the securitizing of new properties. Tokens are unique in that they can securitize various types of assets like tangible as well as intangible ones. This has already had some success, with Andy Warhol’s recent auction of the 14 Small Electric Chairs, an iconic piece of contemporary art featuring an electric chair, allowing art lovers to buy a share in the painting.
The Security Token Ecosystem
We at Coinspeaker chose the biggest players involved with security tokens.
Tokeny: Tokeny is the Compliant Tokenization Platform. The fintech based in Luxembourg is committed to providing an institutional grade, stable end to end platform, allowing tokens to be sold and controlled during and after an ICO or STO.
Securitize: Securitize is a comprehensive application of stack technology & services with powerful features and advanced resources for investors and issuers alike.
Securrency: They establish interoperability between blockchains and legacy structures with associated Decentralized Investment Banking Services (DIBS).
GoSecurity: GoSecurity is your guide to successful offering of security tokens. They are providing a highly scalable and stable platform to launch your safety token. They include KYC, AML and accreditation workflows which are fully compliant and customizable.
Gibraltar Blockchain Exchange: The Blockchain Based Stock Exchange (GSX) aims to be a leading forum for institutional-grade token sales and the exchange of digital assets. Based on decentralization principles and consensus within the community.
Blocktrade: Blocktrade brings together on a centralized and linked marketplace blockchain-based technology and crypto-assets. It is guarded by Swiss with the highest protection and reputation characteristics, performance oriented, high volume and market-depth that meet strict statutory enforcement.
BlockExMarkets: A brokerage based in London where you can buy, sell and exchange crypto, FIAT and participate in ICOs. With a user-friendly interface that monitors the customer and serves a variety of secondary markets, as well as fiat-to -crypto and crypto-to-crypto instruments. The ICO marketplace provides a selection of tested ICOs open to anyone. Participants are required to buy ICO tokens using either crypto or fiat.
VrBex: VRBex is the leading U.S.- based exchange for investors seeking cryptocurrency trading or exchange and investing in cryptocurrency properties such as security.
TZero: tZERO’s blockchain solutions aim at revolutionizing the industry and addressing Wall Street’s inherent inefficiencies so that financial systems are less bound to traditional, centralized business structures.
Bankorus: The world’s first wealth management encryption platform to provide a complete solution for digital asset allocation to high-net-worth customers. Compliance issues will no longer be a problem buying and selling digital assets on the only global market with a smart contract platform based on blockchain technology.
SIX Digital Exchange: The SIX-owned and operated Swiss stock exchange reported on 6 July 2018 that it is developing a fully integrated trading, settlement and digital asset custody network.
DX.Exchange: The Estonian fintech firm is the first non-CFD crypto exchange to offer tokenized stock trading on the blockchain. DX.exchange will include publicly listed companies such as Google, Facebook, Intel and Apple. This is the first time they can buy securities directly from popular cryptocurrencies such as Bitcoin.
Currency.com: The Currency.com platform revolutionizes cryptocurrency investment by allowing anyone with Bitcoin or Ethereum to trade financial assets, commodities and indices from the world’s largest companies – without putting their crypto holdings under price pressure or moving to fiatr and other partners on the development of the Platform.
Coinbase: Coinbase is a global digital asset exchange company (GDAX), which provides a venue for buying and selling digital currencies and sends information on those transactions to the blockchain network to verify those transactions. Coinbase also serves as a wallet for stocking digital currencies.
Vo1t: Vo1t is the world’s leading custodian of blockchain properties. They combined cutting-edge system design with best practices in cybersecurity to create the most secure cold-storage vault in the world.
BitGo: BitGo is the industry leader in investment services for the institutional-grade cryptocurrency. BitGo offers protection, enforcement and custodial solutions to Blockchain-based currencies for institutional investors.
Swiss Crypto Vault: In a strategic collaboration between Swiss Gold Safe AG and Bitcoin Suisse AG, Swiss Crypto Vault AG was formed to provide the combined storage and cryptoasset handling expertise.
Token Market: Security Token Market is the world’s largest repository of past, current, and future protection token offers.
Security Token Network: STN hastens mass adoption by promoting and linking hand-picked STO ventures with key players and investors in the ecosystem.
Smartlands: Smartlands is a global platform tokenizing real economy assets through the issuance of asset-backed tokens (ABT). Use Smartlands’ developed ready, secure, and proven solution. Developing the Platform in collaboration with Stellar and other collaborators.
Rialto Trading: Rialto Trading is committed to providing the fixed income industry with trading instruments. Rialto has developed three products that offer different ways of obtaining liquidity which can be used alone or combined to leverage results.
The truth is, STOs allow businesses to stop beating around the bush and sell tokens directly that function as securities. Investors gain access to the issuer’s pre-determined traditional security benefits, such as profit sharing, equity stakes or voting rights. Most ICOs had rather small implementations, since they could only use their tokens in niche networks. Security tokens create a wider appeal, allowing investment from people who believe in the project but would not necessarily make use of the network itself.