Security tokens on the rise following regulatory crackdown
The ICO market has exploded into one of the fastest growing and most in demand innovations in capital raising, growing more than 20 times in just one year from $240 million raised by ICOs in 2016 to $5.6 billion in 2017, according to a report from Fabric Ventures and TokenData.
ICO’s have become the go-to fundraising method for blockchain startups.
Just $1 billion was raised through traditional venture investment last year, a figure that’s less than 20% of funds raised through ICOs for the same period – a clear mark of where the future of finance lies.
Most of the 1,500 digital tokens now available are utility tokens, which represent access to a company’s product or service, but many of these have operated in a regulatory grey area where they may be seen as securities since they’re often perceived as investment opportunities.
Many blockchain startups have been attracted to the simplicity of utility tokens; with no regulation, companies have avoided extra costs associated with regulatory compliance and have been free to pursue non-accredited investors.
Cryptocurrency exchanges have also widely accepted utility tokens for trading on their platforms to avoid the legal complications and regulatory requirements that come from trading security tokens.
But despite the phenomenal rise of the ICO, the value of cryptocurrencies and the sums invested in ICOs have nosedived in recent months with market conditions volatile and investors wary of regulators scrutinising the market and cracking down on pricing manipulation.
Bitcoin has fallen by as much as 11.5% after American justice officials launched an inquiry into criminal price manipulation in digital currency markets.
A trend has emerged in recent months of long-term crypto holders cashing out as greater numbers of short-term speculators enter the market.
In 2018 the total market cap for all cryptocurrencies plummeted from $815 billion at the start of the year down to just $372 billion in June.
The growing uncertainties in the playing field have rocked the ICO market, with the sum of money raised in ICOs in March this year at its lowest level since August 2017.
With firms wary of market conditions and actions of the SEC, many ICO projects have avoided offering participation to U.S. investors.
But far from hailing of waning interest in the ICO and token market, these developments point to a bend in the road.
2018 is looking to be the year the gap between innovation in capital raising and regulatory compliance finds a bridge.
In this uncertain playing field, security tokens – tokens which are legally compliant and subject to federal securities regulations – seem to be growing in popularity.
Idan Miller CMO of the Elephant said; “the security token revolution is the second phase of the crypto revolution and we are likely to see the shift in the coming months.
“Security tokens improve traditional financial products by removing the middleman from investment transactions and allowing users to more directly buy and sell assets.
“This can lead to lower transaction fees, faster transfers, decentralization, and more access for everyday individuals to invest rather than just financial institutions. Because security tokens are subject to federal securities regulations, they are legally compliant from the beginning.”
Security tokens represent assets with real value, such as physical goods, credit, futures, and more. One of the main applications of security tokens is that they grant companies the ability to issue tokens that represent shares of company stock.
Purchasers of security tokens can own an asset, such as coins redeemable for precious metals or tokens backed by real estate, without taking possession of the asset.
Security tokens have, until now, been on the backburner for capital raising, with most exchanges preferring utility tokens, and little space for security token trading.
But 2018 is seeing the space evolve quickly, ushering in the launch of new platforms for token securities trading with full regulatory compliance, including KYC (Know Your Customer) and AML (Anti-Money Laundering).
Miller said; “by the end of Q3 this year there will be at least 3-4 exchanges that will enable the trading of security tokens and once that happens we are going to see a massive shift from the utility token echo system to this new, more stable, more regulated and more real ecosystem – tokens backed by real assets.
“Templum claims to have executed the first security token trade in a fully compliant platform, and Overstock.com also says it is building an SEC-compliant digital assets exchange through its subsidiary tZero. Another company, Polymath, simplifies the legal process of creating and selling security tokens by creating a new token standard, the ST20, and enforcing government compliance.”
“Releasing to the market tokens backed by equality rights of some of the leading privately held complies around the globe, the Elephant is in the midst of a big private round which attract both crypto investors as well as traditional capital market players like hedge funds, family offices, and secondary funds.”
And as the new exchange platforms line up to open to security token trading, growing numbers of companies are looking to launch security token ICOs:
Causam eXchange, a Causam Enterprises, Inc. company, is using blockchain-based software to try to change how power is bought and sold.
Kairos is using AI-based facial recognition biometrics and blockchain technology to secure people’s identities.
SPiCE VC is a tokenized venture capital fund. The company issues regulatory-compliant securities tokens.
PrivatEquity.biz is introducing a security token that will be backed by shares in promising private companies and unicorn startups such as Xiaomi, BlaBlaCar, and DocuSign.
Bnk To the Future operates an online investment platform that allows qualifying investors to invest in financial technology companies, funds, and other new alternative financial products.
LAToken is a blockchain platform for creating and trading asset tokens. It allows cryptoholders to diversify their portfolio by getting access to tokens linked to the price of real assets.
The Praetorian Group, referred to as a “Cryptocurrency Real Estate Investment Vehicle,” (CREIV) filed with the US Securities and Exchange Commission (SEC) in March 2018 to register their $75 million ICO as a security offering.
Issuing a compliant security token can reduce legal risk and provide protection for both the company and the contributors — especially since the SEC has increased their enforcement initiatives.
And with the fledgling security token market preparing to soar, industry experts are flagging a trending shift towards 2018 being the year the security token moves to center stage.