Here’s why Security Tokens are the next BIG thing!
The ‘Cryptocurrency Craze’ in 2017 wrote a new chapter of crowdfunding for blockchain companies in the form of Initial Coin Offerings (ICO). This platform allows projects to successfully raise funds from multiple sources by offering digital tokens to different patrons in exchange for capital.
These digital tokens can be utility tokens, whereby they act as a future access for an upcoming product or service- Just like a coupon. Or, they can be security tokens that represent shares of a company, and which are inherently designed to be an investment.
Ever since then, there’s generally been an upward trend when it comes to ICOs. And, while many of them may be genuine, unfortunately, a number of them have also turned out to be scams. Lack of regulation and questionable practices in ICOs have swindled investors out of tons of money. This is exactly what brought attention to the U.S Securities and Exchange Commission (SEC), who then investigated such fundraising frameworks in order to ensure compliancy with federal regulations.
In a report published in 2017, the SEC announced that security tokens were subject to U.S Federal Securities Law. One can use the Howey Test to distinguish whether a token is a security by evaluating whether the token in question has a potential for investors to make a profit down the line based on the efforts of others. Following this crackdown, a number of utility tokens have been exposed as securities. On the other hand, utility tokens are exempted from regulation, even though a buyer may purchase items for investment purposes. Hence, many blockchain startups trying to operate ICOs are cautious to outline tokens as utility to avoid the expenses and the complicated registrations processes that follow. Security tokens also have lesser liquidity and tradability, in addition to restrictions on who can actually invest.
But, as disadvantageous as it may sound, regulations do lead to greater credibility and lessen the legal risk of ICOs. Issuing licensed security tokens through ICOs is actually much cheaper than launching utility tokens. Things are changing as several platforms are working to provide technical and legal solutions for security tokens with full regulatory compliance, including KYC (Know Your Customer) and AML (Anti-Money Laundering) practices.
For instance, Polymath is building a platform to facilitate launching and investing in standardized security tokens (called ST-20) by creating a ‘marketplace’ to connect investors, KYC providers, legal experts, developers, and token issuers together. Think of it like the ‘Ethereum of security tokens.’
In other exciting news, Overstock, in partnership with Polymath, is launching the tZero project that provides a licensed security token trading platform that will help increase liquidity for investors. Since, existing cryptocurrency exchanges do not list security tokens due to SEC regulations, tZero will help to fill the gap. TZero tokens are in accordance with SEC regulations, and token holders will be entitled to quarterly dividends from profits.
Another project called Securitize, which is half headed by SPiCE VC (a venture capital group investing in a number of blockchain startups), is similar to Polymath, but offers a more expansive set of tools to launch security tokens in the market.
Security tokens have also seen the emergence of specialized advisors such as Security Token Partners Group headed by Mario Pazos.
Just to clarify: This doesn’t mean the downfall of utility tokens. But, where 2017 was the year of ICOs, “2018 is the year of the security token,” according to Trevor Koverko, CEO of Polymath.
SPiCE Venture Capital founder Carlos Domingo also shared his thoughts about security tokens:
“It’s inevitable that security tokens will transform equity just as bitcoin has transformed currency, because they afford the owner a direct, liquid economic interest and the expedited delivery of proceeds.”