This week, the Security Token Group released its yearly comprehensive study – The Security Token Market Secondary Trading Analysis: 2019. The study provides direct insight into the current state of security token adoption. Additionally, it sheds some light on the major hindrances encountered by investors looking to participate in the secondary market.
The study produced some interesting data. For one, the stats revealed a lack of progress on multiple fronts concerning security token adoption. The report highlighted areas of concern ranging from a lack of understanding surrounding the new technology, all the way to postponements due to regulatory approval. Perhaps the most glaring piece of data the report confirmed is a surprising lack of global investor demand for these regulated tokens.
Security Token Market Secondary Trading Analysis: 2019
As part of the Security Token Group’s comprehensive approach towards the market, researchers chose to evaluate all international jurisdictions. In this manner, the report is able to reflect a global metric of the market’s performance over 2019. This approach provided much-needed insight into the overall health and performance of the secondary markets internationally.
2019 STO Secondary Trading Market Overview
As one of the first reports published regarding 2019’s security token secondary market progress, readers are privy to a huge amount of previously unknown data. For example, the report indicates that the secondary security token market peaked in January at $229,501,221.25. Interestingly, this peak is the direct result of tZERO‘s TZROP preferred equity token trading.
Notably, by the end of the year, the secondary market experienced a 67% decline with December’s market cap at only $76,062,199.46. Currently, the total volume for the secondary markets is around $2,410,607.94. This volume breaks down into a monthly average of $214,682.90 or broken down even further, a daily average of $7,156.10.
Despite a flourishing STO market, 2019 only saw three security token exchanges go live. Interestingly, all three exchanges meet US jurisdictional compliance requirements. This data proves the growing desire of blockchain firms to enter the US markets. The three exchanges that went public in 2019 are tZERO, OpenFinance Network, and Uniswap Exchange.
The tZERO exchange entered service in January 2019. At that time, tZERO only hosted one security token, the TZROP preferred equity token. Despite the lack of variety the platform provided, tZERO maintained the highest market cap all year. As such, tZERO represented a remarkable 58% of the entire secondary market cap. Consequently, TZROP is the largest token in the industry to be traded over 2019. In addition to the most activity, TZROP also receives the title for being the most consistently traded security token on secondary markets regarding daily volume.
The OpenFinance Network opened its doors before tZERO in the fourth quarter of 2018. Unlike the competition, OpenFinance managed to provide investors with a selection of security tokens to trade. As of December, the exchange trades five live security tokens: Blockchain Capital, Lottery.com, SPiCE VC, 22x Fund, and Protos Asset Management.
Uniswap opened later in the year. Uniquely, this exchange focused on real estate-backed security tokens. The exchange hosted three RealT tokenized properties in Detroit, Michigan. Since Uniswap primarily trades real estate tokens, the exchange provides investors with a host of new and unique investment opportunities. Importantly, analysts see tokenized real estate as having unprecedented upside potential.
Security Token Market Secondary Trading Analysis – 2019
The report also shed some light on the pace at which these tokens gained popularity. Notably, the start of 2019 was strong. Importantly, there were five live security tokens trading in Q1. Despite the strong start, most of these tokens did not see daily trading. In fact, the report revealed the vast majority of security tokens only experienced a few trades per month.
Security Token Market Secondary Trading Analysis Reveals Two Truths
After reviewing all the data presented, the Security Token Market Secondary Trading Analysis proved two important points regarding security token activity on the secondary markets. One, it showed that security token infrastructure is beginning to permeate across traditional markets. This adoption is evident as many of the world’s largest institutions decided to trial blockchain tech as an alternative to the current business systems surrounding transactions and settlements.
This decision makes sense when you consider the improved efficiency and reduced costs a company gains from the integration. As examples of major institutions seeking to enter the security token sector, the report lists Santander Bank’s latest blockchain venture. Also, the tokenization of a $700B asset management firm by Franklin Templeton and Deutsche Boerse settling digital securities trades on-chain are listed.
The second, and perhaps most important takeaway from this report is that most retail investors (crypto and traditional) don’t have much interest in the current batch of security tokens on secondary markets. This lack of interests translated into the lackluster performance of most of the security tokens examined.
This dismal investor participation can be attributed to a number of causes. Analysts pointed to regulatory roadblocks, investor fatigue, and low expected returns as some of the main reasons behind the lack of participation. In turn, this disinterest translates into trading platforms struggling to provide much-needed liquidity to the sector.
Future Looks bright
While the Security Token Market Secondary Trading Analysis proved that there is much work to be done in the space, it also demonstrated that the market is developing slowly. Notably, the report showed that there are over 60 security token exchanges slated for launch in 2020. These exchanges span the globe including the United States, Canada, United Kingdom, Germany, Liechtenstein, Estonia, Netherlands, Switzerland, Gibraltar, Malta, Seychelles, Belarus, British Virgin Islands, Singapore, China, Philippines, Antigua, Jamaica, Barbados, Cayman Islands, Mauritius, United Arab Emirates, and Greenland.
Security Token Market Secondary Trading Analysis – A View into the Future
You really have to hand it to the Security Token Group. This team managed to put together a treasure trove of valuable information that is sure to help guide investors and organizations moving forward. For now, those interested in a geographic breakdown of these statistics can find the info here.
Commissioner Hester Peirce, SEC – Interview Series
I recently had the pleasure to sit down and talk with SEC Commissioner Hester Peirce about the current landscape of digital assets, and how the SEC is working on making a clearer path for people in the space. See our discussion below for some valuable information and direction for anyone involved or interested in digital assets, security tokens, and digital securities.
Commissioner Peirce is known affectionately in the crypto community as “Crypto Mom” for her progressive outlook and push for sensible solutions that still allow for growth in the community. She recently released her Token Safe Harbor Proposal (Proposed Securities Act Rule 195) which is a very well thought out proposal to bridge the gap between regulation and decentralization.
The views expressed by Commissioner Peirce are her own and do not necessarily represent those of the Securities and Exchange Commission or her fellow Commissioners.
This interview has been edited for clarity.
RS: For someone trying to determine if the business model is a utility or a security, what would you say are the three most important elements to consider?
HP: Well I think that what I would suggest is that you take a look at the Howey test and determine where you fit in terms of whether you are selling the token to folks wrapped with a promise that you as a promoter are going to do something to make that token increase in value. If that is how you are promoting it, then I would say you need to study Howey carefully and determine which side of the line you fall on.
You can read more from the SEC about the Howey test below:
- Digital Asset Transactions: When Howey Met Gary (Plastic), Speech by William Hinman, Director of Division of Corporation Finance
- How we Howey, Speech by Commissioner Hester Peirce
- Framework for “Investment Contract” Analysis of Digital Assets
RS: If a business model is a security, what are the first steps the business should take with the SEC?
HP: I would absolutely encourage everyone working on something to come into the SEC as soon as possible in the process and specifically reach out to the FinHub, which you can find on the SEC website. You can meet with us in person or you can meet with us by phone. For people interested in keeping me in the loop, And just get a sense from our staff what types of things to think about, like the first question you raised in terms of where you fall, security or non-security. They will not give you legal advice but they will give you things that you really ought to think about as you are trying to figure out which side of that line you are on and therefore how you can go about doing your token offering.
HP: I look at each offering on a case by case basis, so it’s really difficult to make blanket statements like that. I think people need to be looking at where things fall, if it is a security, figure out whether you want to do it as a registered offering or whether you want to use an exemption, and figure out where it falls best in terms of which exemption to use. It’s hard for me to say categorically that STOs are better than ICOs or vice a versa, again we take a facts and circumstances based approach; we see every offering to be dealt with on its own merits.
RS: Should investors be equally cautious with STOs as they are with ICOs?
HP: In this situation as in every other situation, I tell people who are buying things to ask the right questions, if you’re putting a lot of your money at stake in something you better ask a lot of questions, no matter whether it is a new car, or buying a token, or buying a stock or bond, you need to ask questions. If you can’t get the answer that you think you should get, and if you are not getting answers to questions that are reasonable questions to ask then you probably do not want to invest. There are some basic red flags that apply across any purchase or investment no matter whether it is a digital asset or a traditional security.
RS: Right around this time last year you said “we might be able to draw clearer lines once we see more blockchain projects mature”. How do you think blockchain projects have matured in the past year? Is this more/less maturity than you expected?
HP: I think there has definitely been a maturing, it is encouraging, and I like to see that people are becoming more discerning. People are asking more questions than they were a year or two years ago. I think that holding projects to a higher standard has been good for everyone. I do think that we would see more maturity if the securities law framework were more clear than it is. It’s a bit of a chicken and egg problem, you can’t see as much development without regulatory clarity, and you can’t see the regulatory clarity without knowing what it is you’re providing clarity for. I am hopeful that we will see some more development in the coming year, maybe a lot of that will happen outside the USA, but it may help us think about what the regulatory framework should look like.
RS: I know Malta is doing a lot of progressive regulation for blockchain and digital assets, I think that that is helping guide people in a better direction.
HP: We see other jurisdictions, Malta, Switzerland, and some other jurisdictions that are taking a forward-thinking approach. I think we can learn from what they are doing. I would like for us to be more on the forefront, but it is not bad that other people are thinking about this and we can learn from them – regulators can crowdsource too!
RS: You have been pretty vocal about the SEC taking a watch-and-see approach with ICOs and digital assets. Many people in the ICO/digital asset industry wish that the SEC would regulate quickly so they do not need to operate in a grey zone. What would you tell those people?
HP: I would tell them that I have an idea for a safe harbor. I would hope that people can take a look at that. There are many issues in the United States where there is lack of clarity, this only deals with one of those issues. I hope that people get back to me and give me feed back on that and we can develop something that is workable
Readers can see Commissioner Peirce’s Safe Harbor Speech and Proposal here. The Safe Harbor Proposal details five conditions that teams must satisfy to be able to take advantage of a time limited exemption from federal securities law provisions:
“First, the team must intend for the network on which the token functions to reach network maturity—defined as either decentralization or token functionality—within three years of the date of the first token sale and undertake good faith and reasonable efforts to achieve that goal. Second, the team would have to disclose key information on a freely accessible public website. Third, the token must be offered and sold for the purpose of facilitating access to, participation on, or the development of the network. Fourth, the team would have to undertake good faith and reasonable efforts to create liquidity for users. Finally, the team would have to file a notice of reliance.”
The Safe Harbor Proposal is a work in progress and Commissioner Peirce welcomes additional input.
RS: Last month, the SEC filed a proposed rule to amend the definition of “accredited investor”. Can you tell us a little bit more about these proposed changes and how you think they can benefit the digital asset and ICO industry?
HP: The changes really are focused on the institutional category rather than the individual accredited investor category. When we talk about accredited investors, I hear feedback about how frustrated people are that we are essentially judging financial sophistication by one metric, and that is by how wealthy you are. So there are a lot of people who have told me that they would like to see the individual class of what an accredited investor is expanded to people who have demonstrated their financial sophistication in other ways. It is open for comments and people can weigh in on that and if people do not weigh in on that, most on the proposed changes will be on the entity side.
RS: Can the general public weigh in on the proposed accredited investor changes?
HP: You can just send an email, it’s a relatively painless process. It does go up on the website so everyone will be able to see it. We certainly welcome feedback and it is especially nice to hear from people who might not have known that they could submit comments. We are always eager for our proposals to reach more and more people.
For more information about the proposed changes to amend the definition of “accredited investor” :
- Proposed Rule to Amend the “Accredited Investor” Definition
- Press Release – SEC Proposes to Update Accredited Investor Definition to Increase Access to Investments
The deadline for providing feedback to the proposed accredited investor definition is March 16, 2020. Feedback can be sent to email@example.com, noting File Number S7-25-19 in the subject line, or at the comment form here, and click on “Submit comments on S7-25-19” under release number 33-10734.
RS: Currently, companies can legally raise up to $1.07M through crowdfunding, in today’s environment this is not much start-up capital for industries like technology. Above $1.07M companies do not have many cost-conscious options for raising capital legally; the requirements for a company to have an IPO are enormous and bear an equally enormous cost. Some people have been using ICOs/STOs/IEOs as a bridge to solve this gap. What are your thoughts on this?
HP: I would agree that crowdfunding has not achieved the potential that it could achieve, and that’s something that now that it’s been in place for a little while we need to take a look at and see whether we need to adjust how it works and what those adjustments should be. One of the things that we have at the SEC that has been useful is a Small Business Capital Formation Advisory Committee that meets periodically, it’s a group of people outside of the SEC who are involved in capital raising for small businesses. They provide us input on existing rules and how they need to be modified so that they are more workable or on the need for potential new exemptions for people who are trying to raise money. Through that forum we have had some chances to think about crowdfunding and how we can make that work better. I do think people are trying to be creative in thinking about how they can raise money, so I suspect that you are right, some people are viewing token offerings as an alternative to something like crowdfunding. If they are doing that, they better seriously consider how the securities laws apply to what they are doing.
RS: There has been an uptick in IEOs (Initial Exchange Offerings) in the past six months or so; I noticed that the SEC issued an Investor Alert about IEOs recently which is helpful for investors who might not quite realize what is going on with some IEOs. I know some IEOs are trying to make the projects sound more official than they are.
HP: Yes, people like to do that. One of my constant mantras is that I want the SEC to be more open to letting people raise money and invest in projects. But I also want people to know, as a counterpart to that, the SEC does not sign off on investments. So, when you invest in something it is on you, the investor, to make a decision whether that is a good investment at all, and whether it is a good investment for you specifically. Do not assume that things have been pre-cleared or signed off on by the SEC no matter how official something looks.
RS: This is great advice for a lot of new investors that this industry has attracted.
RS: The New York Stock Exchange existed and operated for over 100 years before the Securities and Exchange Commission was established. If the public was able to successfully trade stocks on unregulated exchanges for such a long time, do you think that it is possible that people can self-regulate the ICO industry successfully until there is proper regulation from the SEC?
HP: There are lots of different ways to regulate. We in the US have chosen to regulate our securities market with a mix of self-regulation, government regulation, and quasi-government regulation. One point that I have made in this space, that sometimes gets lost on government regulators like me is that some regulation occurs naturally: markets regulate and discipline themselves. I think the securities industry is one in which we have seen that some versions of self-regulation that can be quite effective. That said, we have a framework that does involve a government regulator (SEC), to the extent that people are engaging in activity that falls within our purview we are the regulator that writes the rules so there should be interaction between what’s going on in that space and us. You can’t just do things that fall within our jurisdiction and say “well I am self-regulating so that’s an acceptable alternative”.
RS: And it comes back around to you saying earlier, contact the SEC, and the SEC can help guide people where to look.
RS: I’ve noticed over the past couple of years a pretty dramatic difference in the digital asset landscape: people are self-regulating, businesses are more professional, and people are asking better questions. I know many people would like SEC regulation so that they can easily follow the law.
HP: I understand that too. I think we are trying to come to a place where we can make it easier for people who are trying to do the right thing to do it in a way that is compliant with our rules that also achieves their objectives, that’s the place that I want to get to. It will never be particularly simple because our securities laws can be really difficult, but we can certainly make it easier than it is now.
RS: Do you foresee the regulations becoming easier for people to follow in the next year or two?
HP: I remain hopeful which is why we want to get the safe harbor draft idea out there so that we can get people thinking about it. One piece of the US regulatory infrastructure that makes nothing simple is that we have so many different regulators who have a potential interest in this space. So even if we do something at the SEC there are other regulators that may also have something to say. There is cross-government cooperation but I think we are going to hear even more calls for there to be even better and closer cooperation.
RS: Is there anything else that we did not touch on that you would like to share?
HP: No, I think you covered it well. You are right to focus on this question of where do things fall with respect to our securities laws and how can we work on adjusting those securities laws so that they help to make it clear to potential people who are interested in getting involved in the space. When a project is really seeking to do something legitimate with the funds and when they are seeing to do something not legitimate with the funds, trying to make a clear path for folks who are trying to do the right thing and I think will serve all of us well.
Below are some additional useful links:
- You can check the SEC database to see if a company you’re thinking about investing in has filed notices such as Form D, Form 1-A, Form C
- One stop shop for SEC news on ICOs and digital assets
- Investor Alerts
- FinHub, the main point of contact for innovators, developers, entrepreneurs to engage with the SEC
- SEC Spotlight on ICOs – for investors and market professionals
BTG Pactual SA Shows 42% Profit Increase After STO Initiative
This week, the Brazilian-based Banco BTG Pactual SA revealed its Q4 earnings from 2019. Considered as one of the most pro-crypto institutions on the continent, analysts were eager to see the bank’s profits. Last year, the bank instituted multiple blockchain strategies including the launch of several STOs. Impressively, Banco BTG Pactual SA showed a net income growth of just over 42%.
As the largest standalone investment bank in Latin America, the news signifies a calling for other traditional financial firms to embrace blockchain technology moving forward. According to reports, the earnings exceeded analysts’ expectations across the board. Until now, Bank officials have kept silent on the firm’s blockchain initiative’s progress. Now, it’s evident that the project was a huge success.
STO News Pushes Profits
This substantial growth started early last year when BTG announced plans to start hosting security token offerings (STO). Since that time, the bank hosted numerous STOs. These offerings utilized both the Ethereum and Tezos blockchain.
In total, Banco BTG Pactual SA experienced a net income surge of over 42%. Broken down into categories, the bank’s recurring net income saw an increase of 61%. That equals out to around $232 million. Additionally, the bank saw a stark increase in its loan book.
Notably, Banco BTG Pactual’s loan book grew by just over 11% from Q3. Executives attributed this growth to a combination of factors. Importantly, the integration of blockchain technology, in addition to a new corporate strategy fueled the growth. Much of the growth in this sector emerged after bank officials announced plans to extend loan services into other South American countries. Specifically, Chile and Colombia are on the list.
Banco BTG Pactual SA Embraces Crypto
Banco BTG Pactual SA became recognized as a pro-crypto organization in early 2019 after the firm announced it would launch the first Latin American tokenized real estate fund STO – REITBZ. The project received heavy media coverage which helped to boost BTG’s positioning in the market. Importantly, the STO raised $3 million.
At that time, BTG executives decided to utilize the Ethereum blockchain to carry out the STO. While the project was successful, banking officials raised some concerns regarding the structuring of the Ethereum blockchain. Basically, bank officials wanted a way to ensure that no transactions got verified from miners located in countries under US sanctions.
Since Ethereum is a decentralized blockchain that allows anyone to mine it via the Proof-of-Work consensus algorithm, blocking miners due to their location was impossible. As such, Banco BTG Pactual SA executives announced a change over to the Tezos blockchain in July 2019. Tezos provides a more permissioned blockchain than Ethereum. Consequently, the firm allows Banco BTG Pactual to avoid any future concerns regarding transaction validations from US sanctioned countries.
Banco BTG Pactual SA – Tezos Big Plans
Almost immediately after the Tezos integration, both firms announced that they had around $1bn in existing and prospective token issuances in the pipeline. This announcement helped to drive profits even further, as investors are now bullish on the new tech integrations.
Banco BTG Pactual SA – An Industry Leader
As the top player in the Latin American crypto sector, Banco BTG now has the ability to set the pace for the entire market. As such, you can expect to see a host of other institutions seeking to integrate blockchain technology as soon as possible. For now, Banco BTG Pactual SA officials deserve a pat on the back for their forward-looking strategy and successful launch of the bank’s tokenization initiative.
Flyt Property Brings First Tokenized Real Estate STO to Africa
This week marks another important milestone within the international security token sector as the African-based tokenization platform, Flyt Property announced plans to host the first-ever Tokenized Real Estate STO on the continent. The news demonstrates an acceleration in the adoption of tokenization across the global real estate market. Additionally, it symbolizes a major advancement for African markets moving forward.
According to company documentation, Flyt Property Investment will issue Africa’s first property-backed security token. Importantly, the blockchain-based token represents ownership in Flyt Property’s new real estate fund. Unlike previous tokenization ventures within the region, Flyt features full regulatory and legal compliance.
Flyt Hospitality Fund
The newly tokenized Flyt Hospital Fund focuses specifically on strategically located hospitality properties. Also, the fund will focus on sectional-title serviced apartments and student accommodations. Traditionally, this style of real estate required the participation of a major financial backer. Flyt believes that through the power of tokenization, the firm can open up these investment opportunities to a host of new private investors.
Importantly, the Flyt Hospital Fund is a South African Section 12J fund. This is a critical categorization as Section 12J investments receive tax breaks and a host of other advantages in the market. The concept of Section 12J properties first entered the market via the Income Tax Act of 2009 as a way to stimulate market growth. Importantly, South African taxpayers who invest in local 12j companies receive a plethora of benefits including a 100% tax deduction.
In a recent interview, Zane De Decker, MD of Flyt Property Investment spoke on the important maneuvers his firm has made. He explained how the new strategy places Flyt far ahead of the curve. Decker also touched on the overall excitement felt by his team. He then spoke on how the project provides new market opportunities to investors.
Decker was keen to go into some of the finer details related to the project. He described how the new services benefit both traditional and token investments. Flyt will allow both fiat and tokenized investments into the fund. Consequently, this strategy will increase the liquidity of the entire project. Lastly, Decker described why the transparency provided by the new tech is a major upgrade for the market.
Flyt Property Investment worked with the Swiss-based financial technology supplier Bakari to make the project a reality. Speaking publicly, Ciaran MacDevette, Co-Founder of Bakari, explained that the new project embraces next-generation financial technology. Additionally, MacDevette stated that Bakari was “proud” to be working with the Flyt Hospitality Fund. He also discussed the reasons why his firm continues to be a leader in FinTech innovation.
Flyt token (FLYT)
FLYT is an ERC-20 compatible token that lives on the Ethereum blockchain. As an ERC-20 compliant token, the platform enjoys some significant advantages including higher interoperability. For example, all Flyt tokens can be self-custodied by investors with only the need for an ERC-20 compatible wallet.
Flyt Property Investment
Cape Town appears to be Africa’s new blockchain epicenter. These latest developments are sure to place Flyt Property Investments in a category of their own. For now, the African markets are primed and ready for large scale tokenization.