In a recent report, Cointelegraph has thoroughly assessed the potential and desire for security tokens. Over the course of 90+ pages, quantitative analysis and commentary from industry insiders paints a picture, hinting at big things yet to come. Below we take a look at some of the highlights in the report.
Simply put, security tokens are an investment contract. They are blockchain-based digital representations of shares in various forms of investment vehicles. Security token applications are vast, with potential underlying assets ranging from precious metals to financial instruments, collectables, and more.
As the blockchain industry is rapidly expanding, so too are token standards available for use among security tokens. As of today, examples can be found on not only Ethereum, but others such as Raven, Tezos, and more.
Access to security tokens is most commonly obtained through either Security Token Offerings (STOs) or secondary marketplaces like OpenFinance.
Why the Fuss?
Presently, there is a mad-dash occurring within the security token sector as a variety of companies attempt to gain first-movers advantage. Those that can establish themselves now, along with the necessary infrastructure, will be looked back upon as both pioneers and pundits within the sector. Cointelegraph states, “Currently, the market for security token trading is a competitive one with banks, traditional exchanges, startup token exchanges, cryptocurrency exchanges, and decentralized exchanges all vying to capture market share.”
Why is this the case though? What is it that these companies envision that makes the hassle worthwhile?
The benefits afforded by blockchain-based securities are numerous and significant in nature. While investing has seen a steady influx of technology over the decades, few examples can match the potential of security tokens to radically improve methods of operation. Aside from the oft-noted increase in liquidity, the following are a few notable benefits expected to be realized through the use of security tokens.
Through traditional means of trading stocks, settlement times can run up to 48 hours. This process involves various entities, and resulting inefficiencies. Depending on their implementation, security tokens have the ability to be settled near-instantaneously.
Traditional securities are typically only accessible for trading during normal business hours. World events do not operate on a set timeline however, meaning that opportunities can often get missed. Security tokens solve this, as markets never close – meaning no lost opportunities.
While decentralized currencies like Bitcoin can be traded quite freely, assets designated as securities must adhere to strict guidelines. This adherence can be a difficult process as different securities have varying underlying assets and structuring. With security tokens, programmers can ensure regulatory compliance from the get-go by building it into its code.
From a regulation standpoint, security tokens have a slightly steeper hill to climb than most digital assets. Thankfully, many countries have already begun developing framework for their implementation as seen in Australia, Hong Kong, Japan, Singapore, United Kingdom, and more.
Despite these strides being made surrounding regulations, various past and on-going events have resulted in what were deemed securities violations. The following are a few notable examples that saw fines doled out by regulators such as the Securities and Exchange Commission.
While the companies noted above were issued heavy fines, the verdict is still out on a few high-profile cases – the most notable of which being SEC vs. Ripple. Despite each of these fines being issued within the United States, and a generally agreed upon lack of regulatory clarity, the nation remains the most popular for hosting an STO.
‘The United States solidified its position as the most popular jurisdiction for the incorporation of STOs, with Switzerland being a distant second’
Although current market participants may be looked back upon as trailblazers, they are expected to soon be joined by a plethora of others. In its report, Cointelegraph references an interview with Raiffeisen Bank International in which it expressed a belief that ‘By 2030, most securities will be tokenized’.
Interestingly, it is noted that while “the majority of investors are not currently asking for exposure to security tokens, investors are beginning to demand a trading experience for stocks that is similar to cryptocurrencies. They want transparency, liquidity, and instant settlement.” If these wants and desires sound familiar, just look towards our overview of the benefits afforded by security tokens.
The potential is there. The interest is there. So, what can we realistically expect the market size for security tokens to look like in the coming years?
As of April 2021, the security token market-cap as a whole approached $1 billion, with trading volumes nearing $5 million per month.
These totals build on 2020, which saw 80 companies host STOs and a market growth rate of 517% per Cointelegraph. Headliners included in these 80, noted by Cointelegraph, include both Red Swan, and the Thai Central Bank. Between these two alone $3.8 billion was raised – the market as a whole raised $5 billion.
During the 2020 calendar year, the following were the best and worst performers among security tokens.
|Company / Security Token||Return on Investment|
Based on multiple reports, it is expected that the security token market will grow to lofty heights in a short period of time – more specifically, $1.5-14.7 trillion within 4 years (2025).
Firms that believe the market will fall within this range include the World Economic Forum (WEF), Klynveld Peat Marwick Goerdeler (KPMG), Finoa, PWC and more.
In the immediate future, it is expected that growth will be fueled first by small and medium enterprises (SMEs). Cointelegraph notes that, “the reason for this is twofold. First, security tokens bring down the costs associated with raising capital…Second, security token markets do not have sufficient liquidity for larger funding needs”. The second point will eventually change with the advent of secondary marketplaces, facilitating the trading needs of large corporations. For the time being, SMEs that do not require the same levels of liquidity will lay a strong foundation within the sector.
Overall, it is clear that the future is bright for security tokens. While it may have taken a bit of time to get the ball rolling, it is now beginning to pick up speed. Regulators are laying out guidelines, and investors are becoming increasingly savvy to the benefits of blockchain based assets.
If any one of the various intelligence reports are correct on what the future holds for this nascent asset class, it will be sooner rather than later that security tokens take the world by storm.