Security tokens continue to reshape the way we conduct business on a global scale. These unique tokens provide companies and investors with a regulated way to enter the crypto space. When a company launches a security token it’s called an STO, or security token offering. Understanding the pros and cons of security tokens makes you a better-informed investor.
Regulatory integration is a huge step forward for the cryptospace. It allows traditional business models to convert over to more efficient blockchain-based structures. While this approach is perfect for many types of business models, it doesn’t always make sense due to some of the drawbacks security tokens contain. Let’s take a moment to examine the pros and cons of security tokens to get a better understanding of these amazing tokens true capabilities and limitations.
Pros of Security Tokens
Security tokens allow traditional business transactions to be tokenized while still meeting the regulatory requirements set in place for the industry in question. Tokenization is the process of transferring an item to the blockchain. For example, a security token can represent ownership rights in a property.
Transferring property ownership rights requires that all parties involved in the transaction meet certain related regulatory requirements. Security tokens have the ability to integrate these regulations directly into their core protocol. In September of this year, the security token launch platform Polymath partnered with BlockEstate to begin the tokenization of the real estate market.
Reducing Investment Thresholds
Security tokens are a powerful fundraising tool which allows companies to lower their minimum investment requirements to nearly non-existent. In the past, companies were forced to require that participating investors provide a certain level of funding to participate in their campaigns.
This situation led to the dismissal of interested parties that were unable to meet the minimum requirements. In other words, companies were unable to accept capital from millions of investors because the cost of processing the investor’s information and was too expensive.
Blockchain technology eliminates this problem by automating the majority of the process. Security tokens take the concept further and remove the regulatory workload through the use of smart contracts.
Enhancing Asset Liquidity
Security tokens provide investors with more liquidity. In its current state, there are thousands of investors locked into long-term investments in which they must wait until the maturity date to access their funds. Since many of these are long-term investments, it can leave these individuals without access to their money for years.
Security tokens can eliminate these concerns. Once a fund is tokenized, an investor can buy and sell fund shares as they see fit. This produces a more effective flow of assets and enables the development of secondary trading platforms to handle new market opportunities.
Hosting an STO is far cheaper than hosting an IPO. Companies can see upwards of 7% of their raised capital go towards issuance and transaction cost in a traditional IPO. The reasons for these high costs are simple. IPOs require the involvement of numerous third-party verification systems. Each adds a fee to the total cost of the transaction.
STOs reduce the cost of crowdfunding significantly when compared to IPOs. Blockchain technology allows companies to automate the most costly parts of their transactions. Additionally, smart contracts can automatically monitor, track, and distribute investment funds without the need of any third party intervention.
Security tokens allow companies to host international fundraising campaigns. Sending any form of fiat currency internationally can be a huge headache. Depending on the amount of funds being invested, you could see over a week in delays. Additionally, there is a risk of losing funds during the monetary conversion.
Security token investors eliminate these international costs. These tokens can be sent across the globe for no additional fees. Also, you won’t have to wait days for your blockchain transaction to complete. In most instances, the transaction takes minutes. Best of all, there is no need to convert your funds.
Improved Market Efficiency
The transparent nature of blockchain technology improves the current market systems significantly. Security tokens provide instant monitoring capabilities. Users can easily track their tokens and investments via a blockchain monitoring application. Investors gain untethered access to their investment’s fundraising progress.
Cons of Security Tokens
No token is without its imperfections, and security tokens are no exception to this rule. These helpful token are bridging the gap between conventional investments and the blockchain space. That being said, they are not without their limitations.
Investor Accreditation Limitations
One of the biggest drawbacks to security tokens is the inability of non-accredited investors to own them. In the US, this means that more STOs will require you to be an accredited investor as part of their SEC compliance. Unfortunately, you need to earn at least $200,000 per year, or, have at least 1 million dollars in the bank, if you want to be an accredited investor.
More Expensive than Utility Tokens
Unlike ICOs, STOs need to include a host of other organizations in their crowdfunding campaign. Underwriting companies are a perfect example of an added cost that STO participants must foot the bill for. Regulation isn’t cheap and it’s much more expensive to host an STO when compared to an ICO.
Secondary Market Trading Restrictions
Another drawback encountered by security token investors is secondary trading market restrictions. Security tokens can only be transferred via licensed platforms. The platforms must possess a security trading’s license in the country they operate in. Additionally, security tokens feature a time-lock mechanism. You can only trade these tokens between qualified investors for a predetermined amount of time after the STO.
The Pros and Cons of Security Tokens
Now that you have a better understanding of the pros and cons of security tokens, you can make an informed decision on which is the right investment for you. Remember, there isn’t a one-size-fits-all when discussing tokens and what may be the perfect fit for one business, could be a total disaster for the next.
Security tokens are the chain that links conventional markets to the cryptospace. You should expect to see explosive growth in this sector over the coming months as the advantages of blockchain technology continue to become better understood globally.
3 More Executives Leave SDX Due to Discrepencies
The blockchain-based digital asset trading venue SDX continues to have a rough start to the new year. This week, another high-level executive announced their departure from the firm. The news brings the number of executives who left the company in January 2020 up to three. The news demonstrates a realignment and shuffling of SDX’s business plan. Also, it showcases the growing pains associated with these changes
According to company documentation, all of these executives departed from their full-time positions in January. The three individuals to leave are Alex Zinder, an architecture lead at SDX, Ivo Sauter, SDX’s head of clients and products, and Sven Roth, the firm’s chief digital officer. The later of the trio agreed to stay on as an external advisor to SDX.
In a recent interview, Sauter explained the motivation behind his decision to leave. He touched on a number of critical changes made throughout the firm. These changes included a shift from the platform’s original vision. He explained that at first, the platform was to utilize the banking sector as a bridge into the rest of the market.
However, this strategy quickly changed as SDX began to tailor its platform specifically, and solely for use by banks. Sauter described how these changes effected moral and fueled the growing dis-alignment between executives and owners. He explained that originally, the platform was to be much more inclusive. For example, SDX was to enable startups to provide services around its features.
Sauter also took a moment to touch on the negative effects this corporate culture had on the project. He explained that, in his opinion, a bit more separation needed to occur between SDX and its mother company, the Swiss stock exchange operator SIX Group. Apparently, these feelings of discourse only grew as the mother company took more and more influence on SDX’s day to day operations.
Additionally, Sauter explained how the big-company approach also inhibited the company’s ability to save. Large corporations require much more reporting. In turn, this reporting raises operating costs. Additionally, smaller firms have more liberty in terms of flexibility and risk management. In the end, the corporate approach made many of the executives feel as if they had been stifled.
Despite the discrepancies, Sauter stated that he had left on good terms. He went as far as to claim that he was at a point in his career that he had no desire to have his contract renewed. Consequently, SDX chose to not offer a renewal.
Challenges in the Market
As with any major corporate reshuffle, there are going to be individuals that no longer fall in line with the platform’s overall goals. Discussing these challenges, a SIX spokesman touched on the changes and what they mean to the project. They explained that whenever you have a concept built from scratch, there are going to be many ups-and-downs associated with the development. In the end, the firm acknowledged that these changes have begun to add up with the spokesperson stating that the firm has “spent quite a few Swiss francs” on the ordeal.
SDX Moving Forward
From the tone of SDX’s past employees, the company is undergoing some heavy internal changes. As such, there is no way to determine exactly how these personnel changes will affect the overall strategy the company has chosen to follow. One thing is for sure, SDX appears to have made a priority shift towards servicing the banking sector exclusively with its new platform.
SEC Charges Opporty for 2018 ICO
This week, the Securities and Exchange Commission (SEC) continued its ICO crackdown. This time, the firm levied charges against project Opporty Founder and Brooklyn-resident Sergii Grybniak. The firm alleges that Grybniak broke the law when his firm raised approximately $600,000 during its 2018 ICO.
News of the charges first broke via Jan. 21 press release. In the release, the SEC reveals the charges laid against Grybniak in detail. Importantly, the primary charge is participating in the unregistered sale of securities. Additionally, the SEC claims that Grybniak made false statements in order to encourage more investor participation.
These statements include a myriad of exaggerated and completely fake claims. In one instance, Opporty claimed that its 2018 ICO was “100% SEC-compliant.” Unfortunately, this claim proved to be the tip of the iceberg. Apparently, Opporty also claimed to have thousands of “verified providers” who were ready to work with the platform.
This claim became so overblown that in one piece of marketing material, Opporty suggested it had a business database that included around 17 million participants. In actuality, the firm had no partnerships. Unfortunately, these claims served one main purpose, to push more investment capital into the ICO.
Major Software Firm
As if the shower of lies put forth weren’t enough, Opporty also made some very specific partnership claims that proved to be bunk as well. According to the SEC, the firm lied about a partnership with a major software company. This lie was to help ease investor doubt about the ability of developers to deliver on their hefty platform promises.
SEC Steps In – Opporty
It doesn’t take much research to see why Opporty ended up in the SEC’s crosshairs. Now, the SEC seeks injunctions against all future digital offerings by the company. On top of the cease-and-desist, regulators require Opporty to return all the funds the company raised during its 2018 ICO. Also, the firm is to face a variety of civil penalties for its actions.
Opporty executives sold the concept to investors as a blockchain-based ecosystem for small businesses. The platform was to provide these small-to-medium sized companies with access to advanced blockchain systems. For example, businesses could list their services and lock in their clients via smart contracts.
United States Investors
Aside from the obvious scamming that took place, Opporty made another key error in its strategy. You see, unlike many similar ICOs, the offering did not explicitly exclude U.S. investors from participating. The 2018 ICO included investments from around 200 US citizens. In this way, the firm invited the SEC to monitor its actions throughout its entire crowdfunding campaign.
An Oppurty Lost
Given the long list of violations this firm now faces, it’s easy to imagine a scenario in which Opporty decides to close its doors. Already, numerous SEC-charged firms have taken similar measures prior to refunding clients’ funds. For now, Opporty has a long legal battle and hefty fines to deal with. You can expect to hear more from this case as the SEC pursues its charges against Grybniak.
A Quick Look at – The Security Token Market Secondary Trading Analysis: 2019
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 a couple of months after tZERO in the first quarter of 2019. 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.