For those of you that don't know what a security or security token is: Securities are tradable financial instruments including (but not limited to) bonds, stocks and options. Securities provide the promise of monetary value in the form of dividends, profit sharing or other mechanisms. A security token is the ownership of this security attached to a cryptographic token.
Last year the Initial Coin Offering, or ICO, saw a massive rise in popularity. The ability to sell the utility of your platform as a crowdfunding mechanism attracted entrepreneurs and investors alike, who were drawn to the lack of the 'accredited investor' entry barrier present on standard VC investment.
Much of the recent conversation has now turned to the ICO's newer, more exciting brother: the Security Token Offering, or better known as the STO. The ICO team at Mo Works Creative Agency thought we would collect ten of the more interesting and valuable insights and facts we've heard around the scene surrounding the legendary 'security token'.
1. Issuing a share-backed security token could replace the traditional IPO.
Traditional IPOs can cost upwards of $1 million, and the time invested is very significant. By releasing a share-backed security token, not only will companies be able to effectively fundraise for a fraction of the total cost, but also complete this at a much earlier point in their timeline.
STOs have the potential to be adopted en masse once they become more clearly regulated, which could result in the IPO (as we know it) dying out due to the more convenient alternative.
2. Security tokens open up fractionalised investments to everyday investors
Investments in giants such as Facebook or Google at their IPO stage has been largely impossible for someone with only the resources, or who only wants, to invest a small amount. With fully-divisible security tokens able to be traded almost peer-to-peer, this barrier to entry will be drastically lowered.
3. Large projects could become more public and community-focused
Imagine Apple wanting to please shareholders numbering in the thousands instead of the usual small board of directors. Much more information would need to be made public, and decision-making usually reserved for behind closed doors could potentially fall to a vote by all token-/shareholders.
The focus would shift from 'please the minority at the expense of the majority' to a less opaque, more community-driven approach for startups and companies that decide to raise using an STO.
4. Issuer and investor/token holder interests are more aligned
As this past year has demonstrated, utility token issuers do not always make decisions that are beneficial to the value of their token. This is in their nature as a 'non-investment' — the business comes first. This may result in a utility-token losing a lot of value.
With security tokens' value tied instead to an asset that's worth is tied directly to the success of the company, token purchases do not have to worry about conflicting interests between parties.
5. The Increasing amount of STOs will create new and exciting derivatives
Personalised portfolios with a large range of different investments will become available to individuals that were only previously available to investment funds. A regular joe could have a portfolio that encompasses a wide range of international companies all in their infancy, and fundraising strategies by businesses would change and adapt to suit this.
6. Security tokens are liquid
Traditional investment is often termed 'illiquid' due to the difficulty faced trying to find a buyer for an asset. An example of this would be having to find a buyer for a house that you previously invested in — you would struggle to liquidate this instantly.
Security tokens possess the ability to be traded in minimal time (potentially even via decentralised exchanges), and are only fractions of the size that traditional investments are.
7. Security tokens' value will be much more stable
A utility token's value is largely speculative and varies with market forces — in the past few years we've seen tokens go 10x… or immediately lose their value. As security tokens are tied to an underlying asset, their value will vary much less.
Due to the increased liquidity of security tokens, market forces will still have some impact albeit on a much smaller scale. Strong price resistances and supports will be present, with variation happening largely between them.
8. Tokenization isn't limited to assets
Tokenization of debts could very well occur once a rigorous security token economy has been established. Where previously investment in debts was largely institutional, investment in debts may become more mainstream. Furthermore, tradable debt tokens representing (for example) mortgages or corporate bonds would be able to undergo a market price discovery based on risk and dividends.
9. Security tokens will help bridge the gap between traditional VCs and cryptocurrency
With regulatory oversight and a few successful STOs, the cryptocurrency space will see much more investment. The ability to purchase an asset-backed security token instead of the traditionally more volatile utility token should see many previously ICO-sceptic VCs participating in STOs and fostering even more growth in the (still) fledgling cryptocurrency space.
10. Security token regulations are on their way
The SEC is an American entity created to look after investor interests after the stock market crash of 1929, and thus far have not provided clear information on regulations surrounding the new asset-class of utility and security tokens.
Statements surrounding ICOs and token sales have however been offered on a semi regular basis. General consensus is that clarification surrounding security tokens and STOs should be coming in the next few months — so get ready!
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment or legal advice. Seek a duly licensed professional for investment or legal advice.