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If you're not familiar with security token (STO) offers, maybe you should be.
With regulators pointing to initial coin offerings (ICOs) and now they are also going after decentralized exchanges (DEX), players in the sector are looking for news on how to raise funds.
Changing the name to "token generation event" does not cut it with most regulators and, in itself, it does not even make simple chords for future tokens (SAFT).
According to the president of CoinShares, Daniel Masters, the STO will be the next big news in the crypt.
Speaking as part of a panel during a breakfast briefing organized by Dow Jones, Financial News, and MarketWatch media, he identifies a third wave for cryptography.
According to Masters, Bitcoin has inaugurated a "new era in value transfer", with the second wave led by Ethereum with its "frictionless way to form global capital" and today a third wave of security token "with particular advantages for the resources that historically remained in private hands ".
CoinShares sponsored the event and is the company behind the Bitcoin and Ethereum trading envelopes of the XBT providers. Trade in ETNs in the United States was temporarily suspended in September due to confusion over the difference between ETNs and exchange-traded funds (ETNs are unsecured debt securities).
Untapped value of private goods
Some of the largest companies in the world are private, such as Cargill, with a value of over $ 109 billion that dominates agribusiness or Koch Industries, which straddles sectors that include consumer goods and oil. It is valued at $ 100 billion.
Many are obviously much appreciated. These companies prefer the freedom of movement that private living permits, but if they come into the public capital market for funds, values will break out due to the fact that there are more participants in those markets – it's all about liquidity.
Now think of a whole range of other private goods, such as vintage cars, art, stamps, gold, and so on. All these assets could be tokenized and in doing so, their value improved.
It could open up a world generally hidden from sight behind the private equity and venture capital gate valves, where mere mortals are forbidden to trample on.
"Legacy financial institutions will not be able to avoid the wave of tokenization," Masters insists.
He expects a "magnetic force" to drag them to these possibilities, regardless of their aversion to all cryptic things.
What went well and what went wrong with the ICOs
Briefly, let's go back to the second wave to see how we will get to this third wave claimed in the evolution of cryptographic space.
The first coin offers were a huge success. For the first time in human history it has been possible for anyone in the world to have access to coding skills to solicit investment capital from potential contributors anywhere in the world with access to the Internet.
It is estimated by ICOData.io that $ 13.3 billion has been collected by ICOs since 2015. From every measure that must be considered a success.
But this year the story is different with investors sitting for ninety percent or more losses. Far from offering diversification, many of the tokens proved useless as the projects and services they aimed to deliver were closed.
As Chris Burniske of placeholder.vc pointed out last week, many of the projects involved in fundraising the ICO have focused almost exclusively on invested capital but not on how to place it as productive capital (how to get consensus, operation and growth ).
In other words, ICO / TGE employees actually filled the bank accounts of the founders and team members with ETH and had no control over the way investment capital was used and no claims to a portion of the share capital.
ICO contributors are paying for access to network services. Some investors may have confused it with a share that gives the owner the legal ownership of a portion of the share capital. But ICOs are not initial public stock offers of stock markets, despite the deliberately confusing designation.
It is assumed that ICO investors were mostly aware of this fundamental difference between tokenholder and shareholder, but invested anyway; on the contrary, they continue to invest in ICO, albeit at a very low rate, in the expectation that the value of the native "utility" token increases.
The problem with all of this, from a regulator's point of view, is that ICOs look a lot like securities when judged against the Howey Test used by the US Securities and Exchange Commission (SEC).
For this reason, many ICOs have started to exclude US investors from their fundraising activities, with developing hubs in Switzerland, Singapore and Malta, where no such conditions have been applied, although respectable projects will still require anti-money laundering (AML ) and know-your- the customer's rules (KYC) to be met.
ICOs are not just a problem for regulators. They are obviously also a problem for consumers caught on the wrong side of the scammers.
The open, decentralized and largely unregulated nature of ICOs, or TGE, if you insist, means that they attract scammers into space, and that of course it concerns both individual investors and legislators.
Although there are still many ICO launches, the billions of dollars in fundraising days, like those seen with the 4 billion dollars of EOS, are over, at least for the short term.
Enter the security token offer
However, with the SEC and several US states that are starting to force ICO promoters to not register as sellers of securities and comply with the appropriate securities laws, with other jurisdictions likely to follow in their footsteps, ICO can be numbered.
This is where security tokens arrive. Instead of trying to fight regulators, there are those looking for their warm hug.
Cypherpunks and others married to the hopes of a decentralized disruption of banks and other financial intermediaries could be suspicious of security tokens. Are not they just another carrier – like the funds quoted in bitcoin exchange – for the acquisition of the encrypted space by the mainstream?
However, STO advocates like Masters, whose company has a foot in the old and new world, see the benefits. On the one hand, it is a safe haven for project developers and on the other hand a huge opportunity to "make securities liquid, transferable and transparent" and open up a broader perspective for "arbitrage between private and public capital markets".
The most successful STO to date comes from tZERO, which raised $ 134 million for its trading platform and then there was a $ 125 million increase in the electric scooter company's SPIN.
The tZERO investors were required to have "fully subscribed agreements for future equity (SAFE) prior to the close of August 6, 2018 of the Token Security Company (STO)".
tZERO is a subsidiary of Overstock.com, the listed online retailer that accepts encryption.
Another start-up company, Securitize, was involved in the transfer of the first security on blockchain:
"Today we made the first transfer of a security on a public account." With @airswap –@carlosdomingo
– Securitize (@securitize_io) 2 November 2018
The compliant token was issued by SPICE Venture Capital Fund on Securitize and transferred to a decentralized AirSwap exchange.
With the SEC recently fined EtherDelta $ 400,000 to manage a stock exchange without registering with the authorities, the issue of compliance with the security law is something that cryptographic projects could do without.
Add to this the access to much greater liquidity and the attractions of the STOs grow further.
Titles on blockchain
Speaking at the panel next to Masters was Myles Milston, CEO of Globacap, who is creating titles on blockchain.
The company is in the fourth cohort of the regulatory sandbox of the UK Financial Conduct Authority. This provides regulatory security for fintech startups to build products without the disadvantage of having to worry about violating regulations.
Globacap defines itself as "a platform that simplifies, streamlines and expands access to global capital by creating blockchain securities".
Milston explained the company's approach: "Bitcoin is the safest database we have on the planet right now." Apply it to titles.The ledger updates automatically, for example when security is exchanged: it is a complete digital securitization … We are the first in Europe to make the tokenisation of the equites. "
He added: "The second wave of the ICO is like that of the 1850s in the United States with the railways". It seemed then that almost anyone could create a corner shop that sold shares in some railway company or the other.
Masters makes a similar observation in a different way: "Ethereum has transformed crypto-space from mono-dimensional to multi-dimensional."
Milston again: "What we are doing is part of the legislation on existing titles".
Just as stablecoins could be one of the key ramps for financial institutions wishing to invest in the asset class crypto, even security tokens could do so.
"An intelligent contract could link to a sharing register, and we could see a lot of unnecessary work in the public procurement markets," says Masters.
STOs could also be interesting for regulators. "A security framework will be a victory for regulators".
Are STOs a threat to the decentralized capital increase?
So perhaps instead of considering the STOs as a threat or a way for regulators to reduce the decentralized and open fundraising model, a less encrypted community should adopt a less contradictory position.
Joe Oehmke of the global consulting firm Promontory Financial Group and regulatory strategy specialists supports this vision.
Promontory Financial Group is owned by IBM and Oehmke wrote the IBM whitepaper on the blockchain and the general data protection regulation of the European Union, which came into force in May of this year.
"Regulators are not necessarily the adversary, it's about how we can foster innovation," says Oehmke.
Oehmke advises companies on blockchain and US financial regulation, among other things.
"There are certainly challenges when it comes to cryptographic resources, such as fraud and volatility," he continues.
"There are many illegal uses by bad actors, so states and the general public are interested in healing."
Not surprisingly, perhaps, he does not believe that the crypt is "a cure-all for what afflicts the financial system", but recognizes that "regulation is intrinsically backward, so it always tries to recover".
Although he has not expressed an opinion that STOs represent the best way for encrypted startups seeking to raise capital, he praised FCA's regulatory sandbox approach and noted how it was adopted by other jurisdictions, in particular from the Monetary Authority of Singapore, which is the financial authority and the central bank of the city state.
Oehmke admits "it's a challenge to think about regulation at a global level, even in the United States it's a problem to align the laws of 50 states".
Common sense approach
Despite this, he sees how STOs can play a valuable role for regulators and regulators: "Crypto is here." Common sense approaches on how to approach the world as it is, "says Oehmke.
Taking a step back, if there are a multitude of STOs and digital securitization chains, how do they work together in the absence of central bank digital currencies (CBDC)?
The Masters think that the answer is obvious. "Bitcoin can be the currency of rail transport and settlement for securities".
Many among the public – a mixture of journalists, analysts and fund managers – have challenged this statement.
Patrick Byrne, managing director of Overstock, was not present at the briefing but presumably would be in agreement with Masters given his comments a few days ago:
"When people start to get in, it's when their financial systems fall in. So yes, since I think the whole modern financial system is a big Keynesian scheme, the magic tree of Ponzi money, I expect that the day will come when people will turn to the crypt ".
So the next time you look at your portfolio of nearly worthless utility chips that do not generate dividend income and have no rights over the company's capital, think about how it could have been all that different if you had real security.
The sad truth of the second wave of cryptography of the ICO was that, more often than not, they were money-making machines for financial insiders who bought in private presale at much lower prices, and the founders who drove away the ETH but failed to invest in productive capital to maintain and support the cryptographic network provided in the white paper.
Milston of Globacap sees tremendous growth for STOs.
"There's a huge amount of money in private businesses that are not currently exploited, and between 10 and 12 months we'll see an explosion."
Ok, we would expect him to say it, given his company's mission, but he might be involved in something like the regulators in the circle and the crypt growing up.
The briefing was moderated by Duncan Mavin (pictured left at the top of the story), publisher responsible for operations and news standards, Dow Jones Media Group.
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