Imagine being able to own .1% of a Picasso or a fourth of an Uber cab that you split with three of your friends. Currently, such things would be burdensome at best or just nearly impossible. However, security tokens offerings (STOs) are providing a path to fractional ownership by enabling the tokenization of virtually anything we can think of. Such offerings have been sweeping the cryptocurrency space, providing a regulated alternative to ICOs. Since security tokens are backed by underlying assets or profits, investors gain access to equity, voting rights, and dividends. In theory, this should allow anyone to invest into anything, opening the doors for unlimited opportunities never seen before. Yet in practice, there are quite a few obstacles one needs to be aware of before getting lost in the hype.
As ICOs became popular fundraising channels, utility tokens emerged. Many projects claimed that these tokens were an integral part of their products, however, most of them didn’t do much but help them raise capital. Since ICOs were never classified as securities, they managed to get around the regulations that are attached to most financial assets. While the regulations of STOs provide for safer waters, they also build a fence around the pool in the form of accreditation requirements. While Title III of the 2016 JOBS Act opened up equity crowd funding to retail investors, that access is still like a crack in a wall (for better or worse) compared to the freedom provided by most ICOs.
Long Lockups Periods
ICOs created an environment of evangelist hodlers that held coins through thick and thin and speculators that would make quick (and pretty sizable) profits by dumping their tokens as soon as they hit the market. This has been a rinse and repeat practice for many ICO investors. However, with STOs this isn’t the case. Investors can be subject to long lockup periods where they are unable to get rid of their assets. Such periods not only tie up capital, but also greatly increase exposure to price fluctuations and long-term success of the underlying asset.
Limited Upside for Speculators
Investors participating in ICOs are primarily moon hunters. Unfazed by the gains in the tradtional crypto market, they hunt for the unicorns that would 10–50x their potential profit. Doing so for ICOs that live on speculation (and not much else) is one thing. However, since the asset underlying STOs has a net asset value, it may act as an anchor on price. While assets like art and real estate tend to retain value and grow over time, realizing gains from such assets requires a much greater amount of what most ICO investors don’t have; patience.
While STOs aim at turn illiquid assets liquid, ironically, they also reduce the availability for exchange or trade. Being subject to many secondary-trading restrictions, the ability to sell off assets is far more difficult than getting rid of shares on an exchange. Nevertheless, licensed security exchange token platforms are coming and there are a few things we should look out for:
- Coinbase bought Keystone Capital to become a regulated broker dealer
- Goldman Sachs backed Circle acquires equity crowdfunding platforms Seed Invest
- GSR capital funds Overstock.com’s tZERO with $400 million and the Boston Stock Exchange partners with tZERO to launch a regulated security token exchange
- Malta Stock Exchange signs a memorandum of understanding with finance to launch a security tokens trading platform Nasdaq is looking to Gatecrash
Ultimately, there is no denying that STOs will lead the path to a tokenized world. Yet like with anything, it is always a good idea to know exactly what you are getting into. While over time regulations are likely to become more relaxed, when that will be no one knows. Before diving head first into anything make sure to do your own research and have a coherent plan for getting in as well as out.
Daniel Elias is the Marketing Lead at Jibrel Network. Jibrel provides currencies, equities, commodities and other financial assets as standard ERC-20 tokens on the Ethereum blockchain. The opinions expressed in this post are his own and do not reflect the official policy or position of Jibrel Network.