The meteoric rise and fall of the 2017 ICO bubble has left a wake of evolution – though some may say challenge – for the rest of the industry. Regulatory pressure, additional ICO entrants and a bear market have pushed the industry to evolve.
One of those evolutions is the emergence of Securitized Token Offerings or STOs.
Here’s why this doesn’t seem like just another fad.
Why security token focus?
The first step is to understand the nature of security tokens. Why are they so important? Let’s look at a simplistic example.
If you’re looking to invest in a hot new blockchain based startup you might be thinking that purchasing tokens is the best way to secure potential profits.
But there is a difference between tokens that are purchased for utility (utility tokens) and tokens that are purchased for asset or equity value (security tokens). Up until late 2017 – there was no classification or comment from the SEC on the difference between the two.
Thus investors poured into the market looking to strike gold, and well, the rest, as they say is history. Boom. Bubble. Bust. And the market is where it is today.
As per some of the comments from the SEC – if you purchase a token for utility that’s fine. But utility is essentially like buying the equivalent of Air Miles for that service. Yes, you may be able to use the air miles to purchase product and use the service. You may even be able to sell the Air Miles. But should the company sell to another company, update the terms to their Air Miles, or eliminate them all together – you are left with nothing. Worse yet, you have no recourse for action.
This is where security tokens enter the picture.
The difference is that security tokens are a tokenized offering of some portion of equity in the company. Be it a direct % of the company, or a future option to purchase shares of the company should it go public – investors are purchasing the underlying asset, not only the ability to use the asset.
Which would you prefer?
As a report from PWC shared, ICO investments from January 2018 until June 2018 have over doubled the 2017 in total.
While recent statistics are not yet available, it’s safe to say that the food of money entering the ICO space will be 2-4x as high compared to 2017.
And yet, many investors are becoming aptly aware of the dangers of investing in unregulated, hyper-volatile blockchain startups.
As risk becomes a larger concern for savvy investors, and the market continues to evolve with more competition money will undoubtedly flow to the more credible, established and higher potential investments.
Any investor who’s considering investing in an ICO will probably look at not only their own risks involved with owning a utility token over a securitized token, but will look at the potential regulatory implications as well.
This reallocation of money may drive more and more blockchain founders to “hedge their bets” – undergoing the rigorous classification and regulatory frameworks to become an STO.
Multiple paths will almost certainly unfold. As the SEC aims at historical ICO fundraises, exchanges who offer to trade potential illegal “securitized tokens” and ICO’s push to attempt to raise large sums of money without going down the traditional venture capital route, the industry may be heading towards a self-fulfilling prophecy.
Yes, there will be a push to securitized token offerings for established markets that favor regulation. Think USA, Canada, Japan and areas in Europe. Investing in blockchain startups may become an accredited-investor-only affair.
But equally important are emerging markets, who may not regulate the industry with as much force, resulting in open and accessible ICO offerings to those who are legally able to participate.
However antithetical to the core blockchain concept securitized tokens may be, the result may be that the fad becomes the future, and ICO accessibility becomes an emerging market privilege only.