Security Tokens: Another Bubble or the Real Deal?19th March 2019
The cryptocurrency market has turned some people into millionaires at the expense of indebting many others.
In retrospect, now that the dust from the meteoric collapse of ICOs has settled, the whole idea of decentralizing wealth seems to be a farce. A few lottery-lucky speculators day traded their week’s paycheck into a fortune if they managed to sell their ICO tokens at the January, 2018 highs.
The majority are left holding some of the most putrid bags in the history of speculation.
The problem with ICOs had been that far too many projects launched a utility token without creating a real economic demand for that token. Meanwhile, people blindly threw in hefty sums of cash in the mere hope of selling their ICO tokens for a profit. When greed combines with whimsical decision-making, bloody bank accounts are the product.
Many ICOs had unreasonable hard-caps, inexperienced teams, and far-fetched goals, yet they still received a lot of capital. Now, many firm believers of cryptocurrencies are ringing a claim that ICOs were so disastrous because investors were given no security under the agreement and legal standing of a utility token sale. An increasing number of people within the cryptocurrency spectrum believe that ICOs are turning into a more refined means of token sales called STOs.
There’s a growing belief that STOs are going to offer what ICOs meant to: access to wealth and previously inaccessible opportunities. However, is this increasingly popular belief just wishful thinking of a community crumpled by the horrific performance of most ICOs?
What is an STO?
Security token offerings (STOs) are the modern-era initial public offering (IPO). If everything is being digitalized, why not digitalize equity too?
To a large extent, equity ownership is already recorded in digital silos. STOs simply make the ownership packaged in tokens. Security token sales issue, well, security tokens. As the name hints, security tokens are financial securities that and their issuers must abide by the regulations of the financial watch dogs of their HQ country. The benefit from this is that, while ICO issuers were free to use raised funds on whatever they wanted, STO issuers will have a fiduciary responsibility to properly handle investor capital and rightfully allocate it to product development, or else face the court hammer.
This is good news.
ICOs had a lot of problems but one that led to such a painful demise of the ICO market was that ICO issuers were not liable for their negligence towards investors’ capital. STO issuers aren’t in as much of a comfortable place. They must represent the best interest of their investors as is required by any entity that issues a security.
Thus, STOs place the act of crowdfunding via token sales as a regulated means of raising capital. While this involves the government in the issuance of tokens, it achieves a far more desirable output: security for the masses. Scam projects would be put at bay and unqualified investors would be deemed unfit to raise capital; moreover, negligence towards investors’ funds would lead to severe penalties.
Security isn’t the only benefit of STOs. These tokens genuinely provide access to opportunities that most people could never dream of before.
Unless you are pulling in over $200,000 a year or have a net worth of over $1 million, excluding the real estate you reside in, you are unlikely to be a part of the 1%. Financial watch dogs have given the 1% a less numeric name: accredited investors.
While accredited investor status varies by country, it typically adjusts for the GDP per capita of a country to ensure that only a select few — ultra wealthy — people are able to be a part of risky yet highly lucrative investment opportunities. However, not all investments that are accessible to just the 1% are risky ventures. Real estate assets, stake in medium-sized private businesses, rare cars, etc. are examples of investments only the ultra-wealthy can access. The sad part is that without access to these investments, many people become victims of inflation as the cash they end up holding devalues every year.
While utility tokens serve close to zero value in resolving this issue, security tokens tackle every pillar holding up the current investment infrastructure that shuts the entry door in front of the masses.
The Solution Token
Security tokens, issued via STOs, make any asset divisible.
Any asset in the world can be tokenized as long as the legal documentation that represents the ownership of an asset is deposited to an entity that can act as a custodian on behalf of owners — in this case, any number of owners of security tokens that are backed by the asset. Thus, whether it be a rare Ferrari, a Manhattan penthouse, or a horse-breeding farm, as long as there’s a means to hand over ownership of an asset to a custodian, it will be possible to tokenize the asset.
The custodian shall merely act as the holder of the documentation that represents ownership or proof of tokenization of the asset. The ownership of the asset will exist on the blockchain, represented by tokens that anyone can buy. This way, security tokens resolve the problem of high yield yet secure investment opportunities being largely available to just the wealthy.
The launch of an STO platform is no easy task. However, a FinTech company called Mobu is working hard to make STOs available to everyone. While Mobu isn’t a lone player in the STO ecosystem, it’s the first one to acquire equity in a stock exchange. This can enable the company to extend the abilities of a traditional securities market into security token launchpad and exchange.
Mobu provides a platform where any asset can be tokenized; the process is simple as the legal documentation representing the asset needs to be deposited to a custodian under channels that are approved by financial regulators. Mobu’s platform provides the legal support needed to handle all this jargon.
Once the legal dues are completed, the asset’s ownership can be represented on the blockchain through security tokens. Anyone who owns those tokens owns a share in the net ownership of the tokenized asset. What this means is that the person gets a fair share of the asset’s income flow and value appreciation. Thus, anyone who owns tokens of a tokenized penthouse has the legal right to the rent the apartment earns, the price appreciation of the apartment, and all the maintenance damages faced by the apartment.
The person will have similar rights to any asset whether it be a luxury collectible or a company.
Mobu delivers these rights by creating tokens that act as a security, thus Mobu enables security token offerings. To abide by the demands of financial regulators and the KYC/AML limitations placed on security ownership, issuance, and sale, Mobu creates its own token standard called the MOB20.
MOB20 tokens will be security tokens that will be coded with the approval of ownership. Only those who meet the KYC/AML standards required to own the security token will be able to buy it. Mobu is currently hosting a security token sale of its own development and owners of these MOBU tokens get a peak into the future security tokens can deliver. MOBU tokens provides access to revenue flow, voting rights, ownership, and more.
Equity ownership in a private fintech company was something only a select few could be a part of. Now, anyone can buy some divisible tokens and be part of the platform’s ownership.
Of course, STOs are not risk-free as they carry the same risk associated with any investment. The main difference between ICOs and STOs is that financial authorities have the right to dictate the terms under which STOs may be offered and the rights security tokens allocate to investors. Thus, people get access to investments in assets that have previously been investment channels for just the ultra-wealthy.
Unlike ICOs, STOs genuinely deliver access to tangible assets that were likely out of your reach in the past. Since the issued tokens are securities, the issuers will have to follow securities laws to abide by investors’ best interests in the progress and delivery of the project.
Security Tokens: Another Bubble or the Real Deal? was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.