Security Tokens Described by Investors as Next Crypto BubbleBy Jonathan Joe Morgan
As the crypto winter continues to bite, investors are predicting a hype cycle in Security Token Offerings (STOs) next year. In fact, some are suggesting that STOs could help $1 trillion dollars of assets migrate to the blockchain before the end of the decade.
STOs are a form of fundraising in which investors receive securities (such as equity or shares) in the form of a token.
“If it plays out the way I think... it is likely to be the greatest investment opportunity humanity has seen in this era,” said Olaf Carlson-Wee, founder and CEO of Polychain Capital in San Francisco, speaking at a panel discussion at the Web3 Summit held in Berlin in October 2018.
When asked for clarification of his remarks after the panel discussion, Carlson-Wee told LongHash he was referring to, for example, the potential for trillions of dollars worth of real estate to be securitized over the next decade in such a way that the provenance of each transaction is recorded on the blockchain.
Vinay Gupta, the founder and CEO of Mattereum, a provider of legally-enforceable smart contracts based in London, agrees. Asked about STOs, he said: “When will they blow up? In 2019 maybe 2020.”
Alex Molé, an investor relations manager at Neufund in Berlin, wrote in a Medium post that STOs offer 24/7 trading and programmable shareholder governance, while also having the potential to increase levels of liquidity and the amount of companies that can list on an exchange. He added that STOs could also reduce costs, market friction and “quite frankly, the amount of back-office employees needed to power a bank.”
Eligibility to participate in an STO is dictated by the securities laws of the jurisdiction where the tokens are registered. In the US, for example, STOs may be restricted to accredited investors, who must have a minimum annual income of $200,000.
Kaidi Ruusalepp, the founder and CEO of Funderbeam (a platform for investors to buy and sell equity stakes in private businesses), predicts that STOs will be the next crypto bubble, reaching $1 trillion in the next two years.
Ruusalepp, who made her prediction while participating in an expert panel discussion at TechCrunch Disrupt Berlin in November 2018, was supported by fellow panelist Jamie Burke, the founder and CEO of Outlier Ventures in London. Burke said an STO “hype cycle” would take hold by the end of 2019. Gupta agreed: “I think you’re going to see all these super complicated financial instruments from the quant-driven hedge funds in private equity.”
The recent bubble in cryptocurrency prices – which burst after Bitcoin climbed to $20,000 in December 2017 – was largely composed of utility tokens, sold indiscriminately to retail investors. While a utility token provides holders with the ability to purchase goods and services in the token’s network, some STOs promise to open up accessibility to securities trading to a wider base of retail investors. At present most STOs are available only to wealthy accredited investors, but some STOs aim to offer their tokens to a much broader circle of investors, at least in regions where such offerings are legal.
So where will investors trade these new tokens? OpenFinance Network and tZERO are among the leading STO exchanges poised to offer a flood of listings in 2019. Coinbase has stated that it aims to be the primary marketplace for the trading of crypto securities. The San Francisco-based exchange has acquired a broker-dealer (B-D) license and alternative trading system (ATS) license, along with a registered investment advisor (RIA) license, according to a blog on the exchange’s website. Meanwhile, Binance plans to launch an STO trading platform with the Malta Stock Exchange.
“Right now the only entry to hugely diversified portfolios are things like pension funds, hedge funds and private equity,” says Gupta. “When you end up with these tokenization systems where you’ve got lots and lots of different assets that are now available as crypto tokens, almost anybody can do their own optimized portfolios for those kind of token systems.”
Polymath, a STO-creation platform, is in high-level talks with Coinbase and Binance and is working closely with Open Finance Network and tZero to ensure that its technology is compatible with the exchanges, according to a spokesman. A Polymath spokesman told LongHash that participation in STOs would be decided by the issuing entity on a “case-by-case basis,” although local regulations may also play a large role.
But not everyone is expecting an STO explosion. Miko Matsumura, the cofounder of Evercoin Exchange in San Francisco, says he doesn’t expect an STO bubble in 2019, or the same sort of spikes in asset price valuations that swept through the cryptocurrency market in 2017. “Liquidity will be low until the later half of the year,” he wrote in a LinkedIn message. “Since these are both regulated and asset-backed, the danger of a bubble in this asset subclass is quite limited.”
And even those predicting a bubble say it isn’t going to be the same as Bitcoin’s. Gupta also says STOs will have different characteristics than previous bubbles in the crypto space, and will be “much less volatile and much more like real finance.”
Gupta says an impending STO boom could also have the knock-on effect of triggering more widespread adoption of algorithmic trading tools among retail investors, thereby having the democratizing effect of bringing advanced trading technology to the mass market.
“You could very easily see people with homemade algos basically being their own quants all the way through to people downloading software that does that for them,” he says. “It is going to be the descent of algorithmic finance for everybody.”
Jonathan Joe Morgan, a former Bloomberg News journalist, is a Berlin-based writer.