Security tokens are beginning to be mentioned more frequently in the Crypto and traditional finance space. In this article we look at what they are and see if this is the next big thing in Crypto. If so, do we have another ICO type bubble coming or something more solid to lend credibility to the overall Cryptocurrency space and offer real use cases?
For the newbie in this space a quick explanation of the difference between coins and tokens.
A cryptocurrency coin, like Bitcoin or Ethereum can be independent of a platform. They can be used as a form of currency outside their native environment. Basically, these are the cryptocurrencies we are all familiar with.
On the other hand we have many tokens like Omisigo, OX and BAT. These are examples of tokens which exist on a particular platform, in these cases, Ethereum.
A token represents an asset or utility that a company has and they usually give it away to their investors during a public sale, called an ICO – ‘Initial Coin Offering’.
Security Tokens vs Utility Tokens
2017 saw the massive influx of Utility tokens in an ICO frenzy, with 2018 and 2019 seemingly seeing their downfall. Checkout this website for a list of the failures. I wrote and article on this frenzy last year which centers around the massively over used term Blockchain. The term was, and is, used in many cases to build hype around projects that promised a lot but so far have delivered little.
What is the difference between these Utility tokens that the ICO frenzy gave us, and a Security token? A Security token is a token that enables the holder to have a specific ownership or rights in a company. They acquire their value by being a trade-able asset. These tokens allow the issuance of dividends, shares and voting rights. In the US these tokens are under the federal legislation that regulates conventional securities. The big issue facing Utility tokens, and the core difference to Security tokens, is something called the Howie test. This test is used to decide if something is a security or not.
Security Tokens are now being used
There has been a lot of talk in the later part of 2018 about Security tokens being the next big thing, and we now have significant movement in this area.
tZERO CEO Saum Noursalehi has this week outlined the first steps toward taking custody of the tZERO security tokens. tZERO finished the $134 million offer in August, and in October said that they had completed the issuance of the tokens. These tokens were then held up in a custodial wallet until this week, January 10th 2019. We will be following the security token developments closely as this is big news in an industry scarred in the public perception by the ICO Utility token frenzy that will be part of history.
In recent articles I have argued that people need to understand that regulation and centralisation of the on and off ramps in Crypto, namely exchanges, is necessary. I am a Bitcoiner and on the surface this statement seems to fly in the face of what Bitcoin is all about. My point is that Bitcoin is decentralised as a protocol or, more precisely, as a language/protocol but the price speculation of this does not require decentralisation. In fact, this decentralisation has been characterised by scams, wash trading and a handful of Whales and Exchange owners moving the price around with ease (in my opinion).
So what of the regulation around tokens? Whist I am free marketeer, I have friends and family members who have been scammed, not in the crypto space however, but scammed nonetheless. I do understand that regulation is important but needs to be done well. So far the authorities have taken a measured approach and have signaled well to the industry as a whole. These regulators are under staffed which may be why more scammers have not been held to account yet. Are all Utility tokens scams? No they are not. Are all utility tokens likely to be classed as securities, at least in the US and therefore face a very uncertain future? This may still happen but it appears not to be a blanket move on all Utility tokens at least at this stage. Ethereum, where most Utility token sit, looks like it will not be classes as a security.
The development of security token offerings is in its infancy and I think warrants close study. We will be following developments closely. To me it appears to offer an excellent alternative to traditional methods of acquiring value in something as the inefficiency and middle man riddled world of traditional finance needs massive improvement. I do not see security tokens as the life sucking scams that most utility tokens are. Bitcoin is being held back by these Utility tokens as capital and resources would be much better deployed into Bitcoin than these projects. Most Utility tokens appear doomed and the sooner this clear out is over the better for the heath of Bitcoin and the overall crypto space. Security tokens do not appear to be a threat but may in fact offer real utility to their buyers and real credibility to the industry as a whole.