Are Security Tokens Key To Tapping A Multi-Trillion Dollar Industry?
Are security tokens going to bring the next wave of institutional money into crypto markets? Let's discuss.
“The blockchain will massively disrupt financial products on Wall Street.” - Larry Summers, Former US Treasury Secretary
What is a Security Token?
A security token is simply a cryptocurrency token that represents the ownership of an asset. Think of this like a stock or equity ownership in a public company. Investors in stocks expect profits in the form of stock price appreciation and/or dividends. However, equity ownership does not include utility. This is essentially how a security token functions as well. Security tokens provide ownership of an asset and returns but NOT utility (e.g. using cryptocurrencies to buy gifts, share power, etc.)
Security tokens are regulated offerings involving the ownership of an asset, usually for accreditors investors with extensive KYC visibility, and are issued via a Security Token Offering (STO). This is in contrast to their utility token counterpart which is conducted through unregulated crowdsales with no ownership in a company or any asset.
There are 4 main use cases for security tokens:
- Real Estate - A unit of real estate can be tokenized and distributed as an investments, similar to REITs (Real Estate Investment Trust)
- Financial Instruments & Investments - Companies can tokenize and issue stocks and bonds in return for ownership and/or a return on assets
- Venture Capital - LP shares can be tokenized and distributed to investors
- Commodities - Tokenizing assets like gold and silver for investors that are backed by physical assets
“The blockchain will bring...efficiency to the financial markets” - Bob Greifeld (Chairman, NASDAQ)
Why Are Security Tokens Important?
The reason why these tokens will revolutionize and disrupt capital markets is due to the extensive programmability of tokens. For example, stocks are just paper or electronic representations of ownership in an asset. In either form, they sit, locked away in a safe or database, with no functionality. Security tokens on the other hand, can utilize smart contracts to automatically engage in a variety of functions. You can program dividend payments and schedules, corporate governance, and proxy voting directly into the token. Security tokens also give you access to 24/7 markets, have lower transaction fees, and provide greater liquidity, as you are able to access and trade across global markets. On the enterprise side, you can say bye bye to back corporate office jobs as there is no need to staff and employee people for this function when it can be embedded into the token.
How Are Security Tokens Regulated & Compliant?
The reason that there are only a few security tokens currently in the crypto space is very simple. It is agonizing to go through the legal tangle and regulation around how tokens need to be structured technologically.
Security Tokens are being standardized according to the ST-20 security token protocol, which is being pioneered by Polymath. This essentially embeds the regulatory requirements (by the SEC for example) into the token, making them available to verified participants only. Authorized investors must meet all the criteria to able to transact in a specific security token, which will vary depending on the token. This provides assurance to the issuer that the tokens will only be held by authorized investors.
The NASDAQ got to $5.4 trillion in 1999, why shouldn’t crypto assets be as big?” - Mike Novogratz (Head of Galaxy Investment Partners, Billionaire and former hedge fund manager)
What Is The Market Potential? Putting things into Perspective
In 2017, Security tokens made up $100 million (roughly 1%) of the total cryptocurrency market cap while utility tokens made up $700 billion. Security tokens were largely ignored last year with all the focus on Blockchain platforms, protocols, and utility tokens.
Utility tokens have taken the Cryptocurrency space by storm and can be expected to plateau, then slow down as the top projects from 2016 and 2017 start to reach the end of their project roadmaps. The result will be the launch of actual products and services utilizing Blockchain and not just alpha, beta, and testnet projects like most of what we have right now. This should coincide with the emergence of security tokens. The security tokens market cap will ultimately pass the cap of utility tokens as it’s a much larger industry involving the world’s Fortune 500 companies and the way they issue proofs for the ownership of assets.
Think of how big the global stock market is. According to Bloomberg, the global market is roughly around $80 trillion. Now imagine having even 25% of that stock issued by companies and institutions as a security token. That would put the security token industry at $20 trillion on a global scale.
To further put the market size into perspective, the S&P 500 (A stock market index that is comprised of the 500 largest companies that trade on American stock exchanges) added $6 trillion in market cap since Donald Trump began his presidency up until late January 2018. It then shed $1 trillion in market cap due to the market correction in February 2018. In contrast, the entire market cap of all cryptocurrencies was a bit above $800 billion at its highest point, around early January 2018. Since the market correction that followed, it now hovers around the $500 billion mark. The utility coin/token market is a spec of dust when you compare it to the global securities market, and this is an indicator of just how big the security token market can be.
I expect security tokens to overtake the utility token market by 2019. If just a few large institutions and investment firms tokenized their assets and funds, we would exceed the utility token market.
Security tokens will lead us to mass corporation adoption of Blockchain technology, not to mention the disruption of current financial industry landscape. The deep pockets in capital markets will soon be with us my fellow crypto enthusiasts.
Disclaimer: Nothing in this article is to be construed as investment advice. Neither the author nor the publication takes any responsibility or liability for any investments, profits or losses you may incur as a result of this information.