Crypto Market Commentary
12 November 2019
Doc's Daily Commentary
The 10/30 ReadySetLive session with Doc and Mav is listed below.Our next live session will be November 13.
Mind Of Mav
Security Tokens Revisited: Still The Next Big Thing?
Traditional asset management may be a grueling process. It typically needs the involvement of numerous middlemen, together with numerous state bodies and regulators.
Assets such as stocks, bonds, property, or even land will typically be prohibitively expensive and time-consuming to manage, putting them beyond the reach of the overwhelming majority of the world’s population.
What’s more, traditional asset management usually involves complex legal agreements and plenty of work, which makes it all terribly difficult to trace and transfer ownership. It’s a slow and cumbersome system—and one that usually lacks enough transparency to stop fraud and alternative forms of corruption.
Tokenization, whereas not without its own faults and regulatory hurdles, offers a radical new approach of thinking about asset management—a reimagining of what’s possible within the financial and technological world.
So, what is a token?
Simply put: “A token is something representing something else, [and] can be rendered in any sort of form,” according to Joseph Lubin, co-founder of Ethereum and founder of blockchain venture studio ConsenSys.
“It can be a piece of paper. It can be an idea. It’s a symbol representing something,” he said. “Your driver’s license, for instance, is a token that’s indexed into a ledger that the state maintains of who’s legal to drive.”
You can think of a blockchain-based token as a type of digital receipt for a slice of an asset. But unlike the receipts of old, these tokens are immutably logged on an auditable blockchain.
In general, there are two types of tokens: Utility tokens and security tokens.
Utility tokens are digital assets that give their owners access to products or services produced by a company. As the label implies, these tokens are meant to be used for something, rather than held or traded. For example, a utility token can provide access to a future service, such as renting computing power, placing a bet at a sports game or casting a legally binding vote.
Brave Software, the makers of the privacy-focused Brave web browser, created the Basic Attention Token, or BAT—a utility token designed for the advertising industry that monetizes the attention of web users.
Security tokens, on the other hand, are digital assets that represent an investment of some sort, such as a share in a company, a voting right in how the company operates, a unit of value, or some combination of the three. These tokens can also represent parts of real-world assets, such as gold, classic cars or royalties from your favorite pop-song.
As such, security tokens must comply with the existing regulatory frameworks that govern traditional securities, such as stocks. As a result, an entire industry has developed to help tokenization entrepreneurs comply with applicable regulations.
In early 2018, security token offerings (STO) seemed to be the next big thing, and then suddenly, they weren’t. Big-ticket projects began to fade away as the price of bitcoin waned until later in the year. Then came the institutions.
Industry players from companies like Vertalo, OpenFinance and Arca say the space is back on the rise, in large part due to increased interest from large institutional players. Now, the security token market is poised to be bigger than the crypto market by the end of 2020, according to Dave Hendricks, CEO and co-founder of Vertalo.
A game of regulation
Mason Borda, CEO and co-founder of TokenSoft, said the first real influx of interest was in February 2018, coinciding with Securities and Exchange Commission (SEC) Chairman Jay Clayton’s testimony, in which he said initial coin offerings (ICO) have largely been viewed as securities. Interest in compliant STOs grew as it became clear ICOs wouldn’t be exempt from securities law.
“That’s when the first wave came where everyone began to adopt the mindset of, ‘let’s make these securities, and we should perhaps undertake further regulatory diligence prior to proceeding’ and so February 2018 was when we saw the first large influx of potential clients,” said Borda.
But that influx would slow down. Borda pointed to declining crypto prices as a major driver, since the interest in STOs is heavily tied to interest in the digital asset space as a whole. Similarly, Juan Hernandez, CEO of OpenFinance, said the lag was part of the greater “crypto winter” at the time.
The winds of crypto winter
Another piece of the slowdown was a lack of regulatory clarity. Though the space initially jump-started with an understanding that most token sales would be viewed as securities, it wasn’t entirely clear how to conduct token sales, and the guidance surrounding alternative trading systems (ATS), according to Lawson Baker, head of operations at TokenSoft.
“People tend to want to raise money when the price is going up, just like the stock market,” said Baker. “Combined with essentially a little bit of muddy waters of like how to do these sales really kind of put a lot of pause on most of the sales.”
Regulatory hurdles mean increased costs, according to Arca Capital Management president Jerald David, which also likely put a damper on the market. As David put it, a compliant STO is expensive, similar to a traditional securities offering with the added complexities of custody and manipulation concerns.
“Most people didn’t realize that at first and when it became obvious, these hurdles made many offerings too risky from a return standpoint,” said David. “People thought that you can just make some disclosures and ‘off to the races’ you go when, in actuality, it is a much more time intensive and complex process.”
But regulatory clarity is on its way, according to David, Hernandez, Baker and others. The next year will be telling, according to David, since the SEC is slated to rule on the federal status of stablecoins.
“If stablecoins are deemed a security, then the trading market will be turned on its head because there currently isn’t an SEC regulated stable coin and stable coins have dominated trading as of late,” he said.
David said he expects regulations to tighten, and the space will subsequently grow as more teams with regulatory experience enter the space. Still, he says the quality will increase because it won’t resemble the “land-grab” mentality surrounding ICOs.
In fact, lack of regulatory clarity remains the main pain point for the industry, according to Hernandez. Questions remain on how to custody tokenized securities, and Hernandez said although the technology is there, much of the space is watching and waiting for the SEC to flesh out what it’s looking for in a custodial solution.
This has kept institutional players from fully engaging in the space, according to Hernandez, but it’s not keeping them on the sidelines.
Hernandez, Borda and others say most of the interest is being driven by larger institutions, like Franklin Templeton. Borda said most of TokenSoft’s clientele is institutional clients, and Baker said much of the next year will probably see a similar client base.
Wall St. Coming?
I think over this next year we’re going to see continued as they keep saying ‘Wall Street is coming,’” Baker said. “Everyone likes to use the Wall Street metaphor, but I would classify it is people with reputations and a lot to lose are coming into the space.”
That’s not just Wall Street, according to Baker, the broader financial global market is entering the space. He said these players are beginning to want to put their reputations on the line in the tokenization space now that a few years have passed since the 2017 bull run. In that time, Baker said many of these institutional players have educated themselves on the space, and subsequently decided that it won’t fade away. Now, they’re fleshing out their strategies.
Hendricks explained that tokenized securities can expedite direct listings, or taking shares directly to an exchange. By allowing accredited investors to trade a token on a private exchange prior to listing it on a public exchange, stabilizing the price for a company before going public.
But looking forward, When much of the crypto nature of tokens is abstracted, Hendricks said they’ll reach their full potential.
“The STOs will be more successful once investors don’t need to understand how to operate wallets or how to deal with private keys for their tokens,” he said. “Wallets and private keys are one of the biggest impediments to the success of security token offerings.”
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An Update Regarding Our Portfolio
We are pleased to share with you our Community Portfolio V3!
Add your own voice to our portfolio by clicking here.
We intend on this portfolio being balanced between the Three Pillars of the Token Economy & Interchain:
Crypto, STOs, and DeFi projects
We will also make a concerted effort to draw from community involvement and make this portfolio community driven.
Here’s our past portfolios for reference:
RSC Managed Portfolio (V2)
RSC Unmanaged Altcoin Portfolio (V2)
RSC Managed Portfolio (V1)