What Is Security Token/STO?
Security Tokens, or STs, are digitalized assets representing complete or fractional ownership. STs and STOs are in their nascence and face many challenges (but are worth it) and shared standards are needed for Security Tokens to take off.
Simply put, a Security Token/ Security Token Offering is a compliant version of Utility Tokens, ICOs or IEOs that plays by the rules of authorities like “big daddy” SEC (the U.S. Securities and Exchange Commission).
Examples include shares in a company, real-estate assets, intellectual property, and even a barrel of whiskey.
ST’s have their fair share of problems, the biggest of which is their nascence:
- Growth in the industry is being slowed downby negative impressions due to previous ICO scams
- There is a lot of confusion due to complexity when tackling crypto and related issues. Big entities such as real-estate agencies shying away from digitalizing/tokenizing assets
- There are many, many exchanges, almost all of which are not qualified to handle STs and the few that are suffering from lack of liquidity.
Immaturity of Security Token protocolsInfrastructure-building, adoption phase, lack of agreed-upon protocols needto be solved as well
On the flip side we only have one thing, but the thing that matters:
A far more efficient, cheaper, and fully compliant process of raising funds.
Now, anyone anywhere in the world can invest, any amount (fractional ownership) no matter how small. Unlike Utility Tokens, you’re investing in a regulated security. And unlike traditional securities, transactions are fast and cheap.
Security Tokens will never reach mass adoption if issuers, KYC/AML providers, wallets and exchanges, investors, regulators and so forth fail to work within the same framework.
The biggest entity in the industry attempting to solve this problem is the Security Token Alliance. Founded in May 2019 by Frederik Busslerworking closely with Joey Bertschler as VP, STA brings togetherdiverse organizations working in the Security Token industry to bring Security Tokens, a.k.a. tokenized securities to mass adoption faster and with higher quality than could be done by entities acting inrelative isolation.
As a potential default for all financial securities and real alternative for IPOs, Security Tokens can helpinitiate the next phase for Blockchain in the same way Bitcoin and the ERC-20 standard did.
ERC-1400 — The new Security Token Standard?
Currently, there are quite a few protocols around that claim to be the potential standard for STs. Mostly ERC-1400 and 1410 both of which can only fulfill a fraction of all the necessary requirements.
Historically, achieving standardizationin the software industry happened through one or a combination of the following procedures (excluding what would not work for ST):
Committee & Competition
In the case of Security Tokens, standardization could meanbringing together Securitize, Polymath, Tokensoft, and all the others to create the different standards and prototypes needed.
Competitionwould enable different vendors to compete over each section of the market, and the best technologies would end up being adopted as standards.
Acting in relative isolation, creating your own security token platform, and then creating simple protocols later — just calling them standards — would arguably result in a market that has even more different standardsthan tokens actively trading.
Just to recap quickly: despite all the different standards, there is not a single one that offers a truly good fit without compromise.
Say we go with ERC-1400. Even ERC-1400 does not contain the functionality for critical events such as restriction events, forcing functions, and so on. Say we need to work with a function for modification of addresses with forced transfer rights and switch to ERC-1410, but nowwe lose administrator events.
Honorable mention: The majority of self-proclaimed STOs are issued with the ERC-20 protocol. This standard does not have the necessary built-in restrictions to prevent unaccredited investors or even criminals from purchasing and trading the token.
How could Security Tokens take off?
While it is touted that Security Tokens provide liquidity, this is far from the truthand one of the things that need to change.
In simple terms, shared standards equal more qualityprotocols, meaning more players in the space, compliant projects, entities from outside of the securities space entering, and eventually a thriving digital version of the securities market. This progress will arguably take far longerthan common belief.
STs are in their nascence, stakeholders, lawyers, advisors, compliance officers and so forth lack
About the author: Joey Bertschleris the Austrian-born Vice President of the Security Token Alliance, the world’s largest think tank for the Security Token industry with over 60 partners, bitgrit and Cosmology Inc. Executive and Advisor to the World Data Science Forum. He has reached audiences of over 2 million on social media channels and is involved in a plethora of marketing campaigns in APAC and CE.