Institutional finance strikes back: Security Token Offerings

DENNIS AVORIN: "The bottom line is, I believe, regulation of cryptocurrency exchanges is clearly necessary for protecting consumers and making sure that entities on the market are accountable"

There is a general sentiment that the hype surrounding ICOs clearly diminished during 2018.

According to recent figures, the funds raised in ICOs during 2018 surpassed the 2017 figures by 118 percent already in the first three months of the year. The common interpretation is that there are a smaller number of properly managed ICOs that raise the funds. counted a total of 1,247 ICOs in 2018 which raised a total of 7.5 billion USD excluding December, as compared to 876 ICOs that raised 6.2 billion USD in 2017.

On the other hand, funds raised clearly diminished over the last quarter of the year, when only 167-231 million USD was raised each month. I interpret this as a downward trend regardless of the first three months of the year.

The growing ranks of crypto-related review sites and scam alert agents such as, for instance, Cointelligence is a good sign that the market is heading in the right direction, as these limit the manoeuvrability for scammers in the ICO space. Which is clearly necessary. As trust in ICOs are dropping, STOs is now the new buzzword on everybody’s lips.

Complicated issue

Security Token Offerings is a more complicated issue than it seems at first sight. First of all, regardless of crypto-friendly and specific DLT regulations, STOs are securities and are going to be licensed by financial authorities. For an exchange to be able to list STOs, this falls within the MiFID II licensing scheme in the case of the European Union. The SEC has also expressed willingness to consider ways of licensing STOs in a recent interview with Andrew Ross Sorkin on Times Talks.

As far as I know, no exchange so far has yet been able to list an STO but there is only a matter of time before someone does, probably during 2019. There are a number of institutions that have expressed interest in pioneering the field by acquiring licenses: The Gibraltar Stock Exchange, Coinbase, Templum, SharesPost, the Australian Securities Exchange, the Malta Stock Exchange, SIX Swiss Exchange, the LSE, and the Malta-based exchange ZBX.

Once an exchange is licensed to list STOs, it is also up to companies to issue their STOs. In the end, it will be the financial authorities who decide on each and every issuance prior to any listings.

Ideological element

STOs and regulation of cryptocurrency exchanges in general also has an ideological element which is currently under debate. Libertarians argue that regulating cryptocurrencies is running against the initial idea of blockchain technologies. I consider myself a libertarian. I am very keen on having a functioning market economy, and it is difficult to imagine a free market without some sort of regulation.

The market economy as we know it dates back to ancient Mesopotamia in today’s Iran and Iraq, and was later reinvented by the Italians during the renaissance. Historians are confident that some of the most integral pillars for having a market economy in the first place originate from laws on private property and, not least, patents. I believe it is perfectly possible to have a market economy without taxes (or at least very low taxes) and nanny state policies. A market economy without laws though, is unthinkable. What blockchain technologies does, if taking the point further, is writing law into the very code. So it’s still basically law, and you cannot get rid of that.

The bottom line is, I believe, regulation of cryptocurrency exchanges is clearly necessary for protecting consumers and making sure that entities on the market are accountable. Once this is achieved, we can be confident to see markets returning to full strength again.


STOs in this context is clearly a bittersweet case, as they are undoubtedly a vehicle for institutional finance to strike back at the Wild West that has been going on within the crypto space. But looking at the diminishing funds raised by ICOs in the last quarter of 2018, it is clearly necessary to reinstall trust in the markets. Some estimate that the STO sector will be worth some 10 trillion USD already by 2020. This deep pool of liquidity will, to a large extent, come from institutional money entering the scene, as STOs are within their risk appetite.

Thus, I believe 2019 will be the year of identity crisis for many players within the crypto space, as the regulated environment and the rise of tokenized securities will require a tricky balancing act not to surrender what blockchain technologies is all about. As for those who believe the cause is already lost since they are now longer recording 800 percent surges on their trading accounts, looking at the yearly lows of Bitcoin might provide some hope for the future. Happy New 2019!

2012 – $4

2013 – $65

2014 – $200

2015 – $185

2016 – $365

2017 – $780

2018 – $3200

(Credit to the crypto luminaire Vincenzo Belpiede for bringing this to my attention)

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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