According to a Fabric Ventures and TokenData report: $5.6 billion was raised through “initial coin offerings” in 2017.
But, of course, as the idiom goes, ‘all good things come to an end’, and to an end it came as the ICO market came crashing down in the tail end of 2018 and the crypto funding tap began to dry out. ICOs dropped to the smallest amount since May 2017, according to this Bloomberg article. Fabric Ventures and TokenData found 435 successful ICOs out of an attempted 913 last year — meaning only 48% were successful.
Investors realised this boom wouldn’t last forever and many projects under the existing ICO structure would inevitably fail. To adapt, companies began looking at other alternatives to raise money and achieve their blockchain initiatives.
The Decline of the ICO…
Like any typical market cycle, where there will be highs there will also be lows. As the Bloomberg article notes, the market has been inflated by the surge of ICOs which caused Ethereum to rise and now some say this surge is the reason for its decline. Others look to regulation as the reason why many eager investors, especially institutions, are still waiting on the sidelines before investing into blockchain projects.
Many are looking toward Security Token Offerings, or STOs who have passed the Howey Test, (a US-based ruling enforced by the SEC) as the new fundraising model.
These usually derive their value from an external, tradable asset. Because the tokens are deemed a security, they are subject to federal securities and regulations. Security tokens allow companies to raise capital without having to lean on investment banks and exchanges as intermediaries.
But will this model help a greater majority of investors become comfortable with crypto investing? Let’s dive into what the modern-day STO looks like.
What is a Security Token Offering?
An STO is like an ICO in that an offering is made by a business to the crowd, in which consumers purchase crypto tokens built on a blockchain, but the two do not share many similarities beyond that. Whereas ICOs are the sale of coins, purported utilities or even currencies, STOs are the sale of securities.
Types of STOs
So, why is this considered so important for new investors entering the space?
Just recently, projects were avoiding ‘security token’ designations like the plague but now the industry is starting to see its massive benefits. The structure has since evolved to refer to the following types of instances, as explained by this Forbes article:
- Traditional financial assets like stocks, bonds, and other traditional equities as Anexio has done.
- Non-traditional financial assets which include assets that have historically been difficult to trade, like shares or revenue rights to VC funds such as Blockchain Capital or SPiCE VC.
- Non-traditional assets like real estate or art, which are illiquid and often prohibitively expensive to own entire units and transfer ownership rights. Fractional shares in token form make these much easier to buy and trade.
- Rights and schema which can include revenue share agreements, royalties, voting rights, and synthetic derivatives.
As described in the piece, the idea of “tokenization” fosters creativity and flexibility to enable a wide range of financialization options with multiple layers of value and the empowerment of communities who can influence the growth of the token.
STOs in practice…
A growing number of platforms, protocols, VC funds and projects are “tokenizing” traditional assets and are swiftly leading the charge, such as tZERO, Polymath, Securitize, Harbor, SPiCE VC, Blockchain Capital – the list goes on. And all signs indicate announcements from blockchain heavy hitters like Circle whose CEO, Jeremy Allaire spoke of “the tokenization of everything” and Coinbase unveiling their own tokenized asset exchanges are not far behind.
SPiCE Venture Capital founder Carlos Domingo expertly summarized his thoughts of the potential size of the security token market, saying: “It’s inevitable that security tokens will transform equity just as bitcoin has transformed currency, because they afford the owner a direct, liquid economic interest and the expedited delivery of proceeds. Every type of ownership can be tokenized, which is a massive multi-trillion dollar addressable market.”
Will STOs be the panacea the blockchain industry is waiting for? It’s too soon to tell, but at least investors are getting the trading flexibility they need to feel at ease with their investment decisions.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.