Security tokens. Asset-backed tokens. Tokenised securities. Digital Assets. However you wish to define it, there is no denying the security token space is growing at speed. Tens of millions of dollars continue to be pumped into startups whose teams are intent on building out an ecosystem capable of supporting the incoming wave of asset tokenisation.
Before mapping out this budding sector, we considered it necessary to share with you a list of 10 factors we believe represent significant tailwinds for the fast-developing security token space.
1. Cost savings
- Between navigating the continuous disclosure rules and stringent corporate governance requirements, getting listed on a public stock exchange is notoriously expensive, energy-sapping and time-consuming. When an asset-backed token is minted and issued, investors from all over the world are instantly able to buy a share of that asset’s ownership.
2. Aligned vision
- The principal-agent problem has certainly caused more than a few otherwise successful companies to crash and burn. Too often, founders are forced to compromise with angel investors or majority shareholders. With security tokens being globally available, investors (i.e., owners) are far more likely to align with the sentiment of the founder(s).
3. Funding opportunities
- The ability to raise funds is one of the many attractive qualities of the tokenised asset space. We saw a glimpse of this in 2017, with ICOs raising over $5.6 billion (USD) globally. STOs, however, are far more easily conceived by laypeople (i.e., it’s simply a more efficient and cost-effective way to represent ownership of a real-world asset) versus ICOs.
4. Community involvement
- The transparency of blockchains aside, smart contracts being able to create never-before-seen governance mechanisms (i.e. voting) undoubtedly bodes well for community participation. The birth of decentralised autonomous organisations (DAOs) also appears an exciting opportunity for the security token space moving forward.
5. Fractional ownership
- Tokenising an asset makes it highly divisible. Beyond this being outstanding with regards to demand and liquidity, it proves a godsend for an investor seeking to de-risk their portfolio. Owning a fraction of a Docklands apartment, an Andy Warhol painting, and a wind farm; some pretty uncorrelated asset right there!
6. Liquidity improvements
- A deeper liquidity pool is a go-to argument often used by security token advocates – and for good reason. Be it the increased divisibility asset-backed tokens offer, reduced transaction fees, faster settlements, or global availability, the sheer number of factors helping ensure for a highly liquid security token marketplace are telling.
7. Faster settlements
- Blockchain-enabled trade settlement is overwhelmingly faster than what we’re all used to. Generally, it takes two business days (i.e., T+2) to settle public equity trades, and between 30 to 90 days to settle private equity trades. This is a far cry from the average time it takes a blockchain to mine a block. On Ethereum, for example, the expected block time is between 10 to 20 seconds.
8. Price discovery
- With security tokens literally representing ownership of assets we’re all familiar with today (e.g., shares in a company), the rate with which tokens achieve their equilibrium price will by far exceed what we have seen transpire in the utility market. Due to their novelty, these tokens have been near-impossible to value and are hence incredibly volatile.
9. Feature sets
- Given smart contract developers’ ability to compose technical standards for any given blockchain (e.g. Polymath’s ST-20 security token standard, Ethereum’s ERC-1450 standard for creating digital stock certificate, and Dusk Network’s XST-20 confidential security token standard), you can easily imagine a future in which minting a security token is significantly cheaper and easier than it already is today.
10. New instruments and derivatives
- Blockchain-enabled tokenisation will undoubtedly create a variety of asset classes never before seen. With this, a new wave of derivatives and financial instruments will likely emerge. Better yet, the markets facilitating their trade will be refreshingly transparent thanks to blockchain technology; a welcome change to the repeated instances of market manipulation in existing financial markets.
- Resource: dYdX – Derivative & Margin Trading From Your Hardware Wallet
The ecosystem surrounding security tokens and tokenised assets is fast-growing. To help you stay in the loop, we’ve broken the sector down into six categories and listed the major players in each. Worth noting, many of these projects belong to more than one category.
- Issuance platforms are responsible for creating and issuing tokenised assets, with some choosing to specialise in one particular asset classes, such as real estate or fine art.
- Existing issuance platforms in the STO space: Polymath (POLY), Ravencoin (RVN), Swarm, Harbor, Securitize, Securrency, TrustToken, Neufund, BlockEx, PrefLogic, Tokeny, Indiegogo, Maecenas (ART), Templum Markets, Republic Crypto, Slice, New Alchemy, Fluidity Factora, seriesOne, Smartlands (SLT), Power Ledger (POWR), and Dusk Network (DUSK).
- Trading platforms allow users to buy and sell security tokens, be it on the primary and/or secondary markets. Those servicing the primary markets will often offer issuance, too, making them a hybrid issuance/trading solution.
- The trading sector of the security token space is well-populated. Here are just some names: BnkToTheFuture (BFT), Own (CHX), Orderbook (by Ambisafe), MOBU (MOBU), VNX Exchange, OpenFinance Network, tZERO, INX, Bankorus, RealOneX (ROX), OKMSX (by OKEx and MSX), SharesPost, Gibraltar Blockchain Exchange (GBX), The Elephant, and Blocktrade (BTT).
- Custodians are an integral part of the STO ecosystem. They are responsible for holding tokenised assets on behalf of clients, so as to protect them against theft or loss. Customers tend to be broker-dealers, HNWIs, and trading platforms.
- The most trusted, reputable custodians in the STO space: BitGo, PrimeTrust, Ledger Vault, Vo1t, SIX Digital Exchange (SIX), Coinbase Custody, Swiss Crypto Vault, and Paladin.
- Firms offering advisory services to prospective STO issuers act as a pivotal relayer between the real-world economy and the crypto industry. These firms often help clients throughout the entire lifecycle of the asset-backed token; handling responsibilities like investor whitelisting, token design, KYC/AML processing, and so on.
- Some go-to STO-focused advisory firms: Satis Group, AnyPay, GoSecurity, Blockpass (PASS), Security Token Group, DigiMax, and Kryptoia.
- Liquidity is the heartbeat of the security token ecosystem. An illiquid market deters both buyers and sellers alike.
- The key cogs providing liquidity models for the STO space: AirSwap (AST), Bancor (BNT), Kyber Network (KNC), 0x (ZRX), Ren (REN), and Global Liquidity and Settlement System (GLASS).
- Entities in the infrastructure space are critical to the long-term vitality of the tokenised asset ecosystem. The solutions they are building will introduce much-needed functionality. We’re talking the creation of derivatives markets, more efficient fiat on- and off-ramps and, of course, more scalable blockchains.
- Some projects critical in this category: Ethereum (ETH), NEO (NEO), NEM (XEM), Waves (WAVES), Qtum (QTUM), Symbiont, Stellar (XLM), dYdX, Wyre Payments, and BANKEX.