It’s official… 2019 is the year of the Security Token. We decided at the height of the ICO craze that we didn’t want to be crypto cowboys and we wanted to do it right. And in our minds, that was STO: a security token offering.
From panels to editorials, it’s all folks are talking about these days. Can digital securities redeem crypto’s shady reputation? Can the old guard really rest assured that protections and compliance are baked into a…token? Cautious excitement from all abounds.
But, while we’re excited by the promise of this brave new tokenized world, there is a lot of misinformation out there about what digital securities are and how they work. I’ve seen this not only in the transient conversations I’ve been having in the last 12 months but even at events and in talks with people who claim to be experts.
So in this post, I’m going to share a few working definitions that might provide more clarity about Digital Assets, Digital Securities, and Security Token Offerings along with the most exciting developments from around the world.
So what is a Digital Security anyways?
Digital Security Tokens first emerged in 2017 as a vision for a safe, compliant, and secure tokenized asset that offered investors the same protections as traditional securities but in a tokenized form.
Some see Digital Securities as another crypto fad, others claim it is a revolutionary advancement that will drive mass adoption for blockchain and crypto in the coming years. I think they have the potential to set an important precedent, to lay the foundation for the tokenization of all securities, and bring about an evolution in how all securities are held and transferred.
tribeOS decided in 2017, at the height of the ICO craze, that we didn’t want to be crypto cowboys and we wanted to do it right. In our minds that was DSO: a digital security token offering (STO).
Mason Borda, CEO of TokenSoft, provided a perfect definition, “It’s a digital representation of an asset that happens to be a security, often an investment contract, for which ownership is verified and recorded on a distributed ledger. A digital security, which is subject to traditional securities laws, is often referred to as a security token.”
Investing in blockchain has been getting a bad rap lately because of the many initial coin offerings (ICOs) related scandals and frauds for 2016 and 2017. These were pump and dump schemes which accounted for about $7 million worth of trading volume per month, according to an MIT Technology Review report.
But we would be wise not to throw the baby out with the bath water. Digital securities are a new way of merging the old (traditional investing techniques) with the new (blockchain tokens) to create new and incredible ways to invest in assets in general and in companies in particular.
What do Digital Securities mean for investors?
Liquidity – the investor can receive a financial asset from the company (for example equity) in the form of a blockchain token. This token is essentially tradable from day one on security exchanges, which provide immediate liquidity to the investor. This is by far the greatest advantage of a DSO. Currently (with traditional investments), investors are generally locked-in with their investment for a long period of time, usually 8-10 years, before there is any type of “exit event”, such as an M&A or an IPO, and can liquidate their investment.
Security – a digital security is backed by real-world assets. Unlike a utility token, where the investor pays cash for tokens that consequently allow service access, a digital security could be a share of a corporation, a portion of a note, or a debt security.
Compliance – a Digital Security Offering (DSO), or Security Token Offering (STO), is not an Initial Coin Offering (ICO). ICOs are completely unregulated. DSOs, on the other hand, are regulated the same way traditional securities are and must comply with federal securities laws. Using blockchain-based smart contracts, the per-jurisdiction rules can be coded into the digital security itself which makes it self-compliant. Federally approved STOs prove the project is legitimate, that they have a viable business plan and a capable/credible team
Equity – Many security tokens are preferred equity shares like FIRE, which entitles investors to annual dividend payments. If that doesn’t sound exciting to you, let me put it this way: tribeOS is participating in a $300 Billion Market. A 5% market share would mean somewhere around $15 Billion in gross revenue for tribeOS — while an opportunity like this comes with risk, we believe that we have the experienced team and mature technology to meet this goal. That’s massive.
No wonder DSOs / STOs are making headlines all over the world. It seems not a day goes by without you reading about digital securities. Government officials have opened their eyes to this revolutionary technology. Not wanting to stay behind, they’ve rushed to pave the way with regulatory laws to manage and oversee STOs.
STOs around the world
In 2018, Bermuda took the lead in blockchain friendly regulations by developing two new acts of legislation: the Initial Coin Offering Act, 2018 (the “ICO Act”), which provides a legal framework for token sales and ICOs, and the Digital Asset Business Act, 2018 (DABA), which regulates centralized crypto exchanges, custodial wallets and digital assets service vendors including custodians, brokers and market makers.
Since the passing of these acts, Bermuda has approved four tokens. Of which, we were the first federally approved security token in the world. This exemplary country gives founders and teams access to regulators. We literally sat in a room with the fintech committee for 4 hours and worked through questions and problems. No other country gives you that kind of access. This is no small deed to make note of.
Bermuda continues to innovate and iterate their laws so that they make sense.
In April of 2019, the SEC released a framework for analyzing whether a digital asset is offered and sold as an investment contract, and, therefore, is a security regulated by U.S. federal securities laws.
According to a job posting on USAJobs, an official government jobs portal, the SEC is looking to hire a crypto securities advisor. One of the key responsibilities of the new hire would be to apply their knowledge of federal securities laws to digital asset securities and crypto matters, i.e., broker-dealer, exchange, clearing agency, and transfer registrations, exchange product applications, sales, and trading practices, etc.
On February 23, 2017, the Canadian Securities Administrators (CSA) Regulatory Sandbox was launched as an initiative of the Canadian Securities Administrators(CSA) to support fintech businesses seeking to offer innovative products, services, and applications in Canada.
TokenGX registered as Canada’s first Exempt Market Dealer (EMD) under the Canadian Securities Administrators (CSA) Regulatory Sandbox initiative and the OSC LaunchPad, with permission to issue digital securities on a public blockchain.
DigiMax, the regulatory-compliant platform for digital securities and STO’s for qualified investors announced listing on Canadian Securities Exchange trading to commence and had begun trading on March 18, 2019, under the stock symbol “DIGI”.
In January 2018, the Financial Services (Distributed Ledger Technology Providers) Regulations 2017 (DLT Regulations) came into force. The DLT framework applies to activities by providers, not subject to regulation under any other regulatory framework, that use DLT for the transmission or storage of value belonging to others.
Recently, the government of Gibraltar released a Token Regulation proposal document to ensure that it remains a leading fintech jurisdiction.
In April, the Gibraltar Stock Exchange announced it has received regulatory permissions granted by the Gibraltar Financial Services Commission (GFSC) to allow listings of digital securities on the exchange.
The Bottom Line
STOs are booming, receiving worldwide acceptance. A recent data analysis by InWara shows Security Token Offerings have increased by 130% in the first quarter of 2019 confirming they’re the answer investors and startups alike have been waiting for. There is no going back.
It’s clear that in 2019, the STO is synonymous with superior investment options.