For more than a year now, media outlets around the world have chronicled the rise and fall (and rise again) of the once-booming cryptocurrency space. At its’ peak, the market was attracting investors large and small who were clamoring to throw money at anything crypto-related. For a while, launching an ICO seemed akin to a license to print money, but all was not well in the booming new market.
After a year filled with stories of fraud, failure, and plummeting crypto values, the worldwide fervor for ICOs has cooled dramatically. In August, crypto-startups pulled in only $326 million in capital through ICOs, which is the lowest total for any month in over a year. At issue (besides the high rate of fraud) is the uncertainty surrounding the ICO process and how or if it is to be regulated via existing securities laws. Now, with a Federal court signaling that ICOs might soon come under the scrutiny of regulators, the crypto industry seems to have made a decision – If you can’t beat em’, join em’.
The End of an Era?
As the future of ICOs becomes more uncertain with each passing day, the cryptocurrency market is undergoing a decided shift towards a whole new product – security tokens. As the name implies, a security token is a form of crypto-asset, much like the utility tokens common to ICOs. The crucial difference is that they’re declaring themselves as securities outright, rather than waiting for regulators to make the call. That means that the new crypto-vehicles will be subject to the same stringent oversight and regulation as traditional securities. They’re also starting to power the ICO’s heir apparent, the STO, or security token offering. Crypto-enthusiasts are hoping that they can fuel a comeback for the beleaguered industry, and assuage the fears of skeptical investors.
In addition to enhanced regulatory oversight, security tokens have another, possibly more important advantage over utility tokens. That advantage is that they are explicitly backed by real-world assets. That not only means that security tokens should prove to be less risky financial vehicles, but that they will be able to reach into new financial territory that was previously impossible for crypto markets. Already, there’s been interest in tokenizing assets ranging from real estate to fine art, and everything in between. Even though this was possible already via traditional securities, their inefficiencies often made the process costly and cumbersome. Security tokens will reduce the friction and costs associated with asset-backed trading, possibly creating a whole new market in the process.
A New Beginning
As security tokens start to gain traction, investors and financial firms throughout the world are starting to take notice. SIX, the owners of the Swiss Stock Exchange, has already announced that they will be building a crypto-exchange to support tokenized securities, and other established trading platforms are expected to follow suit. They won’t be alone, as industry heavyweight Coinbase has achieved regulatory compliance via an acquisition, and companies like Polymath and Overstock.com’s tZero already have functional security token trading platforms. If they take off, it’s easy to foresee a future where investors can access a unified platform that offers easy and inexpensive trading of all types of assets, all on a single blockchain solution.