Chapter 4: Top 3 Challenges That STOs Face
When ICOs proved to be a Wild West-style financial environment, many investors questioned the validity of blockchain investment opportunities. Their complete lack of regulation brought scams and darkness to the surface, proving a need for something better.
Security token offerings (STOs) are rising to this challenge. They are just as inclusive as ICOs, built on the same ideas as the conventional IPOs, and yield a system in which anyone with a reliable internet connection can buy a tokenized version of a real, tangible asset.
While security tokens show promise for investors and entrepreneurs alike, they need to overcome several challenges claiming mainstream membership in an average investor’s portfolio. At the present time, STOs are only available to accredited investors.
Here are three of the biggest challenges that STOs will face on the horizon.
STOs need clear global regulations.
Security tokens have the technology to let people anywhere invest in a company or project. They are simultaneously very secure because they are powered by blockchain technology, which processes transactions in an unchangeable way. But before STOs can go global, they need global regulations.
In July 2017, the SEC set the tone with its ruling on a token called DAO. The regulator determined that “offers and sales of digital assets by ‘virtual’ organizations are subject to the requirements of the federal securities laws.”
This means ICOs were basically STOs in a bad disguise. This determination changed the money-grab mentality that dominated ICOs at their peak in 2017. The ruling also established that blockchain-enabled investing needed to be regulated in order to protect investors and companies alike.
Other countries followed suit, establishing their own rules for security tokens. Sweden established regulations via the Swiss Financial Market Supervisory Authority (FINMA) that distinguishes tokens into three separate buckets: payment tokens, utility tokens, and asset tokens. In Canada, the Canadian Securities Administrators (CSA) established that any ICO must first speak with the regulators themselves to determine if theirs is a security token. On the other hand, countries like China and Korea have simply banned them outright.
It is important that every country in the world find a way to on a set of specific regulations for security tokens. Once in place, these rules will prevent companies from setting up operations in the country with the least regulations or otherwise misrepresenting themselves.
STOs need an established ecosystem of security token exchanges.
One of the biggest challenges to widespread STO adoption is building a way for people to buy and sell them easily.
To live up to the promise of providing liquidity to investors (a primary benefit of STOs), we need an infrastructure of global exchanges. This will let investors anywhere in the world easily buy, sell, and trade security tokens. Without them, there will be no place to trade on a global scale. These exchanges will also keep security tokens from being localized to a specific country, or from being dispersed across smaller exchanges.
Several exchanges are emerging nowadays, and there is talk among traditional stock exchanges about offering their investors the opportunity to trade in these securitized assets. At this present moment, there are no brand-name players in the space.
An exchange ecosystem will entice new investors and build a vibrant community. They will not only need to be functional and accessible, but user-friendly as well. STOs are still looking for their “killer app,” bringing smartphone-style convenience to such niche financial space.
Trusted and established global exchanges will let the STO world compete (in terms of liquidity) with traditional established equity markets. Current equity markets are large, but their geographic limitations prevent them from going global. A truly global STO equity market would eclipse these markets if participants could buy and sell on approved exchanges.
STOs face an education problem and a lack of trust.
The rise (and subsequent fall) of ICOs left a bad taste in many investors’ mouths. Their lack of accountability and unregulated nature had many people questioning them as a safe investment vehicle. This gives STOs an uphill battle right from the start, which is why it will be important to focus on education.
When the dot-com bubble burst in the early 2000s, it would have been easy for investors to write tech companies off as too risky. But doing so would have resulted in many missed opportunities. There’s no denying that ICOs underwent a similar process in 2018, but the industry as a whole has entered into a period of productivity.
It’s more critical now than ever for industry leaders to educate investors on the pros, cons, and possibilities in the STO world.
The technology that powers STOs can be called immature.
Blockchain technology just recently celebrated its tenth birthday. In the past decade, the bitcoin market cap went from being worth effectively nothing to having a market cap of over $62 billion.
Ten years is not a long time for any technology. Consider the internet even 20 years ago, with dial-up internet just taking shape, the first websites going live, and Yahoo! starting out as a company. It was an era of similar buzz and possibility, but there were also many naysayers who couldn’t wrap their heads around what the internet was or why it mattered.
Consider this excerpt from a 1995 Newsweek article titled “Why the Web Won’t Be Nirvana.”
“[Today] I’m uneasy about this most trendy and oversold community. Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks and modems. And the freedom of digital networks will make the government more democratic. Baloney. Do our computer pundits lack all common sense? The truth is no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.”
It turns out the author was dead wrong, but his general sentiment towards the early internet is similar to how many people feel about the blockchain today. To overcome this, the industry as a whole will need time to mature and evolve.
Eventually it will reach a point where its possibilities just speak for themselves and the critics will be silenced. The internet’s already done it once.
Let’s prioritize STOs over ICOs from now on.
Comparing STOs to its predecessors brings out its strengths over IPOs and ICOs.
IPOs are one of the most popular investment types, yet they offer decreased value the farther down the ladder you are as an investor. If you’re not a private firm or accredited investor, then you’re missing out on the majority of up-front value created from IPOs.
ICOs quickly blossomed to fill this gap, but ultimately fell short too. They were designed as a more affordable, faster way to raise money, but ICOs morphed into a lawless world because there were no regulations governing the space. Many ICOs were selling people on ideas through a website and a whitepaper, then simply taking their money and disappearing.
STOs solve both of these problems head-on: they open up investing to anyone, and their tokens abide by regulatory laws to ensure companies and investors are both protected. STOs are the next logical step in leveling the investment playing field.
There are challenges ahead, but through education and regulation, STOs will earn their place at the table.