Where are the flagship issuers of security tokens? This is the crucial question now facing the security token markets. The benefits to issuers of tokenisation – much reduced issuance and servicing fees, a lower minimum fund-raising threshold, faster speed to market, and access to new investors – are now well-understood by issuers.
The infrastructure to deliver those benefits is in place too. The regulated issuance and trading platforms are built and their denizens know how to mint and distribute tokens. The custodians have developed safekeeping services and are submitting to regulation. The payments systems needed to get fiat currency and tokenised cash into and out of the markets are already in use.
Institutional investors, well-versed in token techniques from their activities in the cryptocurrency and decentralised finance (DeFi) markets are ready to buy – indeed, are already buying and selling the cryptocurrencies, utility tokens and tokenised (or “wrapped”) traditional equities that the token-friendly cryptocurrency exchanges and nascent security token platforms currently offer.
Yet there are virtually no genuine security tokens to buy. An unscientific survey by Future of Finance of the longest list of security token offerings, and of seven security token platforms across Asia, Europe and North America, found less than 100 unique security token issues. It is significant that a minority (7 per cent) were instances of token platforms issuing on to their own platforms.
Although the largest group (38 per cent) were equity or equity equivalents – one of the proclaimed benefits of security tokens for issuers is their ability to raise capital through profit-sharing rather than ownership dilution – the second largest category was funds (33 per cent), followed by real estate (10 per cent), debt (7 per cent) and alternatives such as fine art, whisky and gold (4 per cent).
The reality is that the security token markets are at present hosting issuers that previously resorted to crowd-funding. There is a marked absence of marquee name equities (other than in “wrapped” form) and even of the sovereign and supranational issuers (such as the European Investment Bank) that have experimented successfully with debt issuance on to public blockchain networks.
Most security token platforms report a “pipeline,” and engagement letters signed with prospective issuers on the cusp, but those names that do emerge are invariably obscure or unusual and often part of the wider blockchain eco-system already. Efforts to persuade issuers to abandon current listings on small to mid-cap markets are well-directed but have yet to change the pace or scale of tokenisation.
For now, security token platforms are reduced to adding the more popular cryptocurrencies and utility tokens long available on the cryptocurrency exchanges. It makes sense, in terms of bringing liquidity and making it easier for established crypto market participants to expand into security tokens, but it is also a sign of failure: security tokens are different from cryptocurrencies.
Above all, the chief problem of the cryptocurrency markets – lack of regulation – is not an obstacle to issuance of security tokens. Security tokens are securities, and there are tried and tested rules and institutions in place to regulate them. This is now widely understood, making laments about the need to educate issuers about security tokens sound less of an obstacle and more of an excuse every day.
True, legal uncertainty over whether tokens are property and, if they are, whether they can be transferred across a blockchain network, remains a problem. It is noticeable that, since the Swiss Parliament increased legal certainty by passing the Distributed Ledger Technology (DLT) Act in September 2020, equity token issuers have become more visible in Switzerland than elsewhere.
A bigger obstacle is the lack of data. The sources of information about existing security token issues are patchy, disjointed, contradictory and out of date. A conventional prospectus is hard to find, even if it exists. The sum actually raised in a Security Token Offering (STO), as opposed to the original aspiration of the issuer, is usually invisible. Accurate trading prices and volumes are not available.
This event will focus on how to bring issuers to the security token markets, not just through greater price transparency, but by asking what banks, broker-dealers and asset managers should be doing; whether law and regulation are still obstacles and the benefits of tokenisation are exaggerated; and if there are mismatches between issuer needs and security token platform services.
Register Below for the panel discussion on November the 24th
The panel discussion topics to be covered are:
- The first STOs date back four years, yet no major issuers have come to market yet. Why?
- Would de-listings and migrations from other markets help?
- Are “wrapped” public equities hampering or aiding the development of security tokens?
- Are fund, real estate and asset-backed issuers helping the market develop or hindering its development?
- Is the shrinkage of the public equity markets part of the problem or part of the solution?
- Are banks and brokers and asset managers doing enough to bring issuers to market?
- How nervous are issuers about dispensing with intermediaries?
- Are security token platforms doing too much or too little to help issuers?
- Are issuers convinced of the benefits of issuing security tokens?
- Do issuers see value in hybrid issuances and hybrid instruments?
- What can be done to correct the lack of accurate issuer, price and volume information?
- What are the benefits for issuers of their securities being traded 24/7/365?
- Can security tokens really reach the investors other instruments cannot?
- Certain token exchanges have played by the regulatory rules for years. What is their reward?
- Where are valid regulations (or exemptions) in place to facilitate security token issuance?
- Is the pre-issue compliance burden too great for issuers?
- How big an obstacle (or incentive) are novelties such as smart contracts and DAOs?