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Security Tokens Taking a Different Route With Emergence of Private Markets

Blockchain technology has come a long way. The industry has seen rapid growth in its revolutionary decentralized model, and most of the improvements and adoption have happened this year.

One thing that is synonymous with blockchain is digital currencies or cryptocurrencies. These are the native assets of blockchains, and they have tokens built into these blockchains using smart contracts. There are two types of tokens: utility tokens and security tokens.

Crypto users are more familiar with utility tokens than security tokens, and the reason for that is simple - they are more common. Imagine chips in a casino, that is what utility tokens are like. They are used as the native currency within the casino to play games or tip dealers and then converted back to fiat/cash when the player wants to cash out, just like with cryptocurrencies around today. We should add that players who hold the casino chips do not own a stake in the casino for holding, and they are also not entitled to a share of the casino's profits.

With security tokens, however, it's different. Security tokens are like owning stock (shares) in the casino and when the company (re: house) wins, the shareholder wins too. It is safe to say while security tokens give you ownership of an ecosystem, utility tokens are used in that ecosystem.

In essence, security tokens are blockchain-based digital contracts embedded in the network for fractions of all existing assets, some examples can be assets such as real estate, cars, or corporate stock.

Evolution of security tokens

The idea of security tokens evolved from initial coin offerings (ICOs). ICOs are the distribution of utility tokens to raise capital from investors .When Ethereum launched in 2014, ICOs became a household name and were successfully issued for several securities until around 2016. The success of ICOs brought about an increased number of scams which ruined the reputation of projects going the ICO way. This led to the development of security tokens. security tokens provide a guild for regulation, compliance, and tokenization around transactions affecting digital assets.

After the 2017 crash of ICOs, the roots for security tokens were planted, and by 2018, it had started to gain traction when about 28 security tokens raised a collective value of $442 million during that year. Those statistics continued to improve, as shown by PWC's 6th ICO/security token report in 2020 when over $4 billion was said to have been raised through 380 token offerings.

The market of security tokens is not relenting though, as the tokenization of assets and the market is expected to reach exponential growth in the future. A CAGR of 59% from 2019 to 2030 has been predicted.

Regulation in the Markets

Unlike utility tokens, security tokens have always been under much greater scrutiny by regulators. These regulatory bumps are one of the reasons why the growth and general adoption of security tokens have been very modest.

This is starting to change though as in recent years the SEC is beginning to qualify security tokens. In July 2019, the first Regulation A token offering, a $23 million offering for Blocks tack was qualified by the SEC and this set a precedent. The sale of tokens that can be immediately tradable by accredited and non-accredited investors was suddenly possible and this provided clarity around secondary sales. Arca Labs began trading its security token, the ArCoin in July 2020. ArCoin is registered with the SEC and represents shares in Arca's U.S Treasury Fund. This is another example of security token acceptance from a private entity by the SEC.

Other significant movements in these lines happened in September 2020 when the SEC-registered an $85 million security token from INX, a foreign crypto trading company, and in SEC qualified Reg A+

By tokenizing equity rights for pre-IPO companies (startups and early-stage companies), many blockchain projects are now directly undercutting the old model of using ICOs. It is clear how much value security tokenization currently holds, especially in the private markets. There are billions in security tokens coming to the market and they are seeking liquidity solutions. IX Swap is well-positioned to provide the services this multi-billion-dollar security token market needs as it continues to grow and expand.