The security token is the next evolution in capital markets, and after many years of painstaking infrastructure development, the industry is finally catching up to its associated sister, cryptocurrency.
Capital raising has evolved rapidly over the years, originating from traditional stock markets in Wall Street. Subsequently, it moved onto less conventional methods, such as crowdfunding platforms like Kickstarter, which is a different evolution of the same concept. So different that the layperson would not associate Kickstarter with the stock market at all.
The Evolution of Crowdfunding
One of the newer and more creative innovations in the ever-evolving landscape of capital markets and crowdfunding was derived from the birth of Bitcoin and Ethereum. These innovations allowed blockchain-enabled technology platforms to develop ecosystems where tokens were minted to provide utility or to act as a pure token for their native platform.
Such initial coin offerings (ICO) enabled entrepreneurs to raise money globally from potential users of their products while simultaneously achieving market fit.
This phenomenon created a new wave of funding into the markets as companies raised millions overnight with a theoretical “whitepaper” while with little to no development done on the project. In this overnight, unregulated industry, funding became much cheaper and more accessible than raising money through the traditional debt/equity markets.
In any industry where funding is so easily attained, naturally, people came flocking to the new Mecca. This, coupled with a lack of regulatory oversight, of course, attracted sharks that sensed an opportunity to abuse the easy money and lack of regulation.
By the end of 2017, the number of ICO scams had increased exponentially, with 80% of ICOs being scams. This led to the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) stepping in to take a more active stance towards the industry, targeting companies that the SEC deemed as securities rather than utility tokens.
Enter the Howey Test: Given the heightened scrutiny by regulators, companies started to emphasize consulting with leading law firms to determine whether a coin was a utility or a security.
Under the test, a coin is considered a security if it holds any of the characteristics below:
- An investment of money
- In a common enterprise
- With the expectation of profit
- To be derived from the efforts of others
The Birth of Security Token Offerings (STOs)
The utility of a coin was essential, given that most crypto exchanges did not have security broker/dealer or exchange licenses to trade tokens that were classified as securities.
As the number of failed ICOs continued to rise, regulatory scrutiny also began to pick up. Security token offerings (STO) became the natural evolution of the ICOs.
The security token offerings made sense legally, but the lack of infrastructure and trading capabilities created less of a buzz for the retail crowd. Given the lack of trading venues, individuals were not able to realize profits immediately. Similarly, given the nascent stage of the industry, proper licensed STO custodians had not been set up to accommodate the nature of these securities.
Due to these factors, the growth of the STO industry had been stifled and took a backseat over the last few years while its sister asset, cryptocurrency, continues to soar to new heights.
Fast Forward to 2021
The current growth potential for the STO industry far outweighs all other asset classes with the total addressable private market valuation, valued at USD 7.5 trillion. Despite the complete lack of infrastructure throughout its lifetime, STOs are still growing rapidly at 59% CAGR.
More STO platforms have taken note of this growth in recent years and established STO exchanges globally such as InvestaX, OSL, and Archax. The infrastructure of the current STO market is finally starting to come together with licensed broker/dealers, exchanges, and custodians beginning operations.
Security tokens are not going anywhere and are here to stay. The creation of STOs dramatically improves the efficiencies of traditional securities and allows for infinite programmable possibilities. STOs are the future, and we expect the market to continue to grow exponentially.
However, despite the rapid infrastructure developments over recent years, the STO ecosystem is still incomplete and is missing a liquidity solution.
IX Swap is the final piece of the puzzle needed to close the infrastructure loop to propel this industry to greater heights.