STO’s are Not ICO’s 2.0
In the first part of this series, the potential of Security Token Offerings (STO’s) was explored. The possible benefits of fractional ownership, expanded access to liquidity, compliance by design, and programmable assets were all highlighted. However, there are also many aspects of STO’s to be wary of.
Shackles to the Legacy Financial System
Security Token Offerings by design involve compliance procedures. Know your customer (KYC) and Anti-money laundering (AML) procedures will require personal information and documentation. It will not be possible to purchase an STO and remain anonymous. For many crypto enthusiasts, this alone will make security tokens unattractive. Purchasing such a token will essentially be inviting local authorities into your financial life. Each and every transaction will be a transparent, fully tracked event with various legal and tax implications.
Find yourself on a blacklist – it’s entirely possible all you tokenized security assets may end up frozen. The current decentralized independence of some blockchain holdings will not apply to security tokens. Governments and various ‘oversight’ bodies will play a ‘central’ role in the sale and transfer of tokens. So buying into security tokens bring ‘trust’ back into the equation.
Buying Into the Bubble
If you currently hold the view that ‘everything is in a bubble‘ due to over a decade of global credit easing why would you want to expose yourself to security tokens? These assets will be directly tied to the current traditional asset system – stocks, bonds, property and so on. If you believe that these are massively over-valued why buy into tokenized stocks, bonds and property? You are effectively exposing yourself to an inflated market awaiting a sharp correction.
First Wave STO’s will be Experimental
Just like the tsunami of ICO’s throughout late 2017 and 2018, the first wave of STO’s will be largely experimental in nature. Lots of new products will be offered, mighty promises will be made but really how many of these first movers will truly offer value to investors? If you buy into a mid-sized export company offering a 3% dividend – is this the investment dream you are chasing? Sure there will be massive speculative gains for some, but most will simply lose money as these early STO’s fade out of view and a new improved model is iterated on in the coming years.
Access does not equal Liquidity
Many, many businesses/projects may launch tokens. This does not mean liquidity will follow. Simply because you can invest in something doesn’t mean ‘smart’ money will go there. To return to the mid-sized company offering a 3% annual dividend. Does this seem compelling to you? Jumping in on early offerings will more than likely lead to funds tied up in tokens that generate no upward appreciation and very little compound gain. The hype machine will be in full gear. Token X up 500%, trader Y claiming massive returns, but it’s very likely to be smoke and mirrors. Companies the are great investments are probably already fully capitalised, it’s the weaker members of the pack that will come hunting retail investment. So sure some security tokens will be very successful over the long-term but just like tech start-ups and ICO’s most will ultimately fail to offer investor returns.
Unfortunately far too many investors will attach undue weight to the word ‘security’. They will assume that these tokens are ‘safe’. That they have undergone a sophisticated process of auditing. As new tech deploying new code and procedures, errors can and will occur. In time these vulnerabilities will be discovered and exploited. Whether funds will be guaranteed in such circumstances remains to be seen. Over time, standards will improve as with ICO’s and crypto in general but it will be a costly learning curve.
Beware Wall Street Investors/Traders
Once regulatory clarity greenlights institutional involvement – trading and investing in the crypto market will become an order of magnitude more difficult. While it’s entirely true that crypto exchanges are on the whole engaging in numerous disrespectable practices, they are doing so as amateurs. Market manipulation in crypto is relatively easy to identify and track. When Wall Street enters the fray many other shady practices will come with them. The key difference will be sophistication – insider trading will be commonplace but you’ll only know it once you’ve bought the pump. It won’t be easy to swim with the sharks who will move security token prices as and how they wish.
As an investor, it is important to be aware of the coming wave of Security Token Offerings. No doubt, opportunities will arise and an engaged investor may profit but it won’t be easy and the odds won’t be in your favour. The key takeaway is that STO’s are not ICO’s 2.0, where a frenzy of investor interest generated rampant returns for early investors. Research, skepticism and a drip feed of capital will be required to benefit from security tokens in all their coming manifestations.
The last part of this series will examine the current infrastructure of the STO market and attempt to identify areas of opportunity for 2019. As always, looking forward to your comments and critiques.