Utility vs Security: New $10 trillion tokenisation wave approaches?

Wild West crypto days are over. We knew that for a while now, but this week regulatory bodies all over the world came cracking down on ICOs with a series of anti-fraud investigations. Seems like it’s time to play safe. But what IS safe? The article is based on key note speech Alexey Shadrin (Evercity CEO) on Russian Blockchain Week 2018.

In the middle of May the whole crypto world had their eyes on Consensus conference in New York — evaluating, comparing, making their bets on coins that would go pumping right after the event. However, neither altcoins nor bitcoin itself saw to investors’ expectations.

Instead, Bitcoin started its bloody dump in the beginning of last week, dragging the whole market behind.

Why?

In fact, two curious (and rather controversial) events happened in the United States with just a week’s difference. You might have heard of the first one; the second, though, was left almost unnoticed by international media.

Good cop — bad cop
First, CFCT (Commodity Futures Trading Commission) representative Brian Quintenz gave a speech on the regulation issues during Consensus, that was referred to as «very positive» and «comforting» by the community. Re-emphasising SEC chairman Jay Clayton’s February comment, Brian addressed the unique nature of crypto tokens that can «evolve» and change their status from security to utility.

This is indeed a positive outlook on the uncertain state of the crypto-related industries compared to official SEC opinion.

Now let’s get back to 2017 for a moment to see why SEC is being so hard on crypto market. In 2017 the amount of funds attracted to blockchain-related startups during ICOs reached $5,6 billion and significantly exceeded venture investments. And only during three months of 2018 this number went up to 118% of all the 2017!

Source: EY research: initial coin offerings (ICOs) December 2017

A sheriff always comes for the Wild West
The statistics above make the second event that influenced the market this week less surprising. (The most surprising fact is that it was barely covered by major international media outlets). On May 21st (notice — exactly the date where the market turned red!) state regulators unveiled a nationwide crackdown on suspicious cryptocurrency investment schemes which received a nice name «Operation Cryptosweep».

NASAA (not to confuse with NASA) — North American Administrators Association, that unites regulators from over 40 jurisdictions, has initiated 70 investigations of suspicious and allegedly fraudulent ICOs — and it is, according to the Association’s president, «just the tip of an iceberg».

So who is in the NASAA target list?

Top-management of companies that issued Utility tokens without registering them in SEC or using exemptions;
Marketing agencies, listings and platforms that received percents from attracted funds;
Advisors and consultants who received percents and assisted in circumventing the law;
Bounty «hunters».
Meanwhile, other states across the globe didn’t hesitate to follow:

-On May 24th Monetary Authority of Singapore (MAS) started turning up heat on an initial coin offering and warned 8 digital token exchanges for breaking securities, futures rules
-On May 25th UK authorities opened 24 investigations into crypto-related businesses

Some might find these cases much less amusing than the fake ICO offering website, launched by SEC earlier in May in order to educate investors about the typical fake ICOs signs.

We much appreciate SEC’s humour, but jokes aside, there is a more serious question.

What’s next?
The answer might already be here under the name Security Token Offerings (STOs): it has all chances to become the next big thing on the crypto (and not only crypto) market.

Security tokens have massive advantages over utilities, including representation of ownership, tradability and, most importantly full compliance with regulations (yes, we are going to play by rules here).

According to angel investor Gil Penchina, “We’re starting to see securites tokens with Bitcoin Capital’s BCAP, to brokers like Cointopia and Polymath, and enablers of security marketplaces in folks like tZERO and others.”

We shouldn’t forget that crypto market is still relatively small compared to mainstream markets — equity and debt markets for instance. Now imagine the $188 billion IPO (compared to $5.6B ICO) market adopting Security Token Offering format, and other markets following?

And it is quite likely to follow: owners would find tempting 24/7 access to their assets, especially with the New York Stock Exchange being open Monday-Friday 9:30am-4pm ONLY.

We would love to say that now we’ll have security tokens, SEC and NASAA will leave ICOs alone, bitcoin will never fall again and we will all live happily ever after raising billions of dollars for cutting-edge startups (like Alibaba did, raising $21B by selling securities). But it is not that easy.

Security token market growth faces multiple problems including much stricter KYC/AML, accredited investors only and poor infrastructure — so the questions of how are we going to issue and trade these tokens are still to be answered.

However, recent emergence and extreme success of such players as Polymath ($139 million raised, 100+ projects lined-up for their services), aimed at creating a security tokenisation platform, show that demand is high — to say the least.

Conclusions
-It seems like the moment when Utility tokens will wave their last good-bye is not too far ahead. Instead, fully compliant and regulated Security tokens step into game
-Security tokenisation has a 100x (hundreds billions of dollars!) market potential by means of replacing IPO model
Infrastructure of Security issuing and trading is only being formed at the moment — which makes it a great opportunity to step enter. As we know, a smart investor only enters a growing market.

ABOUT THE AUTHOR

Alexey Shadrin

Blockchain, Sustainability and Smart City evangelist, serial entrepreneur and key-note speaker. Evercity co-founder and CEO, DAO IPCI, Russian Carbon fund.

Maria Vyazemskaya

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You are welcome to join the discussion here: https://t.me/evercity