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Will 2019 finally be the year security tokens finally break through?

If you’re not totally sure what we mean by token, it is – broadly speaking – the name given to any kind of tradable asset used by a blockchain-based platform.  The recent explosion in ICOs has seen investors offered with every type of token, from those that can be exchanged for traditional currency or precious metals through to those supported by real estate.

Traditionally there have been 3 types of token – the utility token, the equity token and the security token.  While the first 2 are starting to decline in popularity for various reasons, the security token (STO) looks set to consolidate its positon as the investor’s token of choice.

The reason security tokens are proving so popular is that in the US they are, unlike other crypto and ICO transactions, recognised as securities and are therefore protected by SEC regulations.  This means failure to comply with those regulations could result in severe consequences including severe financial penalties and the potential for the project in question to be shut down completely.

This regulatory acceptance is in direct contrast to the STOs’ main forerunner, the utility token. 

When they first appeared within the Initial Coin Offering (ICO) boom in 2017, the best a utility token could promise an investor was future access to the company’s services and products.  More importantly it didn’t take long before experts quickly recognised that many of the tokens being offered in those ICOs were actually just securities by another name and foresaw that it wouldn’t be long before the SEC got involved.

But regulatory interference wasn’t solely responsible for diluting investor confidence. 

Throughout 2017 and 2018 the news has reported a string of poorly performing and even fraudulent ICOs which has dissuaded would be investors from pursuing an interest in buying utility coins and opening the door for the rise of the security token.

However aside from finally offering investors some much needed legal protection, there are sevqeral more reasons investors are taking to STOs so quickly including:

  • They are cost-effective as the smart contract behind the trade eliminates intermediaries (and their fees) and there are no administrative costs to bear
  • They are fast because the related checks are automated
  • They are global; you can trade from anywhere in the world as long as you have a wallet
  • Similarly they are 24/7 so you can trade at any time
  • They are likely to grow fast as an option as they offer higher liquidity and less admin

However, while 2018 was widely touted to become ‘the year of security tokens’ they have only seen fairly modest growth.  

Industry watchdog ICOrating.com reported a steady increase in interest during Q2 and Q3 of 2018 but, in real terms, the share of projects using security tokens actually only increased by only 1.6% between the 2nd and 3rd quarter of the year.  It is believed the slower than expected take up may be because there is a shortage of platforms able to handle STOs and until traditional cryptocurrency exchanges receive SEC approval to sell securities to accredited investors, the current platforms will maintain their advantage and market position.

While the acceptance of STOs in 2018 has been slower than expected, there has been significant progress in terms of developing the trading infrastructure and regulatory security they will need to succeed.  Many STO projects have also generated major investment leaving them waiting patiently for SEC approval.  Once that approval has been received, they will be able to capitalise on market demand for greater trading security and secure their position as the preferred fundraising method for tokenized projects at the expense of utility tokens, a move that could very well make 2019 the year of the security token.

We will continue to monitor the rise of the security token closely but if you are thinking about investing in an ICO or trading cryptocurrency and would like an experienced perspective on the trade, please call us today on 0203 811 7879 or contact us using our online form

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