If you've been paying attention to the cryptoasset landscape recently, you've likely seen the narrative rapidly switch from companies running utility token Initial Coin Offerings (ICOs), to Security Token Offerings (STOs).
With the unclear regulatory landscape around Initial Coin Offerings, and the benefits of Security Token Offerings increasingly being socialized, many companies who would have raised funds through an ICO as recently as a few months ago are now in the process of launching an STO. That doesn't sound bad though, right? Moving business practices from raising what was likely to be deemed an unregistered security to raising regulated and compliant security tokens?
Well, there’s one major challenge companies are facing when it comes to running an STO: selling security tokens isn't easy.
You'd think that with a move to an STO model, which - when done properly - is fully regulatory compliant, investor interest/demand for these security tokens would be stronger than that of a utility token. But that assumption is incorrect, at least at this stage of game in the tokenization of securities. Here's a few reasons why:
Smaller Investor Pool:
When securitizing tokens, companies are working under numerous regulations that utility token ICO’s have not had to deal with: accredited investor requirements, limits on the number of US investors, etc, all reduce the size of the investor pool that a company can ultimately sell their tokens to initially. The addressable market of STO investors is significantly smaller than ICO’s, in addition to contributing factors listed below.
"Flipping ICOs" has been a common practice in the cryptoasset community since the concept of initial coin offerings was initially popularized. Well-connected investors purchase tokens of in-demand token sales, and sell them almost immediately after the tokens become transferrable - many times the value that the initial investors paid.. Due to regulatory requirements, many of the Security Token Offerings will have lockups for one year, which in cryptoassets, seems like an eternity. Many investors either aren't interested in locking up their funds in an STO for 12 months, or they feel the opportunity cost is simply too high.
Let's be honest, the majority of investment interest in cryptoassets is presently driven by speculation. When you tokenize a real world asset, or tokenize equity in a company, it removes the speculative nature of the investment because you can actually derive a valuation for the token. While this is likely a positive thing in the long-run, most investors, especially retail, are hooked on the speculation token dopamine. When it comes to offering a speculative utility token that could fairly easily pull a 10x gain, versus a security token backed by a real asset that’ll likely trade close to net asset value, many investors still prefer the utility token upside.
Being Too Early is the Same as Being Wrong:
Security tokens are a logical gateway to bring traditional investors into the world of cryptoassets, however, it's still very early in that process. Many people in the crypto community are still confused by the tokenization of securities - just imagine offering a security token as an investment to a family office outside of the space. There’s significant room for improvement when it comes to education, custodian services, UI/UX of STO solutions - the list goes on.
While I believe that the tokenization of securities has tremendous potential, many people are overlooking the difficulties of selling these tokens to investors today. For the time being, I believe that the supply of security tokens will be much greater than the existing demand for them.
Security tokens will likely help to curb the excessive speculation and Wild West ICO cowboy antics, but the general cryptoasset market will be slower to appreciate the regulatory safety of STOs. Until the companies launching STO’s are able to address some of the concerns above, mainstream security token investment will experience slower adoption.
I’ll leave this post with a hot tip for anyone considering the launch of their own STO. Just because you’re tokenizing a security, doesn’t mean more demand will be automagically generated. The value of the security is ultimately in the asset it represents (equity, profit share, real estate) - not the fact that it’s on the blockchain.