Fintech Genome

Security tokens


#1

2018 brings an end to ICO and the introductions of SECURITY TOKENS

TAO ( Token Asset Offering )

The market can now clearly divide the two types of TOKENS

Utility Token
-this is great for companies who have already a points system or token built
-has a large user/community/users in their platform
-no secondary exchange for the token

Security Token
-for all companies globally
-you must use an exemption that is allowed in the country which you are selling your tokens


#2

Hi @oscar Yes, I think Legacy Finance has Equity + Debt. Blockchain Finance has Equity + Utility Token. The latter is as much about marketing as it is about capital raising and a well designed Utility Token has a big impact on Equity value.


#3

Hi @BernardLunn .

The market is adopting tokenization but one thing is very clear an utility token has no place within the securities regulations.

The first 2 waves of tokenization was all marketing, fraud and nothing to show. The next wave is much different.

2019 is the year of the Security Token Protocol that gets adopted by companies, investors …

Oscar


#4

I am going to take the opposite side of this argument. Too many people are promoting STO’s with absolutely no understanding of the hazards involved.

No company with under US$10 million in revenue/year has any business even considering launching as a regulated security. Having previously had a company destroyed by trading on the OTCBB, I have great experience in what happens to small cap companies that allow themselves to be traded on markets. If your token has any liquidity at all, sophisticated investors will find that they can make more money by killing your business quickly than the believers will have stomach for over the long term. You don’t need STOs for this. Just look at penny stocks. These are the kinds of psychopathic traders you are going to be exposed to, and they have absolutely no concern about you. To them, you and your company are just disposable resources.

Unless you have fantastic revenues to fend off an attack, you are going to be destroyed. It is one thing when this happens on a utility token, but when this happens on a security token which is tied to your company, you will quickly find the regulations disallow many options from escaping from this trap and your ability to raise money is severely compromised. You will be forced into toxic financing which results in a death spiral.

I find it inexcusable that many advisors with no experience in small cap securities are advising startups to do tradable securities via STOs. This is an absolutely horrible idea, and will definitely lead to advisors themselves needing to be regulated. The damage to the industry is going to be an order of magnitude worse than the relatively minor damage done from scams in utility ICOs

STO’s are not the answer. That light you think you see is actually a train coming at you.


#5

This is not an opposite view of an STO. This argument is basically saying NO MORE INNOVATION … wow.
if we went by this example:

No Twitter
No SalesForce
No LinkedIn
No Facebook
these are just a few when they raise capital had no revenues

STO are not the problem, its how they are been abused by the same people that depleted investors money with ICO

STO (currently done in Europe is going to be harmful to the market
STO ( currently done in ASIA are going to be extremely harmful

STO coming from USA, Canada, Australia, Singapore, UAE
are companies using current exemptions to raise capital and simply tokenizing their securities.

STO are the future


#6

I am with @oscar on this one. STO need transparent data, but given that the market will take care of it. There are bad entrepreneurs and bad investors in any marketplace, but also good ones. A shrinking equity base and a market duopoly (NYSE/NASDAQ) is not healthy.


#7

@oscar @BernardLunn
we’ve prepared a report on current state of STO market in case you’re interested


#8

Was the report sponsored by the companies described? It is a perfectly viable way to pay for but disclosure makes it more credible. It seems to ignore TZero which is a big player in any objective analysis.


#9

No, the report wasn’t sponsored by any company. We just reached out to representatives of the companies and talked to them about the market. The only reason some of the big players are missing in this report is they refused to talk to us.


#10

Thanks for clarification. Strange that T Zero refused to talk. Any idea why?

All the best,

Bernard Lunn

CEO Daily Fintech

Mobile: +41 78 949 0234

Daily Fintech currently has over 24,000 subscribers in 199 countries who are leaders in Financial Institutions, Startups, Investment Funds, Consulting firms and Regulators. Our Authors are senior executives, entrepreneurs, investors and deal-makers who write from experience.

Author of The Blockchain Economy.


#11

Not sure about tzero specifically, that one wasn’t on me. Reasons were different: no time for talk, asking for commission, simply ignoring messages…


#12

Its very disappointing to see a report like this that is suppose to be neutral but only covers one chain, and more importantly the one chain that will not survive in the Digital Securities Market.

Would be great to see TRUE research and understands and provides proper Research that is not one sided

Oscar


#13

Hey Oscar,

Excited to receive your comments, as your opinion means a lot to us.

You are right that we were trying to cover the whole picture not digging deeper as it was our first research on the topic.

We appreciate your time, if you don’t mind we would like to ask you a few questions about your profound expertise and significant experience in alternative finance.

Please let me know if you are interested in an interview


#14

The financial capital markets are in one of the biggest disruptions in history.
The capital markets are in two parts:
Private capital markets
Public capital markets

and these subtle distinctions are important to not confuse the audience.
as well there is very big differences between
Crypto
and Digital Securities ( securities token, tokenized securities

  1. different regulations
  2. different licensing for operators
  3. different trading rules, restrictions etc

Exchanges vs ATS/Secondary market why in Private capital markets you cannot use the word “Exchange”

The private capital markets globally is the most fragmented and the biggest opportunity for disruption:

1, you need to follow current securities laws in each of the countries around the world
2. you need to understand, regulatory requirements from investors perspective, regulated issuance platform perspective, secondary market platform, transfer agent and digital securities protocol

Once you have the full picture can you now understand what technology is suited to distrupt, without hype of BS.

Wave 1
ICO/STO
2016-2018 according the EU report on 09 January 2019,
78% pure fraud
off the remaining 22% only 3% remain in business

Wave 2
ICO now pretending to be experts in Securities laws

Wave 3 March 2019
Early entrants getting regulated and switching chains
Secondary Markets like Templum switch from Ethereum to permission based

There is more than one chain in the market:
Ethereum is great a crypto currency
it’s not for SECURITIES Laws,

Hyperledger Fabric
Stellar
Corda


#15

Hi Oscar,
If anybody knows this market it is you IMHO. Great to see you here.

Two Q if I may impose on your time/knowledge

I don’t get the move from permissionless to permissioned. Can you elaborate?

Some say Tokens don’t include voting/governance. I know they can but do they?


#16

Thank you @BernardLunn

don’t get the move from permissionless to permissioned. Can you elaborate?

When it comes to SECURITIES Laws, that currently exist, permissionless will not work, as is not capable of following current securities laws, and all the regulatory requirements.

Example: Templum was based on Ethereum, in order for them to maintain their ATS license in the USA and meet all the requirements have now moved away from Ethereum to a permissioned based chain.

Some say Tokens don’t include voting/governance. I know they can but do they?
This is false, when a company tokenizes its securities, it will have all the same attributes that the securities have

  • voting, non-voting
  • revenue share
  • dividend
  • first right
  • exit
  • trading restrictions
  • reporting restrictions
    *corporate actions
    *full lifecycle management

That is the starting point of a Digital Securities Token

Oscar


#17

thanks @oscar, makes total sense.


#18

A great report to do is to show the current exemptions by country:

USA
RegCF
RegD
RegA+

Canada
45-106

and then how each of the work,
for
Investors
Companies
Online Investment Platforms
Secondary market
Transfer Agents

once you have that then you can bring in the discussion of Blockchain that fits these Regulatory Requirements:


#19

@oscar Thanks for your comments. Having gone through all of your remarks about the regulation I couldn’t help but notice a major issue. The issue deals with the pace at which security tokens are adopted as opposed to how current regulatory constraints are inherently stable.

For instance, there is a requirement for a transfer agent to be centralized, this is precisely what DLT tries to avoid. No matter what speed a particular transaction can reach it is not settled without actual record maintenance from the transfer agent, and this is done for a reason I suppose.

And what about the privacy concerns, how does blockchain transparency affect security ownership information? Will we get more detailed information on who owns what and under what circumstances? This for sure will impact speculative trading and in short perspective might bring uncertainties to the market sentiment.

Bottom line, the real question is if we have outraced ourselves and we need regulations adjustments immediately? Or if we need to adjust our perception of implementation of blockchain in accordance to the regulations since regulations are still appropriate and the logic behind them is rock solid?


#20

There is nothing wrong with the regulations.

If you use a chain like Fabric, you can meet all the regulatory obligations for
Issuers
Broker Dealers
ATS Operators
Transfer Agents

and be 100% on chain…

Fabric today has just that:

  1. a Digital Securities Protocol that is globally compliant
  2. a Transfer Agent
  3. Broker Dealers
  4. ATS Operator, Secondary Market

Fabric ecosystem in the financial capital markets is more established and it provides all the regulatory requirements while bringing major efficiencies

To change or create new securities laws: if the process got started today working with regulators its at least 5 years away to remove some of the regulatory requirements that are currently in place.

I personally do not see regulators making those changes when faced with reports of fraudulent activities such as ICO/STO 78% fraud.

Investors are not trusting this either, they want Governance, and Compliance and the technology at this point has not delivered on either of these two points.