There’s a party happening right now and everyone’s invited. The music’s playing, the fridge is loaded and the bathtub’s full of ice. All the ingredients for the sickest soiree are in place. There’s just one problem: the guests have yet to arrive. Welcome to the world of security tokens, where you can tokenize anything you like, but making it tradable is another matter entirely.
STOs Are on the Rise But Liquidity Is Non-Existent
HYGH is a peer-to-peer advertising network and content management system seeking to make outdoor displays affordable to businesses of all kinds. It’s currently raising funds via a token sale, and has elected for an STO over an ICO. Explaining the rationale, CEO Vincent Mueller said: “We see clear benefits to aligning incentives between the project and its backers, and we believe a compliant STO is the best way to achieve this. We’ve set a small check size of $500, in exchange for which investors will receive a 9% share of revenue.” A security token offering was chosen, he added, on account of it being the most ethical means of raising money, helping investors become long-term advocates for the company, rather than short-term token flippers, as was the case with the ICOs of yore.
But how long-term are we talking about when it comes to trading security tokens? In the U.S., there’s generally a one-year lock-up before securitized assets become tradable, but that’s not to say that STO investors can exit after 12 months. Offloading any asset requires a counterparty willing to acquire it, and right now accredited investors with the means and will to purchase security tokens on the secondary market are thin on the ground – as are trading platforms themselves, for that matter.
First Comes Infrastructure, Then Liquidity
The Winklevoss twins might have caught flak for Gemini’s “Crypto needs rules” campaign, but when it comes to securities trading, they’re absolutely right. While the legal status of utility tokens can be debated ad infinitum, securities will always be securities, and thus any project pondering an STO must ensure they are au fait with all pertinent regulations before proceeding. Furthermore, any exchange wishing to list these assets requires a license from their securities regulator, which doesn’t dole such permits out to just anyone.
At Token Summit New York last week, Josh Stein, CEO of security token exchange Harbor, had a lot to say about the state of the nascent industry. “The issue is getting a critical mass of investments and investors,” he told event organizer William Mougayar. “You can have the best tech in the world, but you still need buyers and sellers willing to transact … It’s like a fission reaction, you gotta reach critical mass.” Solving that chicken and egg problem is a task that call for a multilateral approach involving STO projects, issuance platforms, custody providers, secondary exchanges, regulators, and all the other intermediaries who govern the complex security token landscape.