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Cryptocurrency’s Next Casualty: The STO

Written by James Roy Poulter (Founder, The Reserve)

With the fall in value of bitcoin and other cryptocurrencies from the peaks of 2017/8, Initial Coin Offerings, or ICOs, are dead and buried. But if you’ve been watching the industry – there is a new, shiny alternative – the Security Token Offering or STO.

security tokens
James Roy Poulter, Founder of The Reserve

I’m here to explain why they’re dead, too.

ICOs fell flat on their faces partly because they were issuing instruments with zero value – the tokens had none of the rights and rules, such as to voting or dividends that investments typically have.

Security tokens are the exact same objects, but with additional rules added to the sales contracts that govern them. A right to dividends. To vote. They become, effectively, tokenised equity, or debt.

Now indulge me with a thought experiment: it’s December 2019, and we’re all reviewing the year.

We’ve learnt that no one really cared about security tokens.

As the ICO craze passed in 2018, the STO hype quickly passed in 2019.

As a sector we’ve learnt to be humble and realise that the main benefits of blockchains (and other DLTs) are transfer of title to a transparent, auditable, distributed ledger. Cutting out middlemen. The promise has always been about permissionless, public, transparent, trusted data.

As ledger after ledger rushed to serve STOs, we also learnt that just because you can tokenise an asset, it doesn’t mean your sale of that asset will be a success.

The problem is, an STO is not well-suited to venture investing. LPAs and custody pose complications that outweigh any theoretical benefits of liquidity. Most venture investors do not care about tokenisation and it is too expensive for early stage companies with limited spare cash to run sales of securities to retail investors.

We have again ignored that equity crowdfunding has existed for a decade. There was no need for us to have reinvented the wheel in the first place when it comes to retail.

Title (to assets) on a DLT was never a kicker to purchase.

Liquidity was never a kicker either. No one buys something because it’s liquid. They might (have to) pay more for something because it’s liquid. They might buy more because it’s liquid. But, something being liquid is not the reason to buy it. Unless, of course, you structured your fund around this premise. In which case, you probably did invest in tokenised STOs in 2019, because you had no other option.

But all of this is OK. DLT has (should?) never have been concerned about successful sales. The brilliance is the fact that you can. The mere fact that selling tokenised equity is technologically possible, is the feat in it’s own right.

And whilst STOs failed to take off, and markets may have stayed flat, this just demonstrates the issue with floating a bunch of instruments that capture no value – is they do not represent an accurate barometer of the innovation or value actually being created in the space.

Despite a casualty in mis-managed expectations around STOs, 2019 has been our best year. And 2020 will be better yet.

James began his career in finance at EY, in accounting, tax and law. As a Chartered Accountant, he was recognised in the 35 Chartered Accountants under 35, as well as Forbes 30 Under 30, whilst having a technical background as a Developer in Residence at Playfair Capital – an early stage venture capital firm in London.
 
He is Founder, CEO and owner of The Reserve investment bank and Investor in numerous Impact Ventures. He is also Co-Founder of DLT Lab London, a UK Government backed accelerator.
 
James sits on the advisory boards of distributed ledgers Dusk and Radix and is a well-known thought leader and market commentator. 

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