Cryptocurrency firms are shifting their focus to security tokens – digital securities recorded on a blockchain and issued in full compliance with the securities regulations in the jurisdiction in which they are offered – according to new Greenwich Associates data.
After the crypto bubble burst in early 2018, the market recognized that a lack of regulatory compliance was the downfall of recent ICOs. And while the price of Bitcoin has jumped by over 120% since the beginning of 2019, a new ICO boom is unlikely as regulatory uncertainty continues to linger.
In response to this regulatory crack down on token launches, companies are focusing on building technology and an ecosystem for security tokens. Security tokens can be thought of as the convergence of crypto, enterprise blockchain and traditional finance, says Richard Johnson, Principal for Greenwich Associates Market Structure and Technology and author of Security Tokens: Cryptonite for Stock Certificates.
This Greenwich Report is based on a recent study and looks at the emerging market for security tokens, and identifies the most promising applications, the key advantages and the leading players in the space. Study participants include securities exchanges, crypto exchanges, fintech companies, and broker-dealers. Representing this diversity, the leading companies in this market include Coinbase, SIX (the Swiss stock exchange operator) and tZero.
The most promising security token use cases are considered to be private equity securities (private placements) and start-up capital formation. In addition, many companies in the security token industry are focusing on tokenizing new asset classes, including real estate. Real estate is a huge but relatively illiquid asset class, says Richard Johnson.
The main advantages of security tokens are the immutable transaction and ownership record inherent with blockchain, the ability to automate compliance functions, and the potential to unlock a liquidity premium through secondary market trading. In terms of disadvantages, 63% of study participants see lack of regulatory clarity as the biggest obstacle to further adoption.
Given the potential application of security tokens by regulated financial institutions, its not surprising that 62% of our study participants believe a permissioned network is most appropriate for security tokens, says Richard Johnson. However, the issue of which specific blockchain technology to use is less important.
