Some of you might have read Peter Thiel’s Zero to One
, where he talks about the radically disruptive nature of truly transformative startups. The TLDR version is basically this: don’t bother building a startup (at least don’t bother going to a VC for funding) unless you are doing something radically different. Don’t bother building a better mousetrap. Incremental process improvements are not quite something that excites the founder of Paypal and his ilk. It doesn’t matter if that process improvement is worth a TAM of many billions of dollars, it is unlikely that it will have a moat, or a sustainable competitive advantage and as a result true economic profits, that holy grail that drives valuations, will evaporate fairly quickly.
You might be wondering how all this links back to our subject at hand, security token offerings or STOs. Technically, STOs are the lowest hanging fruit of the promised blockchain orchard of eternal ever-happiness! The concept is fundamentally simple and alluring, as we saw from the ICO boom (and subsequent bust). It is essentially crowdfunding for an idea, and all you need is a website and some snazzy PR and marketing. There is the small matter of the SEC and its brethren from inside and outside the US getting involved, and making sure everyone knows what is what, in a manner of speaking (never mind the fact that they will let retail investors buy any number of possibly dubious ‘shitcoins’ from a regulated exchange like Coinbase, but will not allow a crypto ETF intended primarily for savvy institutional investors in the main). Once the regulatory plumbing gets laid down, which is something multiple regulators as well as projects backed by some leading VCs are working on (Harbor, Polymath, Templum etc), it should basically be old wine in a new bottle, but in a good way. At least according to some people - imagine not paying billions in advisory fees to the big banks to raise capital, for starters, and entrepreneurs directly raising capital through a kick-starter type regulated platform from investors who could also be evangelists or early adopters (yes, it is basically an ICO, but regulated, with KYC and all the bells and whistles, and not masquerading as anything other than a security token).
This is where it gets interesting. There is almost a West Coast/East Coast divide to this argument. The ‘Valley’ types, the ones that are more predisposed to a Bitcoin or crypto-driven singularity couldn’t care less about STOs. Their point is that STOs are an underwhelming use case for blockchains. It is fundamentally nothing new, it is just old wine in a new bottle, and it is something that can be done through intelligent legal and financial structuring, without the blockchain stamp of virtue-signalling. The ‘East Coast’ types on the other hand see the humongous TAM that STOs have, and the opportunity for investment banking 2.0.
What is our view? This is one where we too are debating internally, but admittedly leaning more East then West. While we admit that STOs are not the be-all and end-all of the blockchain promise, and it is merely scratching the surface, it IS a mighty itch that is being scratched, and it could be pretty big from a value creation perspective. Imagine being able to tokenize and trade anything on a financial exchange, everything ranging from stocks to real estate to art to patents to future royalty streams! Imagine being able to trade any of these across borders, assuming you clear your KYCs and other regulatory and compliance requirements. STOs could make true global macro traders of all of us. It could also enable fractionalization of otherwise inaccessible assets, and distribute ownership, promoting financial inclusion. And a lot of the legacy infrastructure that slows down security trading and settlements, could arguably be reimagined and redesigned from the ground up, with a distributed ledger architecture. It will take time, but it can be done. At some level, it is almost a no-brainer, it is almost like discussing if Wall Street should use the internet for communication in the mid-90s. Let us get this over with, let us move ahead and open up the STO market spigots and let blockchain move onto the true moonshot transformations. At the very least, the legacy fat cat bankers will have the grins wiped off their faces. Now isn’t that something everyone, including the regulators, the libertarians and the media can sign up for?
We will let you go through our picks for the best security token reads of the year and make up your mind.
Security Token Blogs:
Pomp’s popular medium post provides a decent starting point to understand what security tokens are and what they do. The post talks about the use case behind security tokens, highlights some of the challenges with security tokens (mainly securities laws) and talks about some of the disadvantages of the asset class.
In this post McKeon, a finance professor and crypto enthusiast, first illustrates the shortcomings and flaws in the existing securities market and proceeds to make a strong case for why security tokens are needed and how they directly solve many of the traditional problems of the system while cutting costs and expanding the user base.
Desai talks about some of the key players in the space and goes into the details of the platforms, the underlying technology as well as the economics. From this read you will also take away some understanding of the various security token models.
Quick read by Remeika (CTO of Harbor) on understanding some of the stakeholders in the security token market.