Isn’t it about time our Blockchain Crypto community policed itself? It is all too easy for pretenders to enter the arena unchallenged and start to advise naive founders, claiming that they have been in the game for many years. But when you dig deeper their CVs doesn’t support the rhetoric. A danger to themselves and founders.
We must avoid a repeat of the initial coin offering (ICO) frenzy driven by greed, the result of altcoin profits that encouraged the unscrupulous to get rich quick, to raise capital on the strength of a poorly conceived ideas that should have never seen the light of day.
What next: security token offerings (STOs) in no way should be confused as the next evolution of an ICO market.
Whilst STOs in many ways move against the democratisation of capital, making access more difficult, STOs are already written into Securities Law and we all agree investors should have protection. Although in 2008 the regulators were asleep at the wheel, often turning a blind eye, it seems, favouring bankers not investors. An convenient argument for the system to hide behind inadequate regulation.
We cannot deny ICOs hurt retail investors, but we should remember most of these investors were ‘betting’ with casino money; profits made from the rise of alts, where most shrewd investors got in and got out early. An STO is a digital manifestation of financial instruments that already exist today, so why all the fuss?
It’s legitimate to ask: is there really an STO market? Is an STO simply a more efficient, more transparent and faster way of raising capital? The answer has to be ‘yes’.
I often come across ‘tokenisation as a service’ advisory firms that claim to be able to engineer the new security tokens encapsulated in smart contract code that binds the ‘new instrument’ to a legal framework (jurisdiction). But when you look closer, the people involved don’t come from a capital markets and/or have a computer science background, with insufficient blockchain provenance. Oblivious to the complexities of engineering financial instruments as code that can be secondary market traded.
I hear horror stories where these tokenisation experts have recommended ERC20 protocols to create an equity token. Seemingly oblivious that ERC20 protocols have no limitations for movement of digital assets between wallets, have no ‘track and trace’ because they are ledger based and not OTXU. Allowing securities to be traded off-exchange without the ability for know your customer (KYC) information to follow the token.
I can see the FCA rubbing their hands on this one. The essence of a security token is to digitally connect the private key of the owner of the underlying asset with the formal KYC data, a core function of primary issuance, where the token has to be engineered at the outset to enable secondary market trading on exchanges, where the yield follows the token holder and the holder of the asset is known at all times.
There is no protocol standard for security tokens. This means some exchanges won’t be able to list your token. Tokenomics is, of course, a function of design and engineering of the instrument in a smart contract, enabling it to be exchange-tradable, to be handled by a custodian and payment providers - a whole new ballgame. This is why I bang on about token experts requiring knowledge of both capital markets and how blockchain protocols work.
But here is the thing: any protocol has to deliver the right to recall an asset if sent to the wrong address, the right to re-set access if private keys are lost, as no assets can be stranded on an exchange hurting liquidity and reputation. The need for tracking and tracing assets are de facto requirements in any capital market, as regulators will not tolerate less, and, yes, you may forget that multi-sig opens up ransom opportunities.
So you think you understand STOs, and you think you are able to advise clients?
Be careful what you wish for. STOs are complex and sit in the world of financial engineering. They have legal wrappers and are not for the faint-hearted.
Ignorance cannot be tolerated.