THE STATE OF SECURITY TOKENS IN 2021

Hype + time = reality. Any great technology takes time to deliver. Electric cars have been around for over 120 years, but now Tesla is taking it to the masses. Back in 2018, security tokens were starting to generate some hype, but regulators and consumers weren’t ready. Now the security token racecar has left the starting grid, and it is starting to accelerate. Let’s look at recent developments and why companies and investors need to get on board in 2021.

Security Tokens Emerged in 2017, But Without Much Hype

The first STOs were launched in 2017, emerging from the ICO boom. ICOs had shown the potential of using blockchain technology and smart contracts to raise money — but they had also clearly demonstrated the pitfalls. ICOs had the transparency and efficiency of blockchains but were highly speculative and largely unregulated. Investors and companies were intrigued by the benefits. Regulators were concerned. 

Enter STOs. STOs provide many of the same benefits of an ICO, low barriers to entry, and lower costs than an IPO, while directly addressing the lack of regulatory clarity and directly connected investor risk. Security tokens are considered transferable securities in many jurisdictions including North America, the EU, Japan, Singapore and Switzerland.

Growing Pains

In 2018, security tokens experienced their first small boom, with 28 STOs raising $442 million. Many investors had gotten burnt in ICOs, and consequently, momentum was shifting away from utility token raises. 

But 2019 saw sideways movement. Although 55 STOs raised over $450 million, it didn’t come close to the hype that had previously built up around ICOs. There are many possible reasons for that. Where there’s more regulation, there naturally is less room for an irrational FOMO to develop. It takes a lot more to launch an STO than an ICO, which means the number of projects takes longer to grow than for ICOs. And 2019 marked the tail-end of a two- to three-year bear market — the market was exhausted. Many commentators also pointed to a limited secondary market, which saw wide bid-ask spreads post-STOs. 

Adapting to developing regulatory requirements played its part in cooling the market as well. For example, it took Arca Labs 605 days to gain regulatory approval from the SEC to issue security tokens, “ArCoins,” for its closed-end treasury fund.  

Despite this, 2020 came with several milestones. Singapore’s Security Token Exchange (STOX) went live, and London-based exchange Archax gained FCA approval for STOs. 

New Momentum in 2021

The year is 2021, and momentum is starting to build for security tokens, with several groundbreaking deals, including the big end of town. 

Gibraltar-based crypto trading platform INX closed its STO in May, the first-ever approved by the SEC. It raised around $85 million from over 7,200 investors. Its tokens will also be listed on its own digital securities trading platform Openfinance Securities ATS. 

In April, Blockstream launched its iconic hash rate-denominated debt instrument Blockstream Mining Note (BMN) on STOKR. In the first two tranches of the offering, Blockstream raised over $7.7 million from professional investors. With the recent exodus of Chinese mining companies, BMN has seen significant interest from investors both inside and outside the crypto ecosystem. 

Also in May, software wallet company Exodus closed its SEC Regulation A token offering with the maximum $75 million raised. Its tokens are available in an Exodus wallet and will be listed on the Algorand blockchain network. Regulation A is an SEC regulation that allows companies to raise up to $75 million with fewer requirements than an IPO.

It hasn’t just been crypto wallets and trading platforms though: multinational bank DBS (based in Singapore) issued security tokens for a bond. It was issued on the DDEx exchange. 

And, of course, we (STOKR) announced that we had raised $4.1 million in our pursuit to further grow our marketplace for alternative assets and expand our product offering. 

Demand for security tokens not only in the primary issuance market but also on the OTC market is growing organically and steadily, and we love to see it. It's about time we see some strong secondary market movement coming to this space. 

Europe Is Spearheading Security Token Innovation

A recent report estimates that the market volume of security tokens in Europe will reach €918 billion by 2026. This is something to cheer for!

This new wave of optimism for security tokens in Europe reflects EU and national progress in regulations and continued investment in related platforms.

In September 2020, the European Commission released a draft regulation for markets in crypto assets (MiCA). The regulation is to be introduced by 2023 and seeks to harmonize regulations for the European crypto asset market. Its sister legislation, the Pilot Regime, is currently going through the EU legislative process. The Pilot regime proposes to create a regulatory sandbox in the EU which will allow for a certain level of flexibility surrounding the development of solutions for the trading and settlement of security tokens.

On February 1st, Switzerland’s new security token regulations came into place, allowing for the launch of STOs.

In April, Societe Generale issued its first structured product (a medium-term note) by security token. This was the first time it had used its Forge platform to issue a security token for a complex financial product. It had previously issued security tokens for a covered bond in 2019 and a central bank digital currency (CBDC) in 2020.

On May 6th, Germany passed the Electronic Securities Act (eWpG), which will allow the issuance of security tokens for shares, bonds, and investment funds. This is obviously a key development for STOs on the European market.

Final Thoughts

As more countries update their regulations and interest grows, the STO market will accelerate. Small and medium companies are starting to wake up to the fact that STOs offer them the opportunity to raise money that is just not possible with IPOs. Blockchain technology adds unrivaled flexibility and transparency, and the market is beginning to take notice. 

At STOKR, we’re extremely excited to be among those pioneering this new financial frontier in Europe!

STOKR TEAM