Charlie Xu is a former Strategic Managing Director of Fenbushi Capital, China’s most active blockchain VC fund. Now, he acts as the CEO and founder of Hashgard, a one-stop shop for the management of digital assets. In a recent report, Hashgard performed extensive analysis of the security token market, concluding 2019 to be a ‘watershed year’ for security tokens.
The Bright Future of Security Tokens Explained
Hashgard just released a 40+ page report detailing the functionality of security tokens, industry leaders, and both the advantages and disadvantages of blockchain’s latest wave: the tokenization of securities. Ultimately, Hashgard CEO Charlie Xu holds that STO activity will surpass cryptocurrency’s current market cap of $200 billion in 2019 and will evolve into a trillion-dollar industry by 2023.
The ICO vs. The STO: What are the Pros and Cons?
Security tokens encompass real world assets, which typically have financial value. These can include assets such as stocks, private equity funds, real estate, bonds, even pieces of fine art. Depending on the type of asset, the token will represent certain benefits. A token can be used to pay out profits, interest, dividends, or it could simply represent fractional ownership which the owner can sell at any time.
As a prerequisite for global adoption, security tokens must have significant benefits— not just for investors, but for all parties involved. Xu’s perspective clearly entails such benefits. Some of which include increased liquidity through 24/7 exchanges which operate 365 days a year. In addition, fractionalized ownership of expensive assets results in a decrease of barriers for investors. Such fractionalization also benefits businesses: the need for one investor with $5 million turns into a much more feasible 100 investors with $50k.
Despite many additional benefits, the security token industry still faces some hurdles, according to Hashgard’s report. When compared to ICOs, STOs are subject to the laws and regulations of applicable regulatory bodies, such as the SEC in the US. Due to this, they feature investor accreditation limitations, higher costs, and secondary market trading restrictions.
The Different Entities that Comprise the Security Token Industry
Hashgard’s report also outlines the major platforms in the security token industry, and the different categories of those platforms. They say that there are four primary types of entities in the industry: tech-solution providers, exchanges, peripheral service providers, and existing projects.
Tech-Solution Providers: As a result of the added compliance requirements, security tokens must integrate transparent proof of regulatory compliance at the protocol level. Currently, the majority of tokens feature automated compliance through ERC-20 compatible standards. The most prominent tech-solution providers right now include Polymath, Swarm, Harbor, Securitize, and Securrency. Collectively, these five enterprises have raised more than $100 million in funding.
Exchanges: There are already a number of exchanges and Alternative Trading Systems (ATS) preparing to lead the security token revolution. These include tZero, OpenFinance Network, SharesPost, Orderbook, and Templum. Even traditional financial exchanges have expressed interest in security tokens, such as the London Stock Exchange, SIX Digital Exchange in Switzerland, and the Malta Stock Exchange.
Peripheral Service Providers: These enterprises offer services that focus on liquidity, investment banking, and other areas that support security token transactions. A few of the leaders here include Bancor and Slice.
Existing Projects: Several security tokens are already active. Earlier this month, the security token for SPiCE VC was the first peer-to-peer compliant security token transferred on a public blockchain. Others include Blockchain Capital’s BCTH, Science Blockchain’s SCI token, and Lottery.com’s gaming token.
The Remaining Questions for the Future of Security Tokens
What can be seen thus far, is that the security token industry is not merely taking off now, it has already taken off. Precisely where it will go, is dependent upon a few variables. Hashgard’s report has identified eight points which they say are critical to the future development of the industry:
- Security tokens will require robust regulatory support to flourish.
- Compliance and registration costs are still too high for SMEs.
- The barrier to entry for ordinary investors will be lower, but professional services (market analysis and asset management) will still be necessary.
- Security tokens are set to revolutionize ownership and rights in traditional financial markets.
- Security tokens have special technical requirements.
- With capital flooding into the market, projects will enjoy reduced user acquisition costs.
- The market will provide great potential for the developments of decentralized exchange platforms.
- Security token issuers must seek out high quality assets.
Despite such conditions, Hashgard maintains a cautiously optimistic view when looking to the horizon of the security token industry:
“After nearly 10 years of tokenization of various aspects of the traditional economy, Hashgard believes that 2019 will become a watershed year for security tokens. Hashgard expects that security tokens issued under the supervision of major regulatory organizations will inject new life into traditional capital markets.”
What do you think of the research performed by Hashgard? Do you agree with their assessment of a future trillion-dollar security token industry? Let us know what you think in the comments below.
Image courtesy of Hashgard.
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