Olymp Capital is a European Investment Firm dedicated to both blockchain and crypto-assets. Given the highly anticipated future of security tokens, they’ve highlighted two of the largest challenges that— given the current environment— security token platforms face. While the security token industry is predicted by some to surpass the entire cryptocurrency market cap, Olymp claims that regulatory compliance and the use of the blockchain itself pose certain hurdles which must be overcome.
Security Tokens and the Importance of Regulatory Compliance
Security Token Offerings (STOs) have an enormous task when compared to the majority of Initial Coin Offerings (ICOs): regulatory compliance.
An STO must abide by the rules of issuance according to its local regulatory body. These rules can include criteria such as capital raise limits, the use of general solicitation, investor qualification requirements, auditing and reporting, etc. Yet in addition to this long list of requirements, a security token issuance platform must also provide a means for issuers to ensure compliance of their security token beyond its initial offering.
The sale or trade of security tokens requires knowledge of the receiving party’s identity, residency, source of funds, and accreditation status. Two methods have been developed to provide such information: Know Your Customer (KYC) and Anti-Money Laundering (AML) verification. This is why the majority of current security token platforms— Polymath, Harbor, Swarm, Securitize, OpenFinance Network, Atomic Capital, etc.— all have some degree of KYC and AML verification built into their protocol.
A difficult aspect of these requirements is jurisdiction. Token issuers not only have to comply with the regulations according to their own jurisdiction, they must also account for the laws respective of investors’ jurisdictions.
During secondary market trading, platforms must provide token issuers with a way to abide by all applicable bodies with jurisdictive authority for every trade. The significance of such a task cannot be neglected.
Regulatory bodies throughout the globe have taken different strategies in addressing security tokens. Among some of the more proactive, says Olymp Capital, include the United States’ SEC and Europe’s ESMA.
Once an asset has been ruled a security according to the Howey Test, the SEC attempts to fit digital assets under existing frameworks such as Regulation D, A+, S, and CF offerings.
European regulators suggest digital assets ought to be regulated by MiFID II, the Prospectus Regulation, and Market Abuse Regulation (MAR)— if considered a financial instrument and a transferable security.
Ultimately, Olymp Capital holds that security token platforms can overcome such regulatory hurdles by offering tools and channels that help issuers comply with various jurisdictions:
“We believe [security token platform] success will rely on their capacity to put all necessary aspects of regulations and blockchain technology together in an easy-to-use and streamline manner”
How the Removal of Middlemen could Pose a Challenge to Security Tokens
Another remaining challenge to security token platforms includes the removal of middlemen— a byproduct of utilizing the blockchain itself.
Removed middlemen in this sector can include underwriters, auditors, and lawyers. Of course, there are also benefits embedded in this: lower fees, speedy execution, broader market exposure, automated processes, etc.
However, the team at Olymp holds that the removal of middlemen brings certain disadvantages with it. While many expenses will clearly be eliminated, heavy responsibilities will be added to the security token platforms. Tasks such as underwriting deals, soliciting investor interest, preparing marketing materials, ensuring compliance, and successfully executing transactions will all fall on the platforms themselves.
As Olymp states,
“Those functions will indeed not be easy for security token issuers to successfully handle and execute alone, in the same way financial institutions, auditors or lawyers are capable of.”
Olymp went on to conclude that in order to overcome such obstacles, security token platforms will have to develop integrated solutions:
“To conclude, we believe that, once issuance platforms will be able to deliver efficient ‘all in’ regulated turnkey solutions in the creation of a security token, their cost of issuance will be significantly lower or even free. By so, we believe security token issuance platform’s economic model will be integrated, in the long run, into a broader ecosystem that will represent the final link in the value chain: security token exchange platforms.”
What do you think of the two largest remaining challenges of security tokens, according to Olymp Capital? Is the assessment correct, or are other issues overlooked? What’s the next step for the security token industry? Let us know what you think in the comments below.
Image courtesy of Olymp Capital.