Securities.io Guide us through the World of Security Tokens
By Posted by Stanley Brown and Community Contributor
Feb 26, 2019 | 1:14 PM
What are security tokens? Hyped as the next big thing in cryptocurrency, in the last year or so security tokens have been receiving lots of attention. The battle between unchained cryptocurrency marketplaces and regulators is ongoing. It definitely pays being on the front lines to watch the drama as it plays out.
Antoine Tardif is the founder of Securities.io , a security token news site that looks closely at all of the latest news, views and tales from the space. It should come as no surprise that he has been following the space closely.
Antoine has an in-depth knowledge of this area of the market and in all honesty is an expert in crypto as a whole. However, he also knows that a lot of the rest of us aren't and we were delighted that he helped guide us through the area as well as provided some insight into particular tokens. In summary, he helped us to create the piece below.
What are Tokens?
By now a majority of cryptocurrency enthusiasts will be aware of utility tokens. To review, utility tokens are a digital type of value exchange that can be used now in a cryptocurrency network or in the future. However, today we are focusing on the security token, which is the new kid on the block.
What are Security Tokens?
When it comes to security tokens, the main difference seems to be the rationale of investors buying them. The community considers security tokens to be an investment contract that is similar to traditional financial instruments. Similar to those instruments, when an investor is hoping to profit from a token via favorable price movements, dividends, and/or revenues then that means it is a security.
Determining the reason that is behind each investment decision is not standardized or an easy process. It all boils down ultimately to determining whether or not the token has any use case (for eg. using and buying tokens for video streaming) or just to sell later for a profit. However how and where are security tokens made?
The boom in ICOs is partly thanks to Ethereum ERC-20 token being introduced. This standard offers an easy framework for launching your own token, rather than building your own blockchain out. However, Ethereum, is a much more decentralized movement and does not have any times to official investment channels or regulators. Enter Polymath. This is a project that is aiming to change all of this.
Polymath basically wants to become the Ethereum platform for security tokens. They are ambitiously hoping to provide the same type of success through creating the first security token standard for cryptocurrency called ST-20. Protecting investors from certain types of ICO scams is definitely something that is needed. And the answer may be for Polymath to work together with regulators.
The polymath platform's projected path
Polymath protocols build the possibility into any token for only verified investors to exchange, sell and buy value. With KYC//AML as well as other regulatory requirements, both issuers and investors are able to track their funds as well as avoid running off with one another's money.
Within the cryptocurrency space that could possibly be a game-changer since the rumor is that large sums of institutional money are waiting on the sidelines to get involved safely within the virtual currency markets. Check out our guide for an in-depth look at the Polymath world.
On the other hand, tZero , wants to develop a platform that will allow for crypto securities to be traded. As you probably already know, there are lots of cryptocurrency exchanges that are out there already. However, tZero is aiming to be among the first of the SEC-regulated exchanges. Patrick Byrne, the founder of tZero, believes it could end up being the next NASDAQ but on blockchain instead.
An especially interesting benefit that is being promoted by the project is providing token holders with a 10% gross revenue bonus every quarter. So tZero, in other words, is planning on offering cryptocurrency investors one of the first dividend plans. That could be a big breakthrough as institutional investors and regulated companies are given the opportunity to tokenize their assets safely on the blockchain and be able to take advantage of such familiar concepts as dividends.
Where are the Standards?
In terms of security tokens, where do we stand when it comes to rules? Unfortunately, we still are treading through muddy waters in the regulation pool. However, in this grey area, there are still some tools that are available and at their disposal, especially in the United States:
The Howey Test
The Supreme Court introduced the Howey Test in the 1940's in order to evaluate whether or not a transaction qualified as an investment. The benchmark mainly deals with how financial instruments relate to law in the US. Of course, as previously outlined, it will heavily depend on whether or not the primary motive is profit.
The SEC, in a recent ruling, concluded that both Ethereum and Bitcoin are not considered as securities. However, this ruling raises some very real questions regarding the token definitions that we reviewed previously. Bitcoin is held by many investors for speculating on price movements or purely for storing value. It appears then that the official definition of what is considered to be a security token might solely depend on the opinion of either the SEC or other regulators.
SAFE & SAFT
The acronym SAFT is short for Simple Agreements for Future Tokens. It was invented based on the contract of Simple Investment for Future Equity. Y-Combinator was pioneered by SAFE, which is an incubator that recognizes and develops new entrepreneurs. The concept was to have a simple contract created between investor(s) and a company. When an investor invests in a company early as it is developing then they will receive the right for purchasing equity whenever stock is made available by the company.
To illustrate the concept, earlier this year GSR Capital of Beijing signed a letter of intent for purchasing $160 million in tZero tokens through the use of a SAFE contract. A price of $10 per token was part of this agreement:
It was announced by tZero that the company had signed a letter of intent with the private equity firm called GSR Capital, organized under Hong Kong laws, in order to participate in the Security Token Offering (STO) from tZero.
This same concept applies to security tokens, and it could be argued in this case that actually it was a SAFT agreement that was used. It is also worth noting that numerous ICOs don't have a working product before they seek out funding. In this type of situation a SAFE agreement is an ideal option since in provides investors with a higher sense of security as they are looking to receive the token in the future.
Where are We Headed to Next?
Authorities all over the world are taking a hard and long look at what needs to be done in order to deal with the cryptocurrency marketplace. Many crypto markets are decentralized in nature which is putting a lot of pressure on regulators and governments due to their jurisdictions ending at the borders whereas altcoins and Bitcoins effortlessly cross these borders.
If a company incorporates within the United States, in those situations regulators might have more options that are available to them. However, what if a company is established in one of the crypto-friendly countries such as Singapore or Switzerland? This doesn't exclude the real need for having a better system put into place in order to provide cryptocurrency investors with protection. And it is fairly clear that a growing need exists for crypto self-regulation as well.
Whether you are for or against them, security tokens are definitely here to say. So, the major question then is, for how long? Hopefully you found our security tokens guide useful and information. Make sure you stay tuned into the space in order to see how the future plays out.
If you've read this and are looking to keep up with all the latest security news above then I'd recommend going over to Securities.io and taking a look at what's on offer.
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