Blockchain Security Tokens: Hot or Not?
The buzz around cryptocurrencies has scaled down over the last year. But it doesn’t mean that the market is dead – on the contrary, blockchain technology is evolving, and different decentralized apps (dapps) are springing up like mushrooms. Lacking the initial ungrounded hype, the dapp market is becoming less risky, more mature and regulated better.
Security tokens, as a matter of fact, are the indicator of this maturity. They are one level higher than utility tokens distributed during the ICOs since they have real value. To unpuzzle the term and find out what’s in it for you, keep reading. Let’s start with the basics.
No, they’re not the same. A token represents something within its own ecosystem. For instance, it can give you the right to use a platform, play a game, vote within the given community, stake coins, etc. Cryptocurrency coins, on the other side, are independent of their platforms and can have value outside of their ecosystem. Simple tokens, called utility tokens, can grow to become cryptocurrencies. That’s what we were witnessing with hundreds of ICOs last year. Here’s how it works.
A project, let’s take a decentralized marketplace, for example, issues its tokens to be used on their platform. It means that the users who want to buy and sell goods (services, data, whatever) on the platform, need to possess these specific utility tokens.
Next, a company wants to raise money to develop and promote the platform. Initial Coin Offering (ICO) is the cryptocurrency’s form of crowdfunding: people who want to fund the project, buy its utility tokens during the ICO. If the project becomes popular and useful, utility tokens grow in price, can be traded on exchanges and can bring you significant profits. Also, they can become a separate cryptocurrency. That’s what actually happened with Ethereum, EOS and many other coins.
But if the project fails, i.e., people lose interest in it, the team takes the money and disappears or just doesn’t manage to deliver the services promised, the ICO becomes a scam. You end up with the big fat zero in the form of useless utility tokens that cost almost nothing. To illustrate the situation, have a look at Bancor: the project raised $153 000 000 (just say it aloud!), and now the BNT token costs around $0,7. BNT buyers can do nothing about it – the domain is unregulated, and you invest money in ICOs at your own risk.
So, it’s no wonder that the bubble’s burst – there just couldn’t be as many useful long-term projects as the number of ICOs.
Let’s get back to the tokens. You know by now that utility tokens are the coins that are backed up by the platform or project. The essential prerequisite is the “utility” – access, voting rights, inner currency, etc.
Blockchain security tokens, on the other hand, don’t need this “utility” prerequisite (but they can have it), because their aim is different. They are the equivalents of the company stocks on the blockchain. They represent the real share of the project, don’t need to be used (can be just held) and can bring dividends to the investors. More than that, security tokens are regulated by the government, and this means strong legal protection and less fraud.
In the US, to be considered a “security,” any instrument has to meet certain conditions, defined and controlled by the SEC (Securities and Exchange Commission). To know if these are blockchain security tokens or utility ones, the so-called Howey test is applied.
To be considered a security, the transaction has to be
- an investment of money
- in a common enterprise
- with the expectation of profits
- from the work of a third party or promoter
Meaning that you invest in some project/company and expect passive income from the work of this company, taking no part in its development or promotion.
Another question is whether regulation is good or bad for blockchain tokens. Initially, the absence of authority was the main attraction of the distributed ledger technology. But with the blockchain security affected, it’s good to set some strict rules for the field.
Most dapps struggle to avoid the definition of security tokens. This implies compliance with the SEC rules and potential legal consequences if the conditions or investors’ expectations aren’t met. No one wants to spend additional money to pass the SEC audit. Another reason is more philosophical: governmental regulation is against the mere essence of the blockchain and cryptocurrency concepts.
But there’s one more explanation. In the conditions where the investments are unsecured and profits are not guaranteed, experienced investors have the edge over others, and many feel positive about the market staying unchanged.
Still, regulated security tokens will attract institutional investors to the field, which means significantly larger capital and more rapid development of blockchain technology. The combination of traditional investment instruments with the innovative and dynamic crypto field can bring a revolution to the investment sphere: from unlocking liquidity and 24/7 trading to automated compliance.
Or it can turn out to be just another hype that will raise millions and then burst, just like the ICOs. Both options are possible, but the second one is still a bit less probable. Investors have become more wary and careful in the context of scam ICOs. It also means that their goals for purchasing blockchain tokens have changed. When buying utility tokens, the initial goal was using them within the ecosystem and receiving a service or product. With security tokens, investors care more about the profits: dividends, сompany shares, voting rights, other privileges similar to those offered by the traditional stocks.
Within today’s questionable legal conditions, investors can earn dividends from both regulated and unregulated projects that issue security tokens. The regulated ones are the decentralized crypto landing platforms and exchanges. For example, the Nash blockchain exchange offers the first fully registered and compliant European security NEX. As for the unregulated dapps, they are mostly gambling platforms like casinos, lotteries and sportsbooks.
Security tokens are at a higher stage of blockchain evolution than utility coins. It’s a relatively new, more reliable and less risky way of crypto investment that appeals to many blockchain enthusiasts. More than that, institutional investors are attracted by the regulated nature of security tokens, which means the Wall Street capital is going in for distributed ledger development.
“It’s inevitable that security tokens will transform equity just as bitcoin has transformed currency, because they afford the owner a direct, liquid economic interest and the expedited delivery of proceeds. Every type of ownership can be tokenized, which is a massive multi-trillion dollar addressable market.”
Carlos Domingo, founder, SPICE Venture Capital
In a year or two, we’ll see whether the blockchain community is ready to accept the regulation required for a more rapid expansion of STOs (security token offerings) or not. The opposition is strong, but the opportunities may overweigh the resistance.