The blockchain technology is on the advance. It has the potential to change some areas of life of millions of people. Lending, payment transactions, gambling, identity management and the investment industry are experiencing a massive boost in innovation thanks to this groundbreaking technology.
Tokenisation has opened a new world for investors: New investment opportunities for many assets are being offered all the time. Global investments in blockchain solutions are expected to reach $15.9 billion by 2023 (Statista 2020).
Due to the lack of global regulation for cryptocurrencies and blockchain, STOs (Security Token Offerings) were a natural progression for the previously common ICOs ((Initial Coin Offerings), as technically savvy entrepreneurs and businesses wanted to use blockchain technology. This enabled them to raise funds from accredited investors (Hackernoon 2018).
Security Token Offerings are also the latest development in process optimisation for issuers and investors, as fewer parties are involved in the investment process.
What is Tokenisation and what are Security Token Offerings?
A token represents ownership or rights to an asset in digital form on a blockchain. The concept of tokenisation can be applied to financial instruments that are part of regulated assets, such as bonds and stocks. The same applies to tangible assets such as precious metals, real estate, works of art and copyrighted works.
Security tokens area backed by real-word assets such as properties or companies and therefore must comply with KYC and AML regulations. Depending on the underlying financial instrument, they can be only available to accredited investors.
In the course of the advancing tokenisation wave, the Liechtenstein Government was one of the first to pass an official law in this area. Prime Minister Adrian Hasler explained (Finance Liechtenstein 2019):
“Thanks to the TVTG, a key element of the government’s financial center strategy will be implemented and Liechtenstein will be positioned as an innovative and legally secure location for providers in the token economy”.
How do ICOs differ from STOs?
Similar to ICOs, the STO process provides investors with token that represent their investment. In contrast to an ICO, however, Security Token represent investment contracts in assets such as shares, funds, bonds or real estate.
STOs must be compliant with regulatory requirements. In contrast, ICOs offer the coins as utility token that give users access to decentralised applications. The main difference between these two methods is therefore that ICO coins are offered for “use” rather than investment.
In the past, ICO issuers have been able to avoid legal frameworks and strict governance by regulatory authorities. Since little preliminary work is required for an ICO issue to be legally compliant, the coins can be offered to the general public (e.g. for fundraising).
STOs are more difficult to launch as the offering processes must comply with the relevant regulations, such as AML and KYC, before they can be offered for investment. In addition, funds can usually only be accepted from investors if they have sufficient accreditation and meet certain requirements.
What Potentials does Tokenisation offer to Investors?
At the beginning of the new decade, asset tokenisation is a rapidly growing trend for investors and entrepreneurs. This is due to several key factors:
A broader investor base:
When it comes toreal-worldassets, fractionation is only possible to a limited extent. For example, selling 1/30th of a multi-family house or a small fraction of a company share is currently not practical. However, if the asset is converted into token, these restrictions will be lifted. This makes it possible to buy or sell token that represent fractions of ownership. This allows a broader investor base to participate in a purchase.
Tokenisation has the potential to drastically reduce transaction times due to 24/7 availability. Smart Contracts can be automated to complete transactions instantaneously and significantly reduce settlement times. This also limits trade breaks.
Regulators are currently developing regulatory tokenisation frameworks in developed markets. These frameworks are intended to improve the level of protection and transparency for investors due to the immutability of data stored in digital ledgers via blockchain technology. This increased transparency gives investors more opportunities to manage risk through accelerated transactions.
By making fractional ownership possible, tokenisation allows investors to acquire shares of assets that are not liquid per se. For example, if a piece of land is tokenised, it can be purchased by a large number of different investors. By increasing liquidity, access for additional investors is made possible.
What Potentials do STOs offer to Investors?
A Versatile Range of Investment Opportunities:
The stock market offers only limited investment opportunities, as only a small percentage of companies can go public. STOs are disrupting the industry by allowing smaller companies with proven financials and solid business foundations to increase the reach of their issues. As a result, investors no longer rely on IPO announcements to expand their portfolio.
One improvement of STOs over traditional financial models is the ability to disintermediate. Tokenisation makes it possible to buy financial products without having to pay several advisors.
STOs are Well-Regulated from the Outset
STOs are treated as securities and therefore governed by regulations at all times. Each country enforces different regulatory standards to ensure that companies launching STOs are held accountable to their investors. In addition, unlike ICOs, investors are placing their money into tangible assets such as company shares when they purchase Security Token. This makes STOs more credible and potentially more attractive to investors.
STOs are Becoming Increasingly Relevant
In July 2019, BlockState published the results from an investigative study (BlockState 2019), which examined more than 100 completed, ongoing or planned STOs.
The primary findings of the study revealed:
- STOs are multiplying in number: In 2017, only 5 STOs took place, with a total issuance volume of $65.6 million. In 2019 there were already 55 STOs with a total volume of USD 453 million.
- The most common asset class is equities: The most significant part (75%) of the finished issuances were conducted for company equity.
- The financial sector dominates the tokenisation market: the financial industry was responsible for 77% of all STO funds raised.Real Estate was a close second, accounting for 11% of all funds raised.
The World Economic Forum estimates (WEF Report 2015) that 10% of global GDP will be stored on blockchain technology by 2027. Based on this prediction, Finoa has estimated that the market of globalised tokenisation could reach $24 trillion in financial assets by 2027 (Finoa 2018).
Although the tokenisation of assets is still in its infancy, this evolution of traditional investment processes could disrupt the way people invest. By using tokenisation and STOs to their advantage, investors can expand their portfolios, increase dividends and invest in new global companies.
Statista. 2020. “Blockchain — Statistics & Facts.” Accessed March 13th 2020. https://www.statista.com/topics/5122/blockchain/
Hackernoon. 2018. “Security Token Offerings (STOs) — What You Need to Know.” Accessed March 16th 2020. https://hackernoon.com/security-token-offerings-stos-what-you-need-to-know-8628574d11e2
Finance Liechtenstein. 2019. “Liechtenstein Passes New Blockchain Act.” Accessed March 17th 2020. https://www.finance.li/en/news-detail/article/liechtenstein-verabschiedet-blockchain-gesetz/
BlockState. 2019. “Global STO Study.” Accessed March 17th 2020.https://blockstate.com/global-sto-study-en/
World Economic Forum. 2015. “WEF Report”. Accessed March 17th 2020. http://www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf
Finoa. 2018. “The Era of Tokenization — Market Outlook on a $24trn Opportunity.” Accessed March 17th 2020. https://medium.com/finoa-banking/market-outlook-on-tokenized-assets-a-usd24trn-opportunity-9bac0c4dfefb