STOs (Security Token Offerings) are gaining a lot of traction in the crypto market. The STO-market is expected to grow up to $10 trillion by 2020.
A security token is an asset that gives the right of ownership to its holder and complies with the security regulations. The regulations that surround a security token are similar to those that apply to a traditional security. The regulations limit the type of investors, though. Industry professionals see security tokens as less expensive and more efficient alternates.
Anyone who buys a security token, wants to have an exit strategy — a plan to actually benefit from the token. Something that is completely illiquid is not worth much, as anyone whose frozen assets worth millions of dollars could confirm when he/she is prevented from cashing out the funds. We need a secondary market to do so,
- Numerous rules to transfer a token from Person A to Person B
In order to send security tokens from one person to another, one cannot just send it to the other person’s address. One need to clear KYC/KYB (Know your Customer/Business), age, residency etc. For example, a twelve-year old is not allowed to buy securities in most jurisdictions. How would such limits of transfer be enforced in a system that is open-source, borderless and censorship resistant by design? If a person wants to transfer Apple shares to another person, it gets registered in a central database, but this gets completely flipped on top of its head when this database is decentralized.
The ERC token standard 1400 and its sister 1462, which is also the standard being used for the TenX token. The standard would allow whitelisting of addresses for transfers and could solve this problem to stay compliant — maybe even within 2019.
- Highly tedious for exchanges handle deposits & withdrawals
The crypto ecosystem participants like to stay in control of their own private keys, which means storage of tokens on an exchange where one does not control the private key is not a desired solution. So, how can one trade security tokens on an exchange but then withdraw and/or deposit them?
Here, lots of uncertainties pop up in regards to “source of funds”. How did you get the tokens in the first place? What if there was no proper whitelisting done with your address? How can you prove ownership of a token? Only few of these questions have answers today. Even in 2019 it will be very difficult to see progress here. Some sandboxes might pop up, like it is envisioned in Singapore, but not the all-access crypto-security-token exchanges.
- As a token holder, who to bring a claim against?
Another challenge to tackle is who to go to, when you are unhappy with your token. If you bought your token during the STO from the company, this answer is quite easy, since there is only you and the company. What to do however, when you buy the token on the open secondary market? If a trade doesn’t go as planned, is it the company’s fault? Probably not, rather the exchange or in an Over the Counter (OTC) trade, the other party. What if you are of the belief that the seller has overcharged you for the token? What if the token performance is not as planned?
In unregulated utility token markets, there are not many rules; hence the term unregulated. These tokens are not expected to bring any returns but rather serve a utility function, so there is not much of a claim against the issuing company. There is no insider trading and if something goes wrong with a trade, the only party to go to is the exchange — who may or may not help you out.
This is a big a problem The answers are very subjective and not as objectively solvable as the questions before. There is no right or wrong about who is responsible. Yes, while the exchange might be responsible, it could also be the seller or the company. It will be interesting to see if this gets solved in 2019 at all.