As Bitcoin has become the talk of the town, the digital currency has emerged as the highest trading. In simple words, the paper money got a new online version in terms of virtual coins/stocks.
Now, the point is how one can benefit from it.
What is Bitcoin?
Bitcoin is the virtual currency used to send money to people through the internet, without any physical means.
Bitcoin costs a lot. Many people can’t buy one Bitcoin. No worries. You can buy Satoshi. Learn how to convert Satoshi to Bitcoin and vice versa on safetradebinaryoptions.
How and when was Bitcoin invented?
In 2009, Satoshi Nakamoto (a pseudonym) started mining the genesis block (block No.0). In this mining, he gets the reward of 50 Bitcoins. In this way, Bitcoin came into existence.
When a recommendation came from a well-known and well-framed person, everyone believed it blindfolded. The same happened when Elon Musk (the world wealthiest businessman) revealed his support for digital currency. Recently, he conveyed his message to his followers on social media about his belief in Bitcoin. He stated that:
“Bitcoin is an incredible thing.“
Here, we are going to discuss what new Bitcoin has in its offer box!
Have you heard about OnlyCoins before?
If not, let me open the cover.
OnlyCoins is a virtual content marketplace. In this marketplace, creators, likely competitors of the app, can get payments directly from fans. Moreover, it is a platform of online content subscription services that utilize cryptocurrencies.
OnlyCoin was founded 4 years ago and has achieved remarkable growth. Now, OnlyCoin has made a huge policy change, which has enraged women on the street. There is nothing distressing in it because an opportunity has arisen just as OnlyFans is about to end.
The popularity of OnlyCoins is due to people like Crystal Jackson, other names “The Real Mrs. Poindexter.” She is a Sacramento, as well as a California soccer mom, who commenced on OnlyFans. Within a few spans of time, she managed to secure $150K per month. Her success makes her other colleagues unhappy.
It is the rule of nature, even in every field, the haters come first instead of appreciated. If we wonder, it’s good for the achievers to get motivation from their haters and work harder.
Due to these circumstances, Pornhub had to initiate approving cryptocurrency this year as it was kicked out of the idea of payment networks. Similarly, the OnlyFans also think the same. Additionally, they have banned sexual content, due to this few hustling members are moving out.
Can you even give it a thought that one day suddenly you get news of the collapse of your business worth $150K?
No, can’t imagine, right!
So, here is a solution: OnlyCoins allows sexual content and accepts Bitcoin Cash(BCH), Bitcoin (BTC), and Ethereum (ETH) along with a few other digital currencies. The other financial institutions such as banks are not part of this story.
Now, there is no doubt that this policy change will impact OnlyFans growth immensely. But the good thing happens to OnlyCoin, who will get an advantage from this transition. Might be possible, OnlyCoin touches the growth at sky level.
The beginning of October was supposed to be a Wild Shift on the website. How? The answer is simple, OnlyFans says a final goodbye, and new members will get registered on OnlyCoin and boost the growth.
Is there any doubt left about how influential Bitcoin is?
An entity without the involvement of the government keeps reaching the skies. Bitcoin is the problem solver for all the businesses out there in the market.
There is no history available for any entity that is so strong and worthy. People like Crystal Jackson really got an enormous solace. Her struggle to save her marriage and family will be paid off well when she switched to OnlyCoin.
Wrapping It Up:
On the whole, the world’s strongest digital concurrency, Bitcoin has acquired more platforms to benefit more people. On the farewell of OnlyFans for not allowing sexual content, OnlyCoin accepted the content and offered payment in cryptocurrency. Through this step, OnlyCoin will get a rapid boost in its growth in October.
Are you looking to acquire some coins?
Then, this is the right time to grab the bandwagon.
To some observers, trading security tokens on centralized exchanges might seem contradictory. After all, one of the most vaunted benefits of the distributed ledger technology (DLT) that underpins digital assets is its ability to reduce the role of intermediaries, thereby lowering transaction costs. So why do we need anything more, you might ask?
Practitioner Perspective with Andy Flury, Founder & Chief Executive Officer of AlgoTrader AG
Firstly, it’s important to recognize that different types of security token investors will have different needs. For private individuals who are investing smaller amounts and are comfortable with managing their own wallet, a fully decentralized exchange like Uniswap could be a convenient option. On the other hand, a professional investor or institution would be likely investing on a far larger scale, requiring ironclad security, operating under far more regulatory scrutiny, and potentially managing assets on behalf of multiple clients.
The role of the secondary market is to build the linkages between the traditional and digital asset worlds — providing the support infrastructure and services that make it possible for institutions to embrace tokenization with confidence.
This will involve building tools to manage custody, trading, settlement and compliance, while establishing connectivity to a wide range of liquidity venues including issuance bodies, token exchanges, brokers, and OTC desks. Ultimately, this will be good for the entire security token market, introducing much larger trading volumes and greater liquidity.
STOs — Great for Issuance, but What About Liquidity?
While DLT presents a highly efficient, secure and unbureaucratic way to issue securities, the question is: after a token is minted and issued, what happens next? Unfortunately, many early pioneering projects suffered from a lack of token liquidity, even after being listed on an exchange.
Although progress has been made since then, this is an issue that persists to this day. For example, in January 2021, the most active security token exchange was tZero, with a total combined monthly volume of $6,298,096 or around $203,164 per day. Even highly prominent assets such as tZero’s equity and revenue-sharing token TZROP only attract daily volume in the order of $30,000 – $40,000 a day on average.
The reasons for the relative scarcity of liquidity are multifaceted. In some respects, security token marketplaces face a “chicken-and-egg” dilemma. On the one hand, institutional investors want a platform with a wide selection of quality tokens which they can trade. On the other hand, the leaders of tokenization projects often do not want to pay the exchange listing fees until they can see evidence of liquidity on the platform.
On the other side of the equation, institutions tend to be cautious about the potential cryptosecurity risks associated with an unfamiliar technology and want a trading solution that is similar or ideally, interoperable, with their existing back-end systems. The secondary market will have a key role to play in addressing these concerns in order to bring more institutions into the fold and end the liquidity stalemate described above.
By far the biggest obstacle to a secondary market thus far, however, has been the burden of regulatory requirements, but in both Switzerland and on a wider European level, this is about to change.In next weeks article Andy Flury will therefore take a closer look at this change!
Right now there is an unspoken race being waged over who will win the world’s demand for security token trading and it isn’t possible to decide yet on a winner in this race. Although some candidates enjoy an early lead, some others are moving forward fast with advantages that can make them into winners as well.
The five main candidates include(1):
Currently, cryptocurrency exchanges and startup security token exchanges are in the lead of this race; however, decentralized exchanges are gaining traction. The status quo banks and traditional licensed exchanges are slow to move. Each category may specialize in different segments as well. Banks for example may specialize in segregated markets for a specific company’s private equity that can only be traded by a whitelist of professional investors.
Security token issuers will be able to list their security on multiple trading venues in multiple jurisdictions, and traders will be able to arbitrage across trading venues. However, price gaps will still exist due to perceived risks associated with different venues and jurisdictions. For example, Blockchain Capital’s BCAP token has been trading significantly below its net asset value since inception.
BCAP’s Price on Secondary Markets Trades Below NAV
For some observers, trading securities tokens on centralized exchanges may seem contradictory, as decentralization is one of the key aspects of tokenization, but in practice these entities still lead. We will take a more comprehensive look at this matter in a practical report with Andy Flury from AlgoTrader next week.
The first types of DAMs (Digital Asset Marketplaces) to emerge were centralized cryptocurrency exchanges. Binance, Coinbase, and Kraken are examples of these. They now mostly concentrate on the development of their audiences, having already successfully delivered easy-to-use and optimized web platforms for buyers and sellers of crypto tokens.
Practitioner Perspective with Ivor Colson of Tokeny Sarl in Luxembourg
Decentralized exchanges offering cryptocurrencies also began to emerge in 2020, manifesting in platforms such as Uniswap, Pancake Swap, and Sushi Swap. DeFi protocols such as Aave and Compound can also be considered decentralized marketplaces.
These types of venues are now beginning to emerge within the security token industry, driven by investors who want:
Lower trading and custody fees
Ability to earn interest from lending digital assets to other traders, such as shorters
Transparency with number of shares outstanding, fees, and orderbook liquidity in order to reduce manipulation such as naked short selling
Ability to use digital assets as collateral for margin trading accounts or loans
Diversified liquidity from traders around the world
Why are DAMs emerging?
Naturally, the security token market will always innovate at a slower pace than the purely retail markets due to the heavy regulation requirements. In that light, it was not a surprise that we firstly saw the rise of unregulated cryptocurrency-based DAMs. However, interest in DAMs for privately issued security tokens is currently on the rise. We see three reasons why they have accelerated recently:
1. Private markets are currently dysfunctional. This is an extremely fragmented industry that is still reliant on paper-based processes. Old technology such as fax machines are still being used and Excel is the norm. As a consequence, investors have to deal with long lock up periods or pay premiums to liquidate their portfolios. Investors are now seeing DAMs as venues whereby they can find and transfer their assets to others, P2P, and for a few Euros/Dollars per transfer.
2. The regulation for security tokens has moved quickly recently, especially in Europe. Tokenized securities now fall under the same rules and regulations as traditional financial instruments in many other European countries including France, Germany, Italy, the Netherlands, Romania, Spain and the UK. This has given market actors the confidence to start experimenting and implementing blockchain technology operationally.
3. Blockchain technology has officially gone mainstream this year. The foundations were laid in 2020 with many users utilising smart contracts and custody solutions. At the break of 2021, FinTechs such as Paypal and Square adopted Bitcoin for their millions of users, institutions such as Microstrategy and Ruffer have announced over nearly $2bn in combined Bitcoin purchases. Financial institutions have also joined. The FT asked whether Bitcoin has gone mainstream on its front cover. As one of the world’s most respected financial publishers, the FT actually answered its own question by asking it. Blockchain technology is now normalised and accepted.
Benefits for Stakeholders
There would be no emergence of DAMs if there were not any benefits and improvements to the current state of affairs. So, what are these benefits?
Issuers of financial securities seek investors by offering them shares in their asset. For this they need to describe their value proposition, detail the financial perspectives and legal structure of their project, distribute this information to eligible investors and provide the mechanisms for the transfer of funds in exchange for shares.
A DAM realizes two key benefits for issuers:
A. Digital administration of shares
Issuers can quickly issue and allocate shares to investors via a self-service and user-friendly interface. The compliance is coded into the security tokens and all investors need to satisfy the legal obligations of the offering. These checks are performed in seconds in conjunction with KYC/AML checks. Once administered, cap tables are automatically updated, and issuers benefit from efficiency gains with the digital administration of shares.
B. Access new segments of investors
Due to a digital-first issuance and allocation of shares, issuers can easily, and cost efficiently target investors around the world. New types of investors can also be opened up, as efficiency gains translate into better opportunities to fractionalize and reduce the investment ticket size, allowing issuers to potentially target retail investors. The prospect of a more liquid secondary market also opens up a greater band of investors.
On the buy-side, investors are concerned about whether they can free themselves from an investment easily, and the types of investment opportunities available on the DAM. For this, they need to have an interface where they can access the documents that satisfy their due diligence requirements. After this, they need the mechanisms to easily subscribe and then transfer/free themselves from that investment should they wish.
A DAM offers two key benefits for investors:
A. Greater access to opportunities
Investors can also discover more opportunities via one marketplace across both the primary and secondary markets. All the necessary documentation is available on demand and investors can log in to a marketplace and filter opportunities based on their investment mandates. Issuer contact information is accessible for further information.
B. Increase in liquidity
Investors that hold a share in a company can also utilize the DAM to discover other investors to interact with. They can act as a ‘maker’ or ‘taker’, i.e., selling or buying respectively. They can firstly discover other investors on the DAM and interact by connecting with and making buying and selling offers. The transfer is then made P2P. By offering a venue and the needed functionality, investors are more likely to meet each other and free themselves from their positions when they want to, offering a significant benefit to how current private markets operate.
The DAM operator provides these digital and compliant services to enable issuers and investors to meet with the least amount of friction possible. They provide clearly defined rules and responsibilities that apply to the marketplace. They will conduct its due diligence on the projects listed on the platform. Not only that, but they need to prove they are trustworthy for both investors and issuers. The core benefits are:
A. Monetize customer base
By migrating their issuers and investors over to a DAM, they will be in a better position to monetize their audience at scale. For the issuers, they can monetize the setup of their offerings, onboarding of investors and management services that are needed for asset owners. On the buy-side, they can monetize investors via a SaaS model and/or a transaction based model.
B. Automate and digitize operations
Many operations today are manual, and a DAM operating on top of a blockchain has the ability to automate many tiresome operations. Faxes will be a thing of the past, so will manual cap table updates, duplicated KYC checks and long investor onboarding times. DAMs can utilise automation across all of these currently laborious processes and realise a highly automated and efficient operation. They can offer a seamless experience for their clients, one that is truly digital from the ground up.
Services Available on a DAM
In order for the DAM to be used, there are some essential services it needs to offer. These services can be broken down into the primary market, and those required for both issuers and investors and the secondary market, which is a venue for investors.
А. Primary market
The primary market is where the company releases shares from its entity to investors, so it is from the company to the investors. The company needs to go through various steps to issue its shares to eligible investors.
For the issuer
Issuers need a platform that allows them to create, deploy and issue compliant security tokens to its investors. To satisfy the compliance obligations, issuers need to be able to create/upload smart contracts and integrate KYC/AML services in order for them to approve or reject participating investors. Once the issuer has whitelisted its investors, it can go ahead and allocate the tokens in return for funds from investors.
After the issuer has allocated shares to their investors they need to be able to report and perform post-issuance actions on the securities. Actions like capital calls, buybacks and share splits are functions issuers or their agents need to perform. They can do this directly through the platform. Issuers also need to keep control of their assets by being able to block and unlock tokens, mint and burn, along with forcing transfers between investors. Cap tables are automatically updated when share transfers are executed as the blockchain is used as the source of truth. Reporting functionality is also required, and issuers can easily schedule the delivery of position and transaction reports.
For the investor
On the buy side, investors need an easy-to-use service to firstly view offerings and their documentation in the primary market. Secondly, when they want to invest they need an easy-to-use service that allows them to enter their personal information and upload their documentation to prove their claims and finally execute the investment by transferring funds from their wallet.
B. Secondary market
The secondary market is where security token investors can meet, interact and exchange their shares with one another. For security tokens, this is normally a P2P (peer-to-peer) marketplace in practice.
Right now there is an unspoken race being waged over who will win the world’s demand for security token trading. Who are the participants of this race? That is a question that we will answer next week in another article.
The benefits of tokenization are inevitable. Efficiency gains, automation, transparency, fractional ownership, increased liquidity, and direct access to investors are some but a few examples of why this emerging blockchain and DLT-enabled wave of innovation is increasingly gaining global traction. Will the 2020s be defining years in blockchain history where tokenization finally goes mainstream?
Practitioner Perspective with Marius Smith of Finoa
Tokenization promises to fundamentally disrupt financial markets as we know them today and is a topic that Finoa has covered and researched extensively since its inception in 2018. 1,2
Despite its promises, however, mainstream tokenization or “the tokenization of everything” is still in its early days, and the anticipated boom and wide-spread adoption are yet to be seen. With positive developments globally, the market volume is still expected to grow significantly in the coming years, with innovative use cases emerging everywhere and positive regulatory developments forming on both national and international levels.
Taking into consideration the developments over the past two years, we have revised our initial tokenization forecast and outlined below findings from an extensive overhaul of our initial computations and models that projects that the tokenized asset market will constitute a $14.7-trillion opportunity by 2025.
Projected Tokenized Market Volume until 2025
With a $1-trillion market capitalization of blockchain-based assets, and this being predominantly attributed to cryptocurrencies, in 2020 (accounting for approximately 0.6% of the global GDP), we expect a significant increase in projected market volume over the coming years. Overall, we project that the tokenized market volume will reach $2 trillion, or 1.3% of global GDP in 2021, and $4 trillion (2.5% of the global GDP) in 2022. This year, we anticipate an acceleration in mainstream adoption of blockchain technologies, leading to an additional 0.7% of GDP to be stored on the blockchain. Overall, this will trigger a market growth from $4.4 trillion in 2022 to $14.7 trillion in only 3 years (2025) — an average of an additional $3.4 billion per year.
Current developments in more detail
Despite 2020 marking a pivotal year for cryptocurrency growth and adoption, leading up to total market capitalization exceeding 2018 highs, we still observe a lower-than-anticipated growth traction for tokenization. With positive developments in both the fintech and startup ecosystems and also increasing interest from traditional financial institutions, regulatory uncertainty still poses as one of the main obstacles hindering asset take-up and, combined with an ongoing pandemic, has put a spoke in the wheel on the otherwise bullish developments anticipated globally.
We have witnessed many attempts and examples of blueprints and tokenization of different asset classes, with bonds emerging as the most common product thus far. We find this mainly to be correlated with the legal foundations being most developed and fitting for this asset class compared to equities, for instance, and evidently, the case in countries such as Germany. If we consider the wider developments in regulating tokenization going forward, we expect to see positive advancements for other asset classes in the coming years; however, expect some to take a longer time to form and develop. Consequently, we expect that bonds will continue to accelerate and will be preferred over equities initially, as existing legal frameworks will seek to accommodate these first and by 2025, will be the leading tokenized financial asset class (disregarding cryptocurrencies) constituting 18% of the total tokenized financial asset market on the blockchain. We find recent examples of that both in Germany, where the “Gesetz über elektronische Wertpapiere (eWpG)” — the electronic securities act — was recently passed to provide legal certainty around the issuance of securities, as well as the European Commission’s introduction of Market in Crypto Asset (MiCA), both marking important steps for innovation in the capital markets on a national and European level.
While positive developments for tokenization are anticipated in the coming years, we still expect that cryptocurrencies will be the main driving force of growth for tokenized assets. Institutional adoption is on the rise, and we have seen many examples of large corporations and investors recently entering this space to get exposure to, diversify and seek out alpha from emerging asset classes and crypto projects. The interest from large investors, such as Mass Mutual and Tudor Group and platforms like PayPal, are just a few examples of this new wave of institutional adoption that will have a fundamental impact on the future of market development and growth expectations. Combined with a continuous acceleration of innovation in base-layer protocols and layer-two applications as well as ingenious use cases such as decentralized finance, we are particularly bullish on the growth trajectory for cryptocurrencies and conservatively estimate that they will have constituted 57% of the total tokenized financial assets by 2025. We do believe that these developments will have positive spillovers to some of the other asset classes we considered, and thus remain very positive for the years ahead for tokenization generally.
We delimited ourselves to look at a five-year horizon — an exercise that, with the current level of innovation and uncertainty, is already inherently difficult. We are still in the very early days of tokenization, as well as wider blockchain adoption and application. Extending the forecasted horizon to five, 10, or even 20 years, is, therefore, nearly impossible. What we can say with certainty, however, especially with the very positive developments we are currently seeing on a global level, is that the technology has an immense potential to disrupt, and we have seen only a fraction of its full application yet. We are confident that use cases for tokenization will continue to unfold and are strong advocates of its full realization — an evolution that is not only incredibly exciting but also one that we are very proud to take part in and support. We are just getting started.
Methodology: Projection of tokenized assets 2020 – 2025
As our initial methodology proved to be a very accurate reflection of the market developments, we decided to sophisticate it further by differentiating between different asset classes and including more recent sources.
Research and surveys from institutions, such as the World Economic Forum (WEF), Deloitte and McKinsey (see table of sources for more detail), project that up to 10% of the global gross domestic product will be stored and transacted with the help of blockchain technology by 2025 – 27. With this in mind, we triangulated and ran a market simulation to determine (a conservative) potential market size of a global tokenized market.
We delimited ourselves to financial assets as well as real assets clustered into: listed equity, unlisted equity, other equity, investment funds, bonds, other financial assets (i.e., insurance policies, pensions and alternative investments), home equity and cryptocurrencies. Currencies and deposits were excluded, and our study thus does not consider potential central bank digital currencies.
Based on factors such as the past performance and future growth expectations per asset class, we projected the market size of the individual assets using a bottom-up methodology. In subsequent steps, we applied different assumptions of the individual rate of tokenization per asset class and finally matched our bottom-up results with the top-down research from the WEF.
Following this methodology, we project a tokenized asset market of $14.7 trillion of financial assets by 2025. This does not include currently unmeasured (or nonexistent) asset classes or unidentified tokenization use cases of intangible assets — e.g., patents, usage rights — where we expect significant innovation and growth.
1 The Era of Tokenization — market outlook on a $24trn business opportunity 2 Cost disruption in the issuance market: The case for tokenization
Raiffeisen Bank International’s Blockchain Hub team including Head of Strategic Partnerships & Ecosystems Christian Wolf, Senior Partnerships & Ecosystem Manager at RBI Gernot Prettenthaler, and Digital Banking Analyst Vid Hribar joined us for an exclusive interview about security tokens and to answer the question if they see demand for security tokens from their clients.
Various estimates of the security token market exist. KPMG and WEF project that the market will grow to $8 trillion by 2025.1 Benjamin Schaub and Stefan Schmitt of the Frankfurt School Blockchain Center (FSBC) predict the European market will account for $1.5 trillion by 2024.2 This chapter discusses a new estimate by Finoa, a German digital asset platform for institutional investors. Their calculations estimate that the tokenized asset market will have $14.7 trillion in assets under management by 2025; however, their estimate does include cryptocurrencies such as Bitcoin in addition to security tokens. The not cryptocurrency part of their tokenized asset market estimate is $9.5 trillion by 2025.
Finoa Estimate of Global Tokenized Security Market by 2025, $ trillions
With €176 million total assets, 17.4 million customers, and presence in 25 countries3, RBI’s forward thinking corporate culture has a huge impact. In the beginning of our interview with one of Europe’s largest banks, we established that RBI is seeing increased demand for cryptocurrencies from both retail and professional clients. RBI’s client demand for digital assets ranges from high in politically unstable regions to none in Russia where cryptocurrencies are prohibited. They noted there are regional differences in interest. Slovakia and the Czech Republic are willing to invest more in cryptocurrencies whereas Austria is more conservative when holding variables such as household income constant.
Christian Wolf stated that although clients are not directly asking for security tokens, they are asking for a better trading experience when handling traditional securities like stocks and bonds. Clients want cheaper, faster, and more transparent security trading. Wolf said, “the way we currently trade securities will be gone within 10 years.”
However, compliance with the new Anti-Money Laundering Directive (AMLD5) that came into effect on January 10th, 2020, may have made working with cryptocurrencies more difficult for the bank, although, AMLD5 also brought regulatory clarity which is a positive development. AMLD5 says that any business that exchanges fiat currency for a crypto asset (brokers, exchanges) or stores crypto assets on the behalf of customers (custodians, wallets) is required to register with financial market authorities where they are doing business and implement money laundering policies such as collecting and safely storing the identification data of users, monitoring user transactions, and reporting suspicious activity.
The trio mentioned that RBI is rethinking their compliance’s approach to digital assets. RBI is currently very cautious, but demand from clients, regulators, and the technology are all maturing, which gives them the impetus to progress as well. Luckily, AMLD5 is most likely not applicable to security tokens, because they do not constitute a means of exchange. However, this is not the case in all countries. For example, the UK expanded the scope of its regulation by referring to crypto assets instead of virtual currencies and the new term can be interpreted to encompass security tokens. France is following a similar approach.
RBI is emerging from an experimental phase to market ready phase. They are working on a host of white-labeled products and digital asset custody for institutional and professional investors. One of their most exciting products is their tokenization of fund shares.
Gernot Prettenthaler mentioned that RBI has experimented with the tokenization of fund shares, debt, equity, and the euro with their REST (Raiffeisen Euro-backed stable token). “We now understand the technology, we just need to see what is possible from a legal perspective in Austria.”
Looking ahead, the next decade will be critical to the success of tokenized securities. That is why next week we will take an in-depth look at whether the 2020s will be the pivotal years in blockchain history when tokenization finally goes mainstream.
While the legal battle between the SEC and Ripple is being discussed a lot right now and has taken some surprising turns in recent months, looking at the SEC’s actions against companies that have conducted unregistered ICOs, it’s striking that the regulator has charged many different companies of varying sizes.
The United States solidified its position as the most popular jurisdiction for the incorporation of STOs, with Switzerland being a distant second.
STO Count by Country of Incorporation, 2017 – 2020
“In simple words, tokenization can turn almost any asset, either real or virtual, into a digital token and enables the digital transfer, ownership and storage without the necessary need of a central third party / intermediary.”
E&Y Tokenization of Assets
Largest Fines for Conducting Unregistered Security Offerings
Looking at the SEC’s charges against companies that completed unregistered ICOs, we can say that the Securities and Exchange Commission goes after companies of all stripes. Indeed, while the largest ICO that faced the allegations from the SEC brought in a whopping $4 billion, there are much smaller companies that were also charged with fraudulent ICOs.
A vivid example is the SEC case against B2B blockchain marketplace Opporty. The company completed an ICO in 2018 and raised $600,000.43 Nevertheless, the company did break the law as it conducted unregistered securities offering by selling OPP tokens in an ICO and misleading the investors, according to the SEC.44
Although some cases are still pending, many cases have already finished and some companies have been forced to pay civil fines. However, the fine is a light penalty in comparison to the companies that were forced to return the raised funds to investors. (Table 3)
However, there is a second tool that the SEC uses to punish companies that host illegal security sales: disgorgement. This type of punishment seems to be used by the SEC more often, and it is more severe as the value of disgorgement and prejudgement interest usually outstrips the proceeds from an ICO. (Table 4)
With many surprising plot twists packed into a few months, the SEC versus Ripple lawsuit tends to be the most-talked about of the ongoing litigations. The essence of the SEC claim is that Ripple was conducting an unregistered sale of securities.45 However, Ripple’s position is based on the fact that XRP tokens should be classified as commodities, not securities, like Bitcoin and Ethereum. Ripple seems to be sure of its high chances to win the case as the company announced its plan to go public once the agreement with the SEC is settled.46
Another ongoing case is against LBRY, a decentralized video content platform, which is accused of hosting a four-year-long unregistered securities sale. After the SEC complaint in March, 2021, the company tried to raise a wave of publicity to support the project. The advocates for LBRY stressed that the project tokens, LBRY Credits, are not investment contracts, while the SEC highlighted that the company tokens are indeed securities according to the Howey test. The litigation continues, but it seems like the SEC will win the case.
The crypto industry advances, and so does the crypto regulation. The SEC is closely following the development of the industry: Hester Pierce, the SEC’s “crypto mom”, recently commented on the NFTs gold rush. Potentially subject to speculative activities, NFTs could be easily turned into securities if they are fractionalized.47 Due to grey areas in the regulation, the companies that offer such investment vehicles could get under the SEC’s fire.
Completed Cases Without Disgorgement
Completed Cases With Disgorgement
There are several estimates on the size of the security token market, but even more complex are the projections for the future development of the same. Therefore we will look at different assumptions that have been made by financial institutions over the last few months in the next week.
Tokenized Securities are shaping up as one of the most promising applications for public blockchains, but in which case do they represent an opportunity and in which case do they represent more of a risk?
Practitioner Perspective with Dominik Spicher of the Crypto Finance Group
Within the security universe, interest is strongest in tokenized bond offerings. This investment category is estimated to be worth ~$2.6 trillion by 2025.1 It is worth looking into the mechanics of tokenized bonds and the challenges that arise in a blockchain context. Overall, the specific advantages that tokenized bonds offer stakeholders compared to their traditional form outweigh these factors.
The main challenges facing tokenized bond offerings are the rules and regulations that issuers and other participants are subject to. None of these are fundamental by nature, but they require more tooling and standardization. One of the main opportunities is the advent of multiple institutions cooperating on bond issuance in a transparent way without reliance on trust.
The Tokenised Bond Lifecycle
In a tokenized bond offering, similar to a traditional bond offering, pertinent loan parameters — the offering volume, coupon rate and duration — need to be set. These parameters are directly expressed in the smart contract logic, typically within a contract template. The trustless execution on a public smart contract platform ensures adherence to these terms.
It is possible to move the entire offering, book-building and subscription process on-chain, but it is more common and practical to apply the same procedures as traditional offerings do. The advent of stablecoins, however, has made it more attractive to move the actual bond purchase on-chain. Final delivery of the bond tokens is then trustless and atomic, alleviating the need for payment agents and escrow services, thus reducing issuing costs. However, fulfilling regulations for Know Your Customer rules in the smart contract functions poses the main challenge here. 2
As for almost all digital assets, bond tokens need to be securely storable, transferable, tradable and recoverable during the bond’s lifetime. Financial institutions have many options for digital asset custody and storage, and these options are also available for bond tokens. For those purposes, it is an advantage for the smart contract to adhere to standards, such as the ERC-20 specification. Unfortunately, however, the ecosystem is still in a consolidation phase when it comes to standards supporting more complex functionality, such as permissioned transfers.
Tokens that are not classified as securities typically enjoy completely permissionless transfers. Because the issuing institutions for tokenized bonds are subject to various regulations in virtually all jurisdictions, this is typically unfeasible. In response, approaches have emerged to reconcile compliant behavior and the censorship-resistant nature of public blockchains from simple whitelisting to flexible just-in-time transfer approval. Finding the right trade-off between the end-user experience and the scalability of the underlying platform remains a challenge.
A fundamental requirement when tokenizing bonds is the ability to price the underlying security and its risks in a secondary market. For many security tokens, this can happen off-chain on centralized exchanges or, more interestingly, on-chain on decentralized exchanges, such as Uniswap. However, avoiding liquidity fragmentation across platforms is even more important with tokenized bond offerings, which typically suffer from a lack of liquidity.
Even though smart contract security has made big advances, bond token contracts typically contain an administrator functionality to allow for reactions to unforeseen circumstances, e.g. pausing all transfers. In addition, it is advisable for issuers to be able to handle private key loss by bond token holders. This is especially relevant when coupon and redemption payments happen on-chain.
Finally, bonds usually exhibit regular coupon payments. The public blockchain as the final source of truth makes it convenient for issuers to determine the ultimate beneficiaries of coupon payments: The very same addresses holding the bond token at a particular date in time, which may be expressed in terms of block height, can receive the appropriate amount of stablecoin tokens or some other suitable means of payment on-chain. The flexible nature of smart contracts allows for corporate calendar events to be integrated into the asset itself.
After the bond has expired, the principal is returned to the current token holders. Similar to coupon payments, this can be handled elegantly on-chain with the use of stablecoins, typically after bond token transfers have been disabled.
In order for the on-chain state to reflect the expired bond state, tokens are typically reclaimed by the issuer and subsequently burned — i.e., sent to an address where nobody can spend from — and it could even involve the destruction of the smart contract itself, thus removing all bond artifacts.
Challenges in an On-chain Environment
The main challenge is balancing the manifold possibilities of a public smart contract platform on the one hand and the regulatory environment on the other hand. Today, there is still substantial regulatory uncertainty with respect to the legal status of blockchain-based securities and the legal claims that holders may make, although developments, such as the Swiss DLT bill 3, clarify many previously open questions.
Well-established compliance requirements also apply to tokenized securities and need to be adhered to. Among the most salient ones are KYC rules and Anti-Money Laundering legislation. The inherently open and global nature of blockchains poses an especially pertinent problem here, as legislative details vary across jurisdictions. For example, it is customary to apply specific rules for potential U.S. investors in a security.
Such rules need to be included in a tokenized security offering. Typically, completely on-chain solutions are undesirable for usability, privacy and cost reasons. Instead, most approaches opt for a hybrid on- and off-chain workflow. For example, transfer requests could be required to provide additional associated data that establishes approval by an off-chain entity.
The most important advance needed in this regard is standardization. International bodies, such as the Financial Action Task Force, are starting to propose minimal standards for regulatory requirements in the digital asset space — the Travel Rule being the most well-known example. Technology standardization is also developing for smart contract functionality, enabling a better interplay between end-user wallets, custody solutions and other participants.
Until this standardization and consolidation continues to progress, designers, issuers and users of tokenized security products need to involve legal and compliance experts.
Opportunities: Why Tokenized Bonds
Given the challenges, why involve a public blockchain platform at all in regulated security offerings?
One benefit for tokenized securities: more efficient interactions (such as transfers) and consequential cost reductions. These gains can be small if the processes involved are handled through a single financial institution. The public nature of blockchains shines when multiple entities cooperate in the issuance and handling of tokenized securities. Instead of developing ad-hoc integrations between the different parties, it can then be very attractive to lay down the terms of cooperation in a smart contract and subsequently rely on the blockchain to enforce those terms and synchronize between parties.
A good example is a simple whitelisting functionality to enforce permissioned transfers. Before an address may receive tokens, it needs to be explicitly whitelisted. Having a single administrator role that can whitelist addresses would pose a significant bottleneck for day-to-day operations. A recently developed token standard for the Tezos Blockchain 4 introduced a hierarchical system where administrators could nominate addresses that could subsequently whitelist addresses. Thus, the issuing institution can allow an exchange to whitelist customer addresses independently. An audit trail that records who allowed transfers to a particular address is then readily available.
This example demonstrates how public blockchains can enable defining “the rules of engagement” between financial institutions, allowing them to cooperate on a flexible basis and consider a diverse range of securities and institutional arrangements.
Tokenization can transform almost any asset, real or virtual, into a digital token, but not everywhere in the world is already using this new technology. In 2020, the U.S. took a pioneering role again, but other countries are also already experimenting with the possibilities of these financial instruments. We will deal with this topic in another article next week.
1 Source: “Projection of Tokenized Asset Market 2021 – 2025,” Finoa, page 43 2 Source: “Plumbing for the future of security tokens: Implementing KYC in bank transaction processes.” Dr. Lewin Boehnke, Crypto Finance Group, page 20 3 https://www.admin.ch/gov/de/start/dokumentation/medienmitteilungen.msg-id-77252.html 4 https://github.com/rogerdarin/Digital-Asset-Rules/raw/main/Digital_Asset_Rules_S1_v0.3.pdf
The increasing number of STOs issued by established institutions indicates the potential of this fundraising mechanism. As themechanism ripens, more countries and corporations tap into piloting STOs for bond issuance.
Key efficiencies observed within the pilots include elimination of settlement risk (for issuer, arranger and investors), reduction in primary issuance settlement (from 5 days to 2 days), as well as automation of coupon and redemption payments and registrar functionality.1
Thanks to the provided benefits in improving liquidity and transparency in the bond markets, debt tokens could disrupt the bond issuance process worldwide. The European digital asset custodian Finoa estimates that $2.65 trillion will be invested in securitized debt tokens by 2025 (see Chapter 3).
“The marriage of a digital order taking platform and backend infrastructure driven by tokens is the future of retail bonds. We are keen to see the day when investors can buy and sell bonds, even on the secondary markets at a click of a button on their phones.”
UnionBank Executive Vice President and Chief Finance Officer, Jose Emmanuel Hilado 2
Most Notable STOs by Institutions, 2017 – 2020
Between 2017 and 2020, STOs were most frequently used for financial services, and this category includes bonds issuance.
Number of STOs by Sector, 2017 – 2020
Asset Classes Offered in STOs, 2017 – 2020
Looking across the asset types that are being tokenized, equity remains king, although asset backed securities saw a steady increase (mainly due to real estate).
Type of Asset offered by the STOs by year, 2017 – 2020
Is the tokenization of a security an all around opportunity or does it also pose a risk to certain institutions and companies? This is a question we intend to explore in another article next week.
Overall, the number of publicly announced STOs increased in real estate, technology, heavy industries, and consumer services between 2019 to 2020. But the highest growth segment in 2020 was real estate.
It more than doubled its number of offerings compared to 2019, while finance and banking saw a steep decline to nearly a third of the previous year’s figures.
Total Number of STOs by Industry, 2017 – 2020
When it comes to the amount raised, real estate is again at the top with banking and finance taking second place. As mentioned previously, this is mainly due to the Red Swan project accounting for almost all of the capital raised during 2020.
Amount Raised by Industry, 2017 – 2020
Security Tokens Raised $5 Billion in 2020
Both the target raise amount and the raise amount saw an increase in 2020, however, the most important trend is the increasing success rate (in terms of % of target raised) which seems to have steadily increased over the past four years, as more and more investors begin to familiarize themselves with STOs.
The major segments behind the higher success rate are finance and banking and real estate, as all other segments seem to be lacking in this regard.
Target Amount vs Amount Raised in STOs, 2017 – 2020, $billion
Percentage of Funding Goal Reached, 2017 – 2020
That being said it is interesting to see that debt is the best performing class in terms of % of the raise target achieved, followed closely by asset backed. Equity lags way behind. This is likely due to the perceived risks across those different kinds of security tokens.
Percentage of Funding Goal Achieved by Underlying Asset Class, 2017 – 2020
More countries and companies will also try out STOs for bond issuance as the mechanism matures. We will turn to this topic in an article next week.