The establishment of a framework for security tokens in the U.S. is critical to the widespread adoption and further development of blockchain technology. For the moment, however, these new types of securities must continue to operate under policies that date back to a time long before the Internet.
The Securities Act of 1933, colloquially referred to as the “Securities Act” or the “33 Act,” regulates securities offerings in the US. All offerings must be registered under Section 5 of the Securities Act or meet a pre-established exemption from registration. Any issuer offering or selling security tokens in the US must abide by the requirements of the Securities Act.(1)
Practically speaking, registering an offering means a significant commitment of time and resources, including SEC approval and ongoing compliance obligations under the Securities Exchange Act of 1934, discussed next. A full public offering is done pursuant to a registration statement on Form S-1 (or Form F-1 for foreign issuers). There is also a form of limited public offering under Reg
ulation A (known colloquially as “A+” because Congress several years ago increased the maximum offering size), which has an offering circular requirement similar to, but less comprehensive than, a registration statement and that results in certain disclosure and filing requirements that resemble a lighter version of the public offering. To date, two companies have been allowed to utilize Regulation A+ for blockchain tokens, which requires an SEC declaration that the company’s offering circular is “qualified.”(2)
Exempt offerings(3) come in many flavors besides Regulation A, with security token issuers often relying on Regulation D (private offerings) and Regulation S (non-US offerings). A single offering may rely on both exemptions simultaneously, Reg D for US purchasers and Reg S for non-US investors.
Because they are exempt, these offering types do not have formal disclosure requirements imposed by statute or rule, but informal practices have arisen that vary with the type of security token, the target investors, and other factors.
When doing a series of offerings that rely on one or more exemptions, issuers need to be careful that their offerings are not collapsed into a single offering that might require registration. This is known as “integration” of the offerings and requires careful analysis.
A few other matters to keep in mind for offerings that rely on Reg D:
They are limited to sophisticated investors, which are subject to evolving standards but usually focus on the investor’s net worth or income (so-called “accredited investors”).
Reg D issuers can be disqualified under the “bad actor” provisions, which prohibit issuers from using Reg D if they or their officers, directors, or shareholders have engaged in wrongful conduct. (A waiver process is available through the SEC.)
The issuer must file a notice on Form D with the SEC and various states to provide information about the offering to regulators.
The securities sold will be subject to significant resale restrictions, often for at least one year.
Reg S offerings have various requirements to ensure that the offering is truly non-US in nature and that prevent securities sold offshore from being purchased by US investors. Issuers relying on this exemption need to pay careful attention to the detailed requirements. It is important to have sophisticated legal counsel to advise on either a public offering or an exempt offering.
In the next article, we will discuss the few projects that have used full registration or Regulation A offerings, and we will look at the ongoing requirements for a public company. Regulation D and Regulation S offerings were much more numerous and were used in a variety of circumstances.
1 Securities Act of 1933 2 Full registered token offering: INX registration statement; Regulation A+ token offerings: YouNow offering circular; Blockstack offering circular 3 SEC information on exempt offerings
Unlike tokenized traditional securities, so-called “utility” or “network” tokens remain subject to regulatory uncertainty, largely due to (a) their design, functions, and features, which typically bear little resemblance to traditional securities and (b) their method of creation and distribution.
Network tokens, often though not always issued at a fundraising stage, are treated by the SEC as investment contracts. However, they often are meant to serve a certain purpose within a blockchain network, either as a payment mechanism, as a way to incentivize developers and users to secure the network, as a means to allocate resources, or for governance purposes (or a combination of some or all of these roles). Thus, if the network tokens themselves are treated as securities, every single transfer of such tokens would trigger securities regulations and compliance, essentially making any network inoperable.
The SEC has yet to address the important question of when network tokens are securities. Rather, it has relied on indirect means to provide information and even then has not provided much clarity around the issues discussed in later sections of this article.
For example, during a 2018 speech87, Director Bill Hinman of the SEC Division of Corporation Finance discussed his view of the application of Howey to network tokens, stressing that a digital asset itself is not a security, just like the oranges and orange groves in Howey were not securities. According to Hinman, it is the way in which such assets are packaged and sold to purchasers along with the purchasers’ reasonable expectations that make a distribution of network tokens a securities transaction. Hinman also discussed two instances in which a network token transaction will no longer be treated as involving a security: (1) upon achieving “sufficient decentralization,” or (2) “where the digital asset is sold only to be used to purchase a good or service available through the network.” It remained unclear whether and when the SEC believes either condition is satisfied.
In 2019, the SEC staff released a Framework for “Investment Contract” Analysis of Digital Assets (the “Framework”)88 as well as its first no-action letter in connection with a proposed offer and sale of tokens by Turkey Jet, Inc.
Instead of focusing on the “contract, transaction or scheme” discussed in Howey, the Framework focused on the supposed dual nature and mutability of digital assets, setting forth a long, non-exclusive list of factors for when a token might or might not be an investment contract.
Under this framing, the Framework overlooks the main point: it is the investment contract itself, not the object of the contract, that is a security. In order to properly address the challenges of applying US regulation to network tokens, it is not the mutability of the asset itself (blockchain makes them immutable) but changes in the arrangement (i.e., Howey’s contract, transaction or scheme) under which such asset is being sold that determines whether that arrangement is a security. Just as the oranges in Howey or the barrels of whiskey in Bourbon Sales Corp. were never securities, neither are network tokens. Thus, the question asked by many industry participants—“When does a token transition to non-security?”—is inherently misguided. A token’s state does not transition.
Thus, notwithstanding the Framework, the critical question remains unaddressed: will subsequent use of tokens for their intended purpose within the network implicate securities regulations if such tokens were initially sold as part of “investment contracts,” whether in a registered or exempt offering? Applying securities regulations to all such transfers would surely prevent the network from maturing.
SEC Commissioner Peirce sought to address this regulatory conundrum in her proposal to create a new safe harbor rule for blockchain projects. The proposed safe harbor would exempt the offer and sale of network tokens from requirements under the Securities Act, the tokens themselves from requirements of the Exchange Act, and the persons participating in certain transactions from application of the broker-dealer regulations. The rest of the SEC has not acted on her proposal.89
One project, Blockstack, recently published a memo prepared by their counsel outlining an argument as to why STX tokens shall no longer be securities upon launch of a more decentralized network, Stacks 2.0. The new version of the network will be “sufficiently decentralized” according to Blockstack, as no single entity will play a controlling or essential managerial role within the network, thus failing the Howey test. The SEC has not confirmed or commented on Blockstack’s reasoning.
Creating a framework and a path forward for network tokens in the US is critical to widespread adoption and further advancement of blockchain technology.
To round up this series we will next look at some of the most important regulatory decisions when it comes to the definition of securities that are still relevant to this day.
The state of security tokens under US law is fraught. It has been that way since at least 2016, and the situation became particularly acute in 2017 with the rise of so-called initial coin offerings or ICO, which are a form of capital raising for start-up companies.(1)
While the staff of the US Securities and Exchange Commission (SEC) has sought to provide guidance on the question of when a token is a security, and a few trial courts have issued opinions discussing the issue, there remains a significant lack of clarity not only on that important question but also on the implications in other areas of the federal securities laws when a token issued as a “utility” or “network” token is treated as a security under the now-famous Howey test for investment contracts (“Howey security tokens”).
This article highlights certain key matters in this regard. It first focuses on understanding when a token is a security, drawing a distinction between tokenization of traditional securities (i.e., stocks and bonds) and Howey security tokens. Next, we discuss significant practical implications for security tokens under the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940. The article leaves for others a discussion of state law.
The nature of this article is not to provide an in-depth discussion for the expert but an overview of the issues. For those interested in more detailed information, we have included selected resources at the end for reference. This broad-scope approach should not lead readers to believe that these issues are not significant. In fact, if the matters raised herein do not receive greater clarity, the US cannot in any real sense make progress toward achieving the promise that blockchain brings to capital markets.
Security Tokens Generally
This article focuses on two classes of security tokens: traditional securities that have been tokenized on a blockchain or other distributed ledger technology (DLT) and Howey security tokens, a form of “investment contract” under federal securities laws.(2)
Since the benchmark “DAO report”(3) and the Munchee cease-and-desist order, the SEC’s position on token sales in the US has been virtually unshakeable:(4) digital assets created and distributed by an entity or group are securities under the Howey test. In Howey, the US Supreme Court defined “investment contract” as any “contract, transaction, or scheme” whereby (a) a person invests money (or, in later interpretations, anything else of value), (b) in a common enterprise, (c) and is led to expect profits, (d) solely (or, in later interpretations, predominantly) from the efforts of others.(5)
Since the DAO report, two types of security tokens emerged: those that will always remain a security (tokenized traditional securities) and those that are sold as part of a “contract, transaction or scheme” at the time of fundraising but are meant to serve a certain purpose within a blockchain network, for example, as a payment mechanism and/or as a way to incentivize developers and/or users.
Tokenized Traditional Securities
Tokenizing traditional securities—in other words, issuing and maintaining stocks, bonds and other securities in a digital form on a blockchain—offers various benefits ranging from increased transparency and security to ease of transfer, cap table administration, and investor management. These advantages, coupled with access to global capital and the promise of increased liquidity, make tokenization of securities an innovative way to raise capital for both emerging and established companies.
In the US, primary issuance of tokenized securities should be a fast, straightforward, and cost-efficient process due to the existence of a robust framework for exempt offerings, which applies equally to tokenized and normally-issued securities. Registered offerings, however, require SEC approval and therefore are not easily accomplished. We discuss both exempt and registered offerings in the next section.
An issuer may tokenize common or preferred shares, limited partnership interests, membership interests in a limited liability company, debt instruments, or convertible instruments. The nature of the interest being tokenized, as well as the corporate structure of the offering, may impact specific regulations that apply to token creation and to the offering of such token.
Legal and technical considerations go hand-in-hand during the process of tokenizing traditional securities to ensure compliance and a smooth path to secondary trading. Various regulatory restrictions, as well as tax and KYC/AML considerations, need to be addressed and implemented on a technical level and perhaps built into the token through the underlying technology. Corporate and governance structure, jurisdiction, and token features all affect regulatory compliance, a situation which differs from that of non-tokenized traditional securities. Such compliance requirements should be discussed with a knowledgeable attorney before undertaking tokenization of traditional securities.
For exempt offerings, the broad definition of “security” under federal securities laws has allowed issuers to use the existing US framework to tokenize traditional securities without the need for legislative or regulatory amendments. Issuers in many other countries, with more rigid lists of instruments that are considered securities,(6) have found themselves in regulatory limbo, without a workable framework for issuing tokenized securities, even when new regulations covered cryptocurrencies and “utility” tokens.
In many other aspects, however, application of US securities regulations has not been smooth due to lack of regulatory guidance and leadership, as we will discus in further articles that will be published in the following weeks.
1 What are securities and why are they regulated? 2 2020 OECD Report on asset tokenization; 2020 Article explaining the difference between technology wrappers and legal classification 3 2017 SEC DAO report 4 With the exception of three extremely narrow no-action letters: 2019 TurnKey Jet; 2019 Pocketful of Quarters; 2020 IMVU. 5 Supreme Court cases on investment contracts — Howey and Edwards; court decisions on investment contract analysis of digital assets — Telegram and Kik 6 For example, many European jurisdictions have very specific lists of what constitutes a security that are limited to stocks, bonds, and other items specifically part of a legal entity’s capital stack as well as “collective investment schemes” to cover pooled investment vehicles or funds.
Unlike the utility and hybrid tokens created through initial coin offerings (ICOs), security tokens are designed to fall within existing regulatory frameworks, and offer the associated legal safeguards to investors.
Up until recently, therefore, it would only have been possible to set up security token exchanges with licenses that were designed for the exchange of traditional securities. But the differences in structure between the two markets meant that it was never a good fit.
Take Switzerland, for example. The existing system for regulating traditional securities aims to create a degree of competition and separation of power in a centralized system. As a result, Swiss regulations prescribe the maintenance of separate, licensed legal entities to operate various functions of the securities system such as the exchange(s), the securities depository, the clearing system and the registry. This structure is designed to provide clear accountability and avoid any single entity acquiring too much market power.
Part of the thinking is that aspiring market entrants that want to set up a new exchange can make use of the same underlying infrastructure as incumbents, thereby lowering the barriers of entry to the market. You can think of it as being akin to the telecommunications market, where new entrants are allowed to use some of the same basic communications infrastructure as their competitors. However, given that 7 of the 8 licenses in Switzerland are held by entities owned by the same parent, the effectiveness of this approach is certainly open to debate.
Now consider how tokenized assets would fit into this system. One of the key advantages of DLT is that it allows for greater efficiency and automation by enabling trading and settlement to take place in the same transaction. If the law were to insist that these functions are controlled by separate legal entities, it would negate the central benefit of tokenized assets. Furthermore, as existing traditional institutions are not equipped to deal with tokenized assets on a technical level, any new security token exchange would need an array of separately licensed entities to be established first. Thus, what was designed to stimulate competition in the traditional securities market served as a major barrier to development of a secondary market for tokenized assets.
Thankfully, this contradiction has now been recognized and corrected by Swiss lawmakers. The new DLT Act, which comes into full force in August 2021, creates a new type of authorized body for trading DLT-based assets. This will make it a lot easier to establish exchanges for security tokens, allowing functions to be combined under one roof. AlgoTrader board member and digital asset expert, Luzius Meisser, who was involved in the consultation process during the drafting of the law, describes the implications as follows:
“Swiss lawmakers have recognized that crypto markets are structured differently than traditional securities markets. Consequently, they have decided to allow security token exchanges to integrate vertically: offering the full set of services necessary to operate an exchange. This enables them to be independent of traditional entities such as banks, settlement systems, and centralized securities depositories.”
Furthermore, in order to further reduce barriers to entry, Swiss law exempts small, non-commercially run exchanges from requiring a license, for example when a company organizes a free blockchain-based market for its own shares as a service to its investors. Meisser’s latest venture, Aktionariat, specializes in enabling such markets.
On the wider European level, although plans are considerably less advanced, the direction of travel appears to be similar. In September 2020, the European Commission (EC) published a proposal for a DLT Pilot Regime as part of its Digital Finance Package. Like Switzerland, the EC recognized that digital assets do not fit well into the existing regulatory structure and that a legal foundation will be required to support secondary markets.
Industry watchers view the DLT Pilot regime as a flexible, regulatory sandbox from which a fitting framework for digital assets can evolve. Indeed, the EC’s stated objective is to “create an EU framework that both enables markets in crypto- assets as well as the tokenization of traditional financial assets and wider use of DLT in financial services”.
In what ways do the regulatory requirements differ in an international comparison? In order to answer this question, we will start next week by taking an in-depth look at the regulations that currently apply in the USA. In the process, we will also turn to the topic of the “Howey Test”, which always plays a major role in this question.
Which investment contracts can be tokenized may vary from country to country (and even between regions within a country) based on which country the issuer is in, which country the investors are in, what type of investment contract is being tokenized, and what class of investors is being targeted.
Some companies issuing security tokens prefer to call the offering a “regulatory compliant token offering” rather than security token offering, because the latter can be a legal admission by the company that the assets being sold are securities.
Different jurisdictions define tokens in different ways, and a popular approach is to let the tokens be treated as needed in each given jurisdiction instead of a uniform classification for the whole world. For example, In the US, a token can be a security where in another country it is a utility token (see XRP in U.S. vs. Japan(1)).
STOs are already regulated in major financial jurisdictions such as the U.S., the U.K., Hong Kong, Singapore, and Japan. Most regions allow retail investors to invest in security tokens if the issuer has an approved prospectus. However, there are regions such as Hong Kong that only allow security tokens to be sold to professional investors and other regions such as China that have outlawed security tokens.
In continental Europe, STOs are not currently regulated at an EU level, but a draft proposal for regulation of the use of distributed ledger technologies in financial services was published in September 2020. A few countries in Europe have designed new legislation for security tokens including Liechtenstein’s Blockchain Act, Switzerland’s DLT Act, Luxembourg’s Bill 7637(2), and the German ministerial draft law for the introduction of securities in electronic form.(3)
Overall, all the EU countries have similar rules. If an STO qualifies as a transferable security, then EU securities laws apply to the token. Basically, if the project has an approved prospectus then it can publicly offer the tokens and anyone can purchase them regardless if they are retail or professional. Otherwise, only qualified investors can participate.
Security Token Regulation per Country
Source: Adapted from Security Token Offerings — A European Perspective on Regulation by Clifford Chance, Cointelegraph Research
Regulations is not static. It is constantly changing and it can change in many different directions, making the issuance of Security Tokens easier or harder depending on difference systems that the companies have to navigate through.
For banks and financial market infrastructure providers, tokenization is an obvious fit. It increases the scope of diversification for clients by opening up asset classes that were traditionally illiquid such as real estate, fine art, jewelry, antiques, classic cars and other collectibles.
Practitioner Perspective with Andy Flury, Founder & Chief Executive Officer of AlgoTrader AG
Given the progress in building a regulatory foundation discussed in Section 5 of this report, what type of developments will we see in the coming years? It has been well documented that an increasing number of traditional banks are seeking to provide crypto custody services to their clients, with recent high-profile examples including BNY Mellon, Goldman, JPMorgan and Citi. The logical extension of this trend would be banks offering tokenized assets to their clients.
Private banks, which are primarily engaged in wealth management, will be in pole position to capitalize here but when you consider that WEF estimates that up to 10% of GDP will be secured on the blockchain by 2027, the potential market extends far wider.
The ability to easily fractionalize less fungible assets will also result in some spin-off benefits. For example, a client could use a fraction of a tokenized property portfolio to serve as collateral for a loan. This will not only make it easier to find appropriate collateral to match the size of each loan, it also greatly reduces credit risk for the bank, as tokens are far easier and less costly to liquify in the event of default.
In addition, tokenization will make the trading of equity and bonds far more efficient by simplifying settlement, automating processes through smart contracts, and deepening the digitization of compliance procedures thanks to the transparency provided by the underlying DLT ledger.
A key success factor for these products will be the degree to which they are integrated with existing industry norms and frameworks, expanding rather than replacing existing financial services at first. This point was underlined by Markus Abbassi, Head of Tokenization at Sygnum, a licensed Swiss bank which specializes in digital assets:
“Tokenized assets require both a sound technical and legal implementation to ensure the enforceability of all associated rights and obligations, in the same way as traditional assets. In order to unlock the full potential of tokenization and ensure mass adoption, having an integrated, regulated and standardized end-to-end solution for the primary as well as the secondary market is an important step-forward for the industry.”
As we can see above, tokenization offers clear benefits for both banks and their clients. But what type of services are they likely to develop in the near future?
In addition to large national exchanges and some smaller, specialized newcomers, there will be a compelling business case for banks to create a marketplace for tokenized assets in the form of an organized trading facility (OTF) or multilateral trading facility (MTF) as defined in MiFID 2 regulations. The potential approaches for banks can be divided into four categories, depending on whether it is acting as a principal or agent and what types of assets are being traded.
Source: WIRESWARM / AlgoTrader
Potential Business Cases
А. Bank as Principal
Banks adopting Approach 1 will act as the principal, executing trades against their own balance sheet and thus becoming a market maker for security tokens based on traditional financial instruments such as equities, bonds or futures. Take S&P futures, for example, which typically involve maintenance margins in the region of $55,000. Such minimum capital requirements will price many out of the market. By offering tokenized futures, banks could greatly lower the barriers of entry to such markets, offering more fine-grained diversification possibilities to their customers. Of course, the potential extends far beyond futures — from shares and ETFs to bonds, the possibilities are broad.
From an operational perspective, Approach 1 is probably one of the most straightforward strategies. Banks buy and sell tokens to create the market, calculating prices based on the value of the underlying asset on traditional markets. In addition, the bank could easily hedge its positions by trading equities on traditional exchanges.
Moving to Approach 2, the bank would also act as the principal, but this time trading security tokens that are not based on existing instruments. This would include any tokenized assets that are legally classified as securities but were issued exclusively using DLT. Examples include companies who raised capital using equity-based security tokens, debt-based tokens such as bonds, and asset-backed tokens.
Both the potential risks and rewards are quite high with this approach. On the one hand, banks moving into this space would gain first-mover advantage in their jurisdiction. However, the big challenge and flip side of this advantage would be how to price the tokens, particularly early on when the volumes being traded through other liquidity venues remain light. As a result, this approach would inevitably require either the development of proprietary pricing methodology or the use of an external market maker.
B. Bank as Agent
In the first two approaches, the bank executes trades against its own balance sheet, acting as the market maker, buying and selling shares to provide liquidity. However, for particularly liquid assets, the bank could also simply create an order book and match the buy and sell orders of clients against each other. Given a large enough consumer base and liquid assets, Approach 3 is certainly a low-risk strategy from the bank’s perspective. Services like Robinhood have shown that there is a market for fractionalized ownership of traditional stocks, which would have a good degree of name recognition among consumers, so a selection of tokenized high-profile assets might be a good way to test the water and establish the market early on.
However, other types of security tokens, such as tokenized real estate for example, will be less liquid. By their very nature, investors are likely to hold alternative assets over a longer period of time and trade them less frequently. This is where Approach 4 would be a prudent option: Rather than offering continuous trading, the bank could instead provide an auction platform where users could place bids to buy or sell tokens. These auctions could be conducted over standard time intervals, such as once a week, in order to pool demand. At the designated auction time, the buy and sell orders of clients would be matched against each other. In principle, this system would function very similarly to the opening and closing auctions on national exchanges. The goal of such mechanisms is to establish the auction price such that the largest possible number of buy and sell orders can be executed. Any remaining unmatched orders stay in the system until they are cancelled or until the next auction date. Thus, Approach 4 is also a relatively low-risk strategy and could be a good way to overcome light liquidity early on while clients gain familiarity and begin to feel comfortable with the asset class.
Conclusion
Due to its ability to make the transfer of value far more efficient, tokenization remains DLT’s most promising financial use case. The regulatory hurdles that have thus far hampered the growth of secondary markets will be overcome, which is likely to catalyze a huge injection of liquidity.
This provides a number of opportunities for banks and financial institutions to facilitate new markets, bringing tokenized assets to a much wider range of clients. A topic that we will explore further over the course of the next couple of weeks.
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:
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
Faster settlement
Diversified liquidity from traders around the world
24/7 trading
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?
Issuer
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.
Investor
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.
DAM Operator
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.
