In 2018, financial regulatory bodies began to take a more serious look at the blockchain industry. They were particularly focused on ICOs because of the amount of money that was being raised, and the concerns of illegitimacy among some projects. In the wake of increased regulatory attention, the number of new ICOs began dialing back, and a new buzzword became popular in the crypto ecosystem: security tokens.
The concept of security tokens did not come about because of the regulatory clampdown, but has been around for a while. Ever since Ethereum came up with the idea of smart contracts and tokens issued on the platform, some projects have been envisioning a day when all securities can be traded as tokens. The major advantage tokenization gives securities is liquidity and speed of transactions. However, the ecosystem is still a long way from that reality.
What Are Security Tokens?
To understand security tokens, one must first understand securities. A security is basically a tradable financial instrument that represents a stake in the wealth created by a third party. There are several debates as to what must qualify for a financial instrument to be called a security. However, in the US, a method of determination known as the Howey Test is used. The Howey test basically states that a financial instrument is a security if it contains:
- Investment of money
- A common enterprise (as the company in which the investment is made)
- The expectation of profits solely from the efforts of the promoter or third party
Security tokens are cryptocurrency tokens that are classified as securities based on the above definition. Security tokens are referred to as blockchain investment products when they take their value from the issuing company, which investors purchase with the anticipation that it will increase in value and can be sold later at a profit. If the token contains ownership stake of the issuing company, it becomes an equity token.
There are some crypto projects (e.g., Ripple and Stellar) not originally intended to be securities, that are still in contention as whether they will be classified as securities by the SEC. However, there are also various projects that were designed to be securities from the onset.
Before an existing security can become tokenized, it requires the proper infrastructure, which includes issuance platforms and exchanges. The top issuance platforms at this time include projects such as Polymath and Swarm. Exchanges being prepared for the trading of security tokens include projects such as tZero and OpenFinance Network.
There are several security tokens in the crypto ecosystem today. Most of them are still under development. Some of them are beginning to make news, such as the owners of St. Regis Aspen Resort raising $18 million in a security token offering (STO).
Among the tokenized securities currently in existence, here are 5 interesting ones you should know about.
1. BCap (Blockchain Capital)
Blockchain Capital was arguably the first company to offer a security token. Its token sale was conducted in the most regulated fashion and set the pace for other security tokens to follow. Only accredited investors were allowed to participate in the token sale, and the hard cap was hit in 6 hours.
Blockchain Capital is a venture capital firm investing in blockchain technology companies. The fund was launched in 2013 and has made several investments since then. The ICO was conducted in April 2017 and raised $10 million.
Blockchain Capital was co-founded by Bart Stephens, Bradford Stephens, and Brock Pierce. Bart and Bradford Stephens function as managing partners in the fund. The BCAP tokens grants holders a portion of all the profits earned by the fund, only deducting a management fee of 2.5% (based on total asset managed) and a performance fee of 25% (based on returns).
2. 22X Fund
22X Fund is a tokenized fund put together by a group of entrepreneurs to invest in the startup companies of the 22nd batch of 500 Startups. The fund holds between 2.5% and 10% equity in the companies it invests in.
Token holders receive returns on investment by trading the tokens (at an increased price) and also receive proceeds from liquidity events, such as an investment exit or an IPO. The ICO took place in March 2018, with a token priced at $1.
Slice is a commercial real estate platform that brings investment in US real estate to international investors. Slice is designed to function as underwriter, issuer, and placement agent for the real estate properties on their platform. Slice offers fractional ownership in US commercial real estate, which means investors own shares of real estate properties through their tokens. The minimum investment, however, is $10,000.
Investors get to go through the KYC/AML process during registration. When that is done, their account can be funded. Real estate properties can be purchased with the funds, which provides liquidity for the real estate market. Each asset token represents full legal rights in the participating unit of the asset. Each purchase comes with the official certificate and token representing the investment.
Dividends are paid in tokens quarterly, based on the rental income generated from the property. Also, the token value increases as the value of the commercial real estate increases. The tokens can be traded on the Slice platform or on security token exchanges. The company is led by the CEO, Ari Shpanya.
The platform is yet to launch and is expected to have a security token offering in the near future.
4. SPiCE VC
SPiCE is arguably the first tokenized VC fund. It is a fund model that offers immediate liquidity for venture capital investments, which traditionally takes 7 to 10 years. The SPiCE token is a tradable asset, as well as being a piece of the investment made by the VC fund.
SPiCE started in 2017, and the fund is managed by Tal Elyashiv, Ami Ben David, and Carlos Domingo. SPiCE is focused on investing in security tokens, even though they have shown interest in some utility tokens also. The SPiCE portfolio includes projects such as Securitize, Saga, Slice, and Graphpath.
SPiCE has its ICO from February 1 to March 3, 2018. A total of 130 million SPiCE tokens were created, 85% of which were offered to the public. The tokens can now be traded on OpenFinance Network, (although US investors have to wait a year before trading theirs.
Sia is a blockchain-based decentralized cloud storage platform. Sia allows the renting out of spare storage capacity by any individual or organization. The Sia project has 2 tokens for its platform. The first is the utility token known as Siacoin, which is the token that is used to rent storage capacity on the network, used by both the renters and the hosts.
Siafund is a separate token generated at the launch of the Sia platform in 2015. There are a total of 10,000 Siafund tokens. All the tokens were initially held by the Sia parent company, Nebulous, and members of the Sia community. However, some of the tokens have now been sold to qualified investors (from Nebulous) through a Tokenized Securities Offering (TSO).
750 Siafund tokens were made available for auction in April 2018, raising a total of about $1.5 million, with each token selling for about $7,500. Siafund token holders are entitled to a portion of the network fees paid by both renters and hosts on the Sia platform. This network fee is currently about 12%.
Siafund has no utility value and hence is classified as a security token. It is currently only traded through the Bisq exchange.
The security tokens trend has had (and will continue to do so) an enormous impact on the blockchain industry. In fact, several blockchain enthusiasts are of the opinion that stocks, bonds, and all other traditional financial securities will eventually be tokenized. While that sounds like a pipe dream at the moment, this aspect of the industry is already building up. As this article shows, there are already many existing security tokens, and there are much more on the horizon.
As regulations by government agencies get clearer, more security tokens are expected to spring up, especially in 2019 and the following 2 years.