- What advantages or disadvantages do STO’s have in comparison to ICO’s?
The utility token market has been tested for its resilience in 2018. Companies want to raise money. They see a huge opportunity in raising money through token sales, but they want to be regulatory compliant when doing so. In the utility token ICO market, we are already seeing that companies aren’t able to raise the same level of capital for their projects, and we at Polymath are experiencing a massive demand from companies wanting to issue regulatory compliant securities tokens. The utility token market cap was relatively flat following the creation of Bitcoin leading up to the creation of Ethereum, which served as the launchpad for the explosive growth in utility tokens. Similarly, the securities token market has been relatively flat since the creation of the Blockchain Capital securities token, and Polymath will serve as the launchpad for the explosive growth in securities tokens.
To further illustrate this paradigm shift, the utility token market cap is currently ~$100 billion while the financial securities market is closer to $100 trillion. We believe the entire securities market will be tokenized which will dwarf the app token market by several orders of magnitude.
- How do you think STO’s will impact the global financial market?
Security Tokens in any industry will be the largest application of blockchain technology. We predict there will be many trillions of dollars worth of security tokens by 2020, because blockchain-based securities represent such a superior form of ownership relative to paper share certificates. Security tokens are programmable, easier to track, the trading is automated, and they are more liquid.
- Do STO’s pose a threat to Bitcoin becoming the Global Reserve Currency? Please Explain.
(Disclaimer: This is not financial advice.) Bitcoin is a completely separate entity from the STO market. The only crossover that could occur later is in times of financial despair for citizens to move their capital from high-risk assets to low-risk assets starting with the most liquid and ending with the most illiquid. STOs and Bitcoin will both have a place in acting a hedge for these types of scenarios. However, they both have entirely different purposes within a portfolio, albeit both being tied to blockchain technology, so I understand how this question could be raised.
- How can regular investors position themselves best to take advantage of the growth of STO’s?
It’s becoming a very tight market for investors in the space, especially looking at the early rounds for exciting projects. It’s important for larger investment entities to provide value to the projects they invest in, because with so much competing capital, firms need differentiators that can make their money more attractive. Investor support can also help drive the STOs they are interested in further. Investors can aid their investments by making introductions to other investors, assisting with marketing and brand recognition, providing solutions to improve operations, and helping with recruiting. Those are some of the main ways we think investors should support the projects in which they are invested.
- What assets do you see being good opportunities for STO implementation?
I wouldn’t say there is any best asset or worst asset opportunity, but what we’re finding is that interest in security tokens are coming primarily from private companies, and real estate owners. There are huge benefits that tokens can provide over paper, especially when it comes to trading in the secondary market. Private companies can now have a functioning, secondary market to provide liquidity to their investors. This is a massive improvement over previous private securities.
- Why do STO’s give more people opportunities to invest in digital assets versus traditional assets?
Let me pose a scenario. You are an investor looking at two deals that are identical in every single way, except one. In deal A, the security you receive is an illiquid piece of paper that costs a lot of money to trade, takes days to trade, and cannot be traded during the evening, on weekends, or holidays. In deal B, the security you receive is a security token that is liquid, essentially free to trade, it trades and settles instantly, and can be traded 24/7/365. Which deal would you prefer…? Investors and companies are starting to see the value of security tokens and it is only a matter of time before they become the default.
- What regulations do you feel are important to include or exclude for STO’s to grow to their potential?
Laws and regulations are the biggest difference across regions. Investors in some regions, like the United States for example, are becoming very nervous about putting capital into utility tokens based on recent comments and actions from the SEC. Conversely, the regulator in Singapore has said they do not believe any utility tokens to be securities. We’re at a very interesting point in time with regulations regarding utility tokens and what occurs over the next 6-12 months on the regulatory front will have a massive impact on the blockchain space moving forward. I think the best scenario we can hope for at the moment, in lieu of previous regulations, is for federal governments to take a stance of non-action, objective research and observation, and for them to work directly with standards such as ERC1400/1411 in order to better understand this type of reg-tech and how it can actually benefit what regulators are trying to impose.
- What red flags should investors look for before investing in an STO?
The answer may seem too common sense, but investors should hark back to standard securities investments for any indicators. Companies have been creating financial securities for many, many years and the laws are very clearly defined. You can do x. You cannot do y. All we are proposing at Polymath is that a financial security can be represented as a token on a blockchain, rather than a piece of paper. Blockchain-based securities are programmable, so you can automate much of the back-office functions like voting and dividends, and they are much more transparent than their legacy, paper counterparts. And interestingly enough, the securities we are creating have regulatory compliance built into them, which make the more attractive from a regulatory standpoint than paper share certificates. In the legacy world, transfers of securities to unauthorized parties are prevented by someone in the physical world saying, “Hey, you can’t do that”, which is a flawed system. In our blockchain-based system, transfers of securities to unauthorized parties are prevented through technological means. Unauthorized transfers cannot occur, because the technology does not allow them to occur. So really, the STO market you are looking at in regards to future investment theses is really just the traditional securities market and should be seen as such.