TechCrunch in its recent report has explored the notion of support towards security token offerings and how the promotions around them have failed to make the market attractive to investors. TechCrunch adds, such promotions have been going on from some time now, but their findings suggest that people are less inclined towards purchasing STOs and they carry very little use cases.
“The party is over. A few, however, present a credible use case”
According to TechCrunch, the sudden popularity of security tokens in 2018 was undoubtedly a scramble to paper over cash grabs. However, there is a use case for tokenized securities that is worth considering in today’s market. With the use of Bitcoin the ownership of an asset can be digitally secured and transferred without intermediaries. The security tokens could do exactly the same for investment contracts. Smart contracts is one of the most sorted out value proposition that have been discussed in cryptocurrency since long before Bitcoin.
“From a long distance overview, the use case for tokenized securities looks very compelling as the case is with many blockchain-based projects but if we zoom down to the user level the misaligned incentives appear for key market participants.”
- Investors: Digital tokens carry a lot of technological risk, regulatory risk and market risk. Without a liquid market ready and waiting, private placement investors have very little incentive to layer risk on top of the risk-return they already understand.
- Brokers: Effective bankers and brokers charge a huge sum for primary issuance. The more effective they are, the less incentive they have to adopt, especially given their investors are not clamoring for this product.
- Issuers: With markets awash in private capital, there are very few quality issuers that cannot raise funds. The better the investment opportunity, more likely is the access to funds and investment banks in the top quartile, where investment decisions have kingmaker effects in the market.
The value proposition around security tokens is that smart contracts will reduce the cost of compliance in primary issuance and secondary trading. Issuers will benefit by reduced liquidity premiums and more buyers will come forward to compete for their offering. Investors will benefit by gaining more access to opportunities for growth-stage investment. This is the compelling story in US capital markets that have, for nearly two decades, starved retail investors of exposure to growth-stage investments.
The conclusion of the report from TechCrunch sounds like a bit ominous but we can’t deny that we are still in early phases of the security token industry and just testing the early waters. The industry is still not mature enough to draw conclusions towards liquidity and lack of investor eagerness. We also can’t deny the fact that several security offerings successfully reached their hard caps over the period of last few months. The investor market is not as free that it was in the case of ICOs because of regulations. Further, we can’t ignore the benefits that a tokenized economy brings. The tokenized securities market will likely emerge as a responsible investor market rather than a market that depends on hype for functioning.
Editors’s note: Several quotes and statements in the article have been taken from the recent TechCrunch report and have been restructured for better understanding of our readers.