Traditionally one of the greatest obstacles to rapid technological progress in society has been the inability for worthy projects to find the funding required for an entrepreneur to turn a vision into a reality. In response to this problem, there has been a lot of innovation surrounding alternative funding mechanisms over the past few decades. These innovations have occurred most notably in the Venture Capital and Angel Investor circles, as well as in crowdfunding platforms such as Kickstarter. Now, though, there is another funding mechanism on the scene which is claiming to revolutionise the funding of tech projects… token sales.
A token sale is simply the creation and the sale of a cryptographically backed token (cryptocurrency) on a blockchain platform. Within this umbrella term, there are three main types of token sales: Initial Coin Offerings (ICOs), Security Token Offerings (STOs) and Utility Token Offerings (UTOs). Historically speaking, out of the various types of token sales ICOs have grabbed the most headlines and media attention. For example, early in 2018, during the ICO hysteria, EOS raised over $4 Billion in its ICO, whilst on aggregate 2018 brought in over $21.5 billion from ICO and UTO sales. However, since then the ICO/UTO bubble has burst and many have lost faith in the entire token sale enterprise. In their minds, this was a bubble like every other and since it has burst, it is time to move on. Although that may be true for many people, there are still quite a few who see ‘The Tokenization of Everything’ as an inevitability – to them, it is a matter of when not if. The Tokenization of Everything (TOE) refers to a world where anything from patents to houses, to concept cars, can be represented by a blockchain-based token and then sold/traded with anyone, anywhere. So then, out of these two camps, who is right?
Short-term outlook (-12 months)
The token sale model receiving the most hype at the moment is the STO, to the extent that a quick Google search of the term will show many proclaiming 2019 to be ‘the year of the STO’. STOs are tokens representing securities, created on top of an existing blockchain platform. The main benefit of using an STO as opposed to any other type of token offering is that it operates in a space with clear regulatory frameworks which guide issuers and investors alike. The claims being made are that this token sale model will revolutionise all types of project funding, specifically where VCs, Angel Investors or IPOs are involved. The perceived benefits are summarised in a Nasdaq issued report (Security Tokens Set To Take Center Stage in 2019) which states that“Security tokens digitally represent ownership in any asset, such as a piece of a tech startup or a venture capital fund and can provide investors with various rights to that company or fund. Furthermore, Security tokens provide liquidity to investors, access to compliance features to issuers, and a framework for oversight to regulators.”
Under close inspection of the current state of the market, however, these claims fall apart. The infrastructure that is necessary for a fully optimised STO market to operate has barely begun construction, who knows how long it will take to build? Furthermore, the claim that STOs will provide token owners access to a liquid secondary market also seems to be a wild exaggeration. Quite simply, the Securities and Exchange Commission (SEC) in the US has very strict requirements and protocols for self-proclaimed ‘Securities Exchanges’ and will take action against any exchange not complying with these requirements. Consequently, there are no sizeable exchanges accepting STOs for secondary sale at this moment. Essentially this means the token becomes “a zombie coin” in the words of Trevor Koverko CEO of PolyMath (an STO platform). Taking this into consideration along with other points not mentioned here, the short-term prospects for STOs as well as the Tokenization of Everything is pretty bleak. But is this the case for the medium to long-term?
Medium to long-term outlook (1-10 years)
Due to the factors stated above, it seems that the TOE hypothesis and all the promise that holds for tech startups/companies will not be coming true in the short term. However, I believe the medium to long-term prospects to be much more promising.
Let me explain: ICOs will always be the go-to funding mechanism for new blockchain platforms, this is simply due to the historical success of this strategy. For example, EOS, Ethereum and Waves all did ICOs to raise initial capital for their projects and are now amongst the biggest and most successful blockchain platforms in the world. So too does it appear that UTOs will also be the best option for teams building Decentralized Apps (Dapps) on top of these blockchains e.g. games, lending platforms, sharing economy apps etc. Furthermore, reiterating what was previously mentioned about STOs – I do believe they will be a viable alternative to legacy systems (VCs, Angel Investors and IPOs) but the timeline will be much longer than the community perceive and there are other questions that need to be answered before we can go forward. Due to the immaturity of the industry and no precedent having yet been set to call upon, I will leave you with some open-ended questions to consider with regard to the role of STOs in the TOE:
? How hard/long/expensive is it to become a registered STO in your jurisdiction and is it worth it?
? How big is the liquidity pool for these STO exchanges (plus their secondary markets)?
? What exactly can be considered an STO and will we need another token sale model in order to make the TOE a reality?
In summary, the token sale market is shrouded with uncertainty at this time; there are a lot of big claims being thrown around but little evidence to show their viability at this moment. That being said, token sales and their applications to the technology industry can offer massive benefits relative to legacy systems, especially for those who do not have access to sophisticated and fairly stable financial systems (like we do in Europe), and the fact that they raised over $21 Billion in 2018 is an indicator of this truth. What we need to see going forward is attention being paid to the development of the infrastructure for these markets and clearer governmental frameworks surrounding the space. There must be substantial progress in both of these areas before the Tokenization of Everything can occur and unlock the entrepreneurial potential pent up in entrepreneurs and innovators all across the world.
By Anthony Broderick – Cryptocurrency Analyst & Media Editor at CoinSchedule
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