Note: This blog post was originally published on Medium on March 23, 2018.
The Polymath team has spent the last week talking with our advisors and we are more convinced than ever that the security token stampede is coming.
Stocks, bonds, venture capital, private equity, equity, and LP shares will all become programmable KYC-aware tokens.
These tokens can provide investors with the same rights that shareholders have in the traditional financial securities world, and on top of that, tokenization allows for securities to be more accessible, liquid, and secure than traditional forms of asset ownership.
Recognized companies have already launched initial coin offerings in which they sell self-described utility tokens to the public. Utility tokens allow for access to blockchain code or software. They function much like a software license and provide access to a network. Companies that have conducted– or are planning to conduct– such utility token sales include Atari, Telegram, Kik, among others.
But, during the recent Senate Hearing on cryptocurrencies, the U.S. Securities and Exchange Commission Chairman, Jay Clayton, dropped a bombshell.
“I believe every ICO I’ve seen is a security,” he stated. “Merely calling a token a utility token or structuring it to provide some utility does not prevent the token from being a security.”
We agree with Chairman Clayton, and that’s one of the reasons we founded Polymath.
The SEC had already warned investors that ICOs have fewer investor protections than traditional securities. Funds lost in an ICO may never be recovered and the tokens from a typical ICO are not backed by any real-world assets.
Nicolas Morgan, a former lawyer with the SEC, predicted an assembly line for ICO enforcement. “You might be right that your ICO is not a security, and some judge, at the end of the day, may agree with you, but is it worth the expense and distraction to get that answer from a judge?”
He added: “It’s probably a better course of action if you’re anywhere close to being a security, to just assume that it is and go forward with that presumption in mind.”
Securities tokens programmed to verify who can buy and sell them would fundamentally change the securities market. The need for centralized exchanges disappears almost entirely since the token itself is self-regulating. Smart contracts ensure that all securities tokens related to that contract are traded in accordance with any rules that are required by the compliance process.
In short, securities tokens can only be traded to verified addresses, assuring companies and regulators that these tokens cannot be held by unauthorized investors.
With initial coin offerings having raised more than $4 billion, securities tokens are more important today than ever. They represent the future of tokenization, while utility tokens may be fading into the past.
We see a changing landscape in the cryptocurrency space.
If 2017 was the year of the utility token, 2018 and 2019 could very well be the years of the securities token.