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Block Beats BlockBeats
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Fortunately, fewer and fewer people are being fooled, otherwise STO will cause many people to suffer.
In a recent exchange, a big guy who studies the blockchain economy said this to BlockBeats.
The hottest concept in the blockchain industry in 2017 is ICO, and it is also the ICO that made the concept of blockchain and digital cryptocurrency popular, but it also caused many problems. There is no shortage of new concepts in this industry. Recently, STO (Security Token Offering) has suddenly attracted everyone's attention and become a recent hot spot.
Are STOs a new scam disguised as an ICO?
Can investing in STOs be safer than ICOs?
Should ordinary investors participate in STO investment?
How do the United States and Hong Kong view the securitization of digital assets?
These questions will be answered in this article.
In the mouths of many professionals, STO is interpreted as "under the legal and compliant regulatory framework, the issuance of securities on the blockchain with Token as the carrier, linked to tangible assets." Its biggest feature is that it is recognized as a security by the US SEC, so STO is more compliant than ICO, and compared with traditional securities, it provides stronger liquidity, and "eliminates middlemen, expands the scope of tradable assets, Faster transaction speed". It seems that currency speculation has been legalized, and STO seems to have brought a bright future to the financing industry and the entire currency circle, but will there really be such a perfect financing method?
In theory, STO is indeed safer and less risky than ICO, and investors are more at ease when making investment decisions. Because STO is more regulated and endorsed by the company's tangible assets. ICOs are indeed too risky. According to ICO consulting firm Satis Group LLC, 81% of ICOs are scams.
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The ICO craze has faded
In fact, as of now, almost all ICOs in the world are unregistered securities/Token issuances. The market has been cold in the past half a year. Facing increasingly stringent regulations and pressure from investors, project parties probably don’t want to worry about being imprisoned every day. The number of ICO projects and the amount of financing have decreased sharply. According to ICORating's data, the total number of ICO projects has dropped sharply from 275 in June to 159 in September, and the proportion of projects that successfully achieved their ICO goals has dropped from more than half in the first half of the year to about 30% now.
If the ICO can no longer continue to raise funds, what should entrepreneurs who want to obtain start-up capital do? We have to come up with a new pattern. Following the IBO in August and September, their new gimmick this time is the STO that is "more regulated and regulated than ICO."
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Decentralization and supervision, can you have both?
One of the unavoidable topics of STO is regulation. But what are we talking about when we talk about regulation in the blockchain world?
Regulation actually means that we have abandoned the decentralization and globalization of the blockchain, and we have begun to move towards narrow nationalism.
The Security Token issued through STO must be compliant from the initial issuance to the secondary market transaction. And laws and regulations are clearly territorial. Securities that are compliant in Malta may not be compliant in the United States, so can Security Tokens traded on exchanges registered in Malta be unable to provide services to American users?
The blockchain itself was invented to be independent of the authority of government agencies, break the barriers of national borders, and enable capital to circulate without hindrance on a global scale. Through ICO, a small start-up company in Hangzhou can get investment from American and European investors. However, STO seems to bring everything back to before the emergence of ICO. Entrepreneurs can only obtain investment from certified investors through officially licensed channels.
STO propagandists often advocate its liquidity, because tokens can flow freely around the world based on ERC-20 or other main networks. However, in such a situation where the global market is divided, how strong is the liquidity of assets? In fact, regarding liquidity, the first thing to be solved is that the secondary market has not yet started. Restricted by policies, security tokens can only be traded on designated exchanges and cannot be circulated globally. If Tokens cannot be freely traded, how can we talk about liquidity?
On June 28, OpenFinance, the world's first securities token exchange, was launched. However, it is also the only secondary market trading platform for securities tokens available on the market. There are only 7 tokens available for trading, and only There are trading pairs with USD.
Binance cooperates with Neufund, a blockchain company in Berlin, to establish a securities token trading platform; and although Nasdaq has not officially announced the establishment of a securities token exchange, CEO Adena Friedman said that they are indeed considering transitioning to cryptocurrency At the same time, new names such as tZERO and Polymath have also begun to appear in people's vision, neither relying on the resources of traditional exchanges nor the experience of encrypted digital currency exchanges, trying to establish a brand new securities token trading platform.
However, in the context of market fragmentation caused by regulation, this road is really a long way to go.
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How do securities tokens achieve compliance?
So in the future, what direction should the secondary market of securities Token develop in order to solve this problem?
Currently we see two possible development directions:
1. Rely on centralized regional exchanges, such as tZERO and Open Finance.
2. Embed regulatory layer protocols in Token, such as Polymath and Harbor.
1. A centralized regional exchange that is fully regulated
As mentioned above, the legislation on securities tokens may vary from country to country, and in countries with greater local power, there may even be large differences in regulatory standards between states. In this case, an obvious operation method is to establish a local closed centralized exchange. For example, if the exchange is established in Singapore, the transaction of a certain security Token from the initial issuance to the subsequent secondary market is restricted on this platform. According to Singapore regulations, services are only provided in Singapore. Through the centralization of transactions, the responsibility of reviewing the compliance of each transaction of this Token falls on the trading platform.
The centralized exchange model is the most suitable for compliance requirements, but it also greatly limits the liquidity of assets on a global scale. If a certain security Token leaves this platform, the compliance of the transaction cannot be guaranteed . This may be too contrary to the idea of decentralization of the blockchain.
OpenFinance, the first trading platform available on the market today, is such a centralized exchange. Registered in the United States, they promise that the entire process from initial issuance to secondary market transactions will be fully regulated by regulations.
In the United States, there are two options for companies to issue securities: the first is that the IPO company chooses to register with the SEC and disclose relevant information in accordance with the securities law; it is difficult for start-ups to meet such requirements, so they generally choose The second type of exemption from registration: By complying with certain regulations (Regulation D, Regulation A+, etc.), within the scope of the relevant rules, securities can be exempted from registration with the SEC.
Assets on OpenFinance must meet one of Regulation D (506b, 506c), Regulation S, Regulation A+ (Tier 1 or Tier 2), and Regulation CF to obtain an exemption. At present, 506(c) is more commonly used in the industry: there is no limit on the amount of financing, publicity can be made, and sales can only be made to qualified investors. In addition, in order to comply with the regulations, the securities tokens for the first time on the platform also need to meet AML (anti-money laundering), KYC (customer authentication), Investor Suitability (investor suitability), Investor Accreditation (investor recognition for Reg D ) and Solicitation compliance (fundraising compliance for Reg S).
Exemption from registration does provide great convenience for companies to issue securities, but it also brings some other troubles, such as directly affecting the free trading of tokens. This is also the way tZERO completed its STO in August. tZERO is a blockchain subsidiary of e-commerce retail giant Overstock, and wants to build the world's first securities Token exchange (although it was preempted by OpenFinance). According to tZERO’s official website: “The tokens were issued in a private placement exempt from the registration requirements of the Securities Act of 1933, and therefore are not freely tradable.”. After the 90-day lock-up period expires on January 10, 2019, these tokens can be withdrawn to accounts or personal wallets, and traded among qualified investors on the platform (if the platform can be built as scheduled). One year after the end of the STO, that is, after August 6, 2019, ordinary investors will be able to buy and sell tZERO tokens.
However, tZERO has great ambitions in the future, and hopes to be able to register directly with the SEC in accordance with the US securities laws in the future. If it can be realized, the liquidity of token is bound to be greatly improved. Domestically speaking, the token can be listed on the exchange established in cooperation with BOX Digital, and can even be traded on other international exchanges. However, the idea of direct registration through the SEC is too far away and too difficult, and there is no detailed plan yet.
2. Embed the supervisory layer protocol in Token
This way is to embed the necessary regulatory requirements into Token's smart contract and fully comply with the government's security regulations. In this way, Token does not have to rely on a centralized platform, which greatly improves liquidity. Both Polymath and Harbor are based on ERC20 plus a regulatory agreement to issue Tokens that map equity. Under the regulatory framework, the asset ownership and transaction information under the chain are uploaded to the chain, and then circulated in the form of Token.
Taking Polymath as an example, its goal is quite ambitious: to be the Ethereum of the security Token world, similar to the ERC20 token standard, they proposed ST20 to help companies issue security Tokens.
Such Token involves three levels: the first is the protocol layer, which transitions from Ethereum-based smart contracts to Polymath's blockchain, the second is the legal layer of legal tools and services, and the third is the application layer of liquidity. These layers are designed to reduce legal complexity and ambiguity surrounding securities and improve asset liquidity. Through the Token created by Polymath, the smart contract will verify who has the right to buy and sell. Only investors authorized by Polymath's KYC provider can own Token.
Regulated exchanges and Token issuance with built-in regulatory protocols, the two mentioned above are only two common types we have observed for the time being, and I believe that there will be more possibilities in the future. But everything has changed, and ICO Token issuance is developing in a direction that is more compliant, more legal, and a little less protective of investors.
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IPO、ICO、STO？
Risk Warning for Investors
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From the above table, we can see that as the three fundraising channels, IPO/STO and ICO have fundamental differences in the underlying assets when they are issued. The certificate or rights and interests of the blockchain world. Because of the relationship between the first two and the real world, the government must participate in supervision to protect the rights and interests of investors.
But as Token, the difference between STO and IPO is that STO inherits many characteristics that ICO can bring liquidity, such as global trading and 24-hour trading. However, the current supervision is not clear. According to the application that tZERO has completed, global investors can participate in STO transactions, but there are restrictions on the transaction of Security Token, which may limit the transaction scale, price limit, and transaction time limit wait. These contents still need time to verify.
Generally speaking, STO combines the characteristics of ICO and IPO, and solves the problem of ICO without supervision and opacity. At the same time, the free flow of Token under certain conditions also helps to improve liquidity. It is a security covered by Token.
For companies that want to go public in the future, it is a good thing to accept supervision in advance. If you carry out STO with this attitude, then this blockchain project will actually be listed at an earlier stage, just like the New Third Board and New Fourth Board.
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What is the difference between stock securities and Security Token, is it suitable for investment?
The difference is that the attributes of Token are strengthened, so that Security Token can be circulated globally and within 24 hours. In theory, the liquidity will be stronger, but the protection of investors in the stock market will also be available in exchanges that support Security Token. weakened. The higher the risk, the greater the return. This simple investment principle remains the same.
Regarding financial products and digital cryptocurrency products, the attitude of the Hong Kong Stock Exchange in the Fintech Legislative Framework Report released on the 18th of this month is that the legal framework surrounding finance and digital cryptocurrency should be the same, "Issuing digital assets on the blockchain should be done by Regulatory under the existing securities regulatory framework”.
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When is the earliest you can buy STO?During the ICO period, investors can use false identity information to purchase tokens, and can use false information to trade on exchanges. From buying to selling, the whole process can be done anonymously, and only when they finally cash out can they see real people. In the STO era, investors' attempts to hide their identities will no longer be feasible.
First of all, investors who purchase STO must provide identity information. On the one hand, the project party wants to prevent malicious speculators from buying or investors hoarding securities after buying, and on the other hand, investor information must be provided when reporting to the regulatory authorities. Identity verification is no longer as simple as providing identity documents. Taking American investors as an example, qualified investors must meet one of the following two conditions:
(1) Income of $200,000 in the past two years, or (2) Net worth of more than $1 million (excluding residence). For overseas investors, the funds need to be deposited into the corresponding bank account and frozen for 3 months, and they can invest in STO after obtaining the legal proof of the source of funds from the bank.
