Given the need for a move towards to a more regulated cryptocurrency space, many experts believe security tokens will play a more prominent role in the future of the industry. Some commentators even think that there will be a paradigm shift from utility tokens to tokenized securities as the virtual currency narrative continues to evolve.
STOs Replacing ICOs
According to Crowdfund Insider, the subject of security tokens and its place in the emerging virtual currency ecosystem formed a prominent part of the panels at the recent LA Blockchain week in October 2018. At the StartEngine Summit titled ‘Tokenizing the World,’ participants touched on the importance of blockchain-based tokenized securities.
In the United States, security tokens form the only means of cryptocurrency-based crowdfunding. Earlier in the year, the chairman of the United States Securities and Exchange Commission (SEC), Jay Clayton said that most ICOs were securities. Since then, the Commission has led a crackdown on unregulated ICOs offering securities in the guise of utility tokens.
With the SEC’s hardline stance, security token offerings (STOs) are the only means for cryptocurrency crowdfunding in the United States. This situation places a lot more prominence on tokenized securities. Recently, many stakeholders have been expressing their confidence in the emerging security token paradigm.
From Speculative Investment to Institutional Interest
Commenting recently on the place of tokenized securities in the emerging cryptocurrency ecosystem, Antoine Tardif, CEO of Securities.io, said:
"Security tokens will soon overtake utility tokens in 2019. Institutional investors will soon overtake retail investors and these same institutional investors are attracted to securitized tokens trading on regulated exchanges."
For Tardif, there is an imminent tokenization of real-world assets in markets like real estate and venture funds. When this happens, emphasis will be more on regulated digital assets than on the many utility tokens dotting the virtual currency landscape.
For big money players, regulatory compliance is of paramount importance. The unregulated nature of the industry remains a major stumbling block preventing the influx of institutional players like family offices, hedge funds, etc. However, security tokens which by nature are regulated, offer an entry point for these big money investors.
Standard Smart Contract Protocol for Tokenized Securities
As part of the drive to advance the cause of security tokens, creating a standardized smart contract protocol for security tokens remains one of the prominent issues. There is a need for a smart contract protocol that adheres to securities regulations.
At the summit, StartEngine unveiled its ERC1450 standard – an attempt to create a token protocol with in-built securities regulation compliance. Earlier, the company created the LDGR Token – an ERC-20 token compliant with securities law.
However, the new ERC1450 standard enables the recovery of investor information occasioned by theft or hack. This feature is made possible in tandem with a Registered Transfer Agent (RTA).