The Future Is Bright for Security Tokens

General StartEngine Stories November 13, 2018


The Future Is Bright for Security Tokens

Though the crypto market has taken a downturn over the past 6 months in the face of regulation, the talk at the StartEngine Summit on October 19th was that this downturn wasn’t negative, but necessary. To those who understand the technology, the price spike and the mania surrounding it were worrying: market adoption had not yet reached a point where those prices were justified.

A lot of entrepreneurs were building on blockchain, a lot of investors were participating in the marketplace, but in many cases, neither party had a firm understanding of the technology. Rather, they saw the money and acted. Furthermore, at that point in time, the regulators had yet to wade into the market.

Sam Trautwein, Co-Founder & CEO Carbon-12 Labs

In the first panel of the morning, Sam Trautwein, CEO & founder of Carbon-12 Labs which is building the stablecoin Carbon, touched on this very topic, saying,

“There are two difficult parts of building a stablecoin project. The first is getting through the noise. Crypto is something that a lot of people don’t understand, and it’s allowed people to do a lot of stuff on sheer charisma. The second part is we need to see more subpoenas and lawsuits. Regulatory positions are one thing, but we need to see legal precedent. Until we see some groups get dragged through the court system, we’re not going to have a lot of strong legal basis for a lot of this stuff, and that’s part of the natural evolution of the space…the compliance side is one of the bigger issues in the space right now. It’s going to hurt a lot of the people who moved very fast.”

Howard Marks (left) and Danny Maltzman (right) reveal “The Heist,” in which $1000 of Bitcoin was held at the wallet address in the painting, waiting to be stolen

So the atmosphere in October was more subdued than the excitement thick in the air of the April summit, though that didn’t stop StartEngine from hosting a heist, in which an attendee was able to steal $1000 dollars of Bitcoin from a painting.

However, the rest of the day was given to the discussion of the future of finance and securities markets, not the infinite applications of blockchain and how it will revolutionize the world tomorrow, or even today, as many conferences do. As Sam continued moments later,

“When you’re building an alternative banking system, moving fast and breaking things shouldn’t be your motto.”

Nevertheless, despite the more serious focus, positive energy was present: 946 people attended the day-long event to see the 52 speakers we had brought together to discuss what is actually going on in the world of digital securities, and what will come in the next few years.

The key to security tokens lies with interoperability

Throughout the day, one of the key points that speakers focused on as the main value proposition for security tokens is the concept of interoperability, or their ability to work in conjunction with each other. In the words of Andy Bromberg, Co-founder & President of CoinList:

Andy Bromberg, Co-Founder & President of CoinList

“A lot of [the benefits of tokenizing securities] drills down to creating more liquid, more efficient markets for securities that don’t have hyper-efficient, hyper-liquid markets today. One of the core benefits of tokenizing securities is that they become interoperable. All of a sudden when a bunch of securities are issued on the same standard, they can interoperate with each other. You can have contracts that reference multiple different tokens, multiple different assets, and play off each other. You can build interesting financial products on top of that.”

From left-to-right: Jor Law (Verify Investor), Jamie Finn (Securitize), Deven Soni (Polymath), Timo Lehes (Swarm Fund), and Allen Jebsen (StartEngine)

Similarly, on the “How to Tokenize Securities” panel with representatives from Securitize, Polymath, Swarm, and StartEngine, the discussion turned to the different security token standards that each platform is proposing, how they work, and why they might eventually succeed. Or, another way to look at this question is how can security token platforms achieve interoperability. When the moderator, Jor Law from Verify Investor, asked “why do we need so many d*** standards?” a few things became clear as the panelists verbally parried back and forth:

  • 1) different token standards are means by which these platforms can compete with each other
  • 2) there can be a plethora of security token standards as exchanges and ATS platforms will adopt any standard as long as it meets a threshold of volume and critical mass, just as wallets adopt new currencies
  • 3) Ultimately, this plethora may well become a singular standard. Platforms with a unique standard may back into someone else’s standard once a specific technology proves itself to be superior to others
  • 4) this level of competition to create interoperability is a good thing

When Jamie Finn of Securitize asked Allen Jebsen of StartEngine how he planned to get competitors, other ATS platforms, to adopt the StartEngine standard instead of attempting to force StartEngine to adopt another standard, Allen replied that it was a non-issue. These platforms will ultimately build platforms capable of handling many standards, and phase specific ones in or out as necessary. “We look at it as coopetition. We want ATSs to work together, to have one buyer on one platform be matched with someone from another. We want to join in that space. We think of it as growing all secondary markets together.”

Merging two worlds

Much focus was given to the intersection of regulation and innovation over the course of the day—as it should be, given how highly regulated securities are in today’s markets and how new blockchain as a technology is. During the panel “The Tokenization of Alternative Assets,” Daniel Eisner, who is building Oilcoin, a project that wants to build a stablecoin utilizing oil reserves, noted his belief that the current laws themselves are not the problem. In his words,

Daniel Eisner, Co-Founder & CEO of Digital Reserve Technologies

“I don’t think that the laws themselves don’t work. I think the people’s expectations of what the laws should be don’t match what they are. When people first started to look at blockchain technology, all of a sudden you had this ability to transfer an asset peer-to-peer on a global basis. Everyone wants to know ‘why does the government not just let me do it?’ The reason ultimately is that it’s important to control money flows, and its important to protect investors.”

Mike Belshe, Co-Founder & CEO of BitGo

The question then becomes one of creating an actual exchange for tokenized securities. Token exchanges as they stand today have numerous problems. As Mike Belshe notes, “we have decentralized money trading on the most centralized exchanges ever…it’s not a step forward with technology, but backwards…there’s tremendous learning about insider trading, self-dealing, failure to provide best execution, all kinds of cheating that happens when you have one party that controls all elements. That has to go.”

Mason Borda, CEO of Tokensoft

Yet the reality is that while many security exchanges and ATSs are being built, none of the few that are live today have a true marketplace. As Mason Borda, the CEO of Tokensoft, pointed out, “the market is young. People have figured out that these tokens should be offered as securities late last year. Doing a security token offering is a lot harder than doing a traditional round. Not only is hard to attract the investment, as it traditionally is, but the infrastructure is still very young. There are maybe 2 exchanges in the US that can support security tokens. None of them have much liquidity.”

The dream of these more liquid and more efficient markets is what brought everyone to the StartEngine Summit in Santa Monica, but that dream is still being built into a reality. Nevertheless, the future is bright for blockchain companies and startups alike.

“People assume you have to be a blockchain-oriented business to do an STO, but you really don’t,” said Josh Amster, VP of Sales & Business Development. “You have to want to tokenize your security, but the question is “do you need capital, and do you want liquidity for your investors? If those are true, then this is a space you want to be in.”

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