Security tokens *might* be the cryptocurrency to actually threaten stock exchanges
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A year ago the cryptocurrency buzz was all about initial coin offers, but 2019 is being picked as the year of the ‘STO’.
Furthermore, they might start undermining stock exchanges by a “decrease of up to 70 per cent in costs”, says crypto advisor DigitalX (ASX:DCC), although without explaining how they came to that figure.
An STO, or a security token offer, is the next evolution of cryptocurrencies.
Whereas the value of a regular cryptocoin or token isn’t based on anything besides demand, a security token is usually backed by an asset. Unlike a stock, they don’t confer ownership but instead rights to a return from the underlying asset.
Digital X head of investments Tim Davies says more STOs, where investors can use familiar metrics like price to earnings ratios, are “expected” to lead to a shift away from IPOs.
Already one Perth-based mining industry advisor PCF Capital plans to pitch a gold mining STO under the name “FutureGold”.
“[This shift is] potentially impacting the revenue of existing stock exchanges,” Mr Davies said in a market commentary on cryptocurrencies.
“Several exchanges are responding to this threat by announcing plans to build digital STO asset exchanges, with ongoing talk that Nasdaq is looking to partner with an existing STO platform to list digital assets in compliance with SEC regulations.”
The company does have an interest in selling the ‘STO story’ however, telling investors on Friday morning after market open that it’s setting up a joint venture in the US to target investors interested in putting money into STOs.
Henrik Anderson, chief investment officer of Australia-based cryptocurrency investment fund Apollo Capital, says the STOs definitely have the potential to reduce the cost of raising capital but cautions that the sector is very new and experimental.
“We will see a market divided between new exchanges such as Malta Digital Exchange, which is started by well known Melbourne entrepreneur Rick Klink,” he said.
“But it’s hard to say how much it will reduce costs by. Next year we will see more STOs but the market is fragmented and we will have to see if it takes off.”
Embrace the regulation
In Australia, initial coin offers (ICOs) aren’t regulated, but tokens and cryptocurrencies that act like securities do come under the gaze of the corporate regulator.
ICOs have faced continual scrutiny as to whether they are securities and should therefore be regulated — as companies like Byte Power (ASX:BPG) are discovering.
Mr Davies says STOs are structured to meet guidelines of market regulators, be that in Australia or the US, and this opens an opportunity for institutional investors to put money directly into these instruments.
Mr Anderson says people have been talking for years about how the entrance of Wall Street firms will make crypto respectable.