Over the period of 2017 and 2018, a total of 2,104 ICO’s were launched with a total of USD 13,768,377968 raised. Most of the ICOs managed to raise the required funds. The investors made money, with ETH prices on the rise, the projects made more just by holding ETH and selling them at all-time high whilst some held on to ETH and saw its value erode.
One of the reasons why most projects have gone down the ICO route is due to its ease of launch. ICOs also give private investors a chance to be a part of something bigger, due to restrictions and red tapes.
A crypto token that passes the Howey Test is deemed a security token.
What is Howey Test*: *
The genesis of the Howey Test was a 1946 Supreme Court case. In the case, the titular W.J. Howey Company sold citrus grove plots to outside investors. Howey and the investors reached an arrangement whereby the buyers would immediately lease the groves back to Howey, which would harvest and sell the resulting citrus products.
The Supreme Court ruled the citrus groves, in this case, to constitute an investment contract and, thus, a security. It applied four main criteria in making this decision, which subsequently became known as the Howey Test.
In order for a financial instrument to be dubbed a security and fall under the purview of the SEC, the instrument must meet these four criteria:
o It must be an investment of money
o With an expectation of profit
o In a common enterprise
o With the profit to be generated by a third party.
The citrus grove in the precedent was bought with money and an expectation of profit by a pool of common investors, and its success depended on Howey’s ability to profitably make money from selling its citrus products.
While ICOs were not deemed securities by the legal entities, others are being looked into to determine if they are securities tokens sold under the guise of utility tokens. We have already seen SEC slapping fines on ICOs for illegally selling securities. The SEC is continuing scrutinizing the projects An it seems they will not stop there. They are also putting the “advisors” and media personalities under the microscope for their role in promoting ICOs. Likes of DJ Khaled and Floyd Maywheather have already been fined for their involvement in blockchain projects that have not brought the promised results.
For upcoming projects that want to go down the ICO route, they have to be very careful on how they conduct themselves. The SEC is planning on setting up a division which will be dedicated to assisting start-ups in fintech. This will help startups avoid issues that are currently faced by the ICOs launched in the last couple of years.
This brings me nicely to the topic of my discussion: STOs.
Having said all the above, the future of tokens lies in Security Tokens. Security Tokens, unlike Utility Tokens, derive their value from an external asset they are backed by. By following the correct procedures these may prove to be very powerful instruments.
Currently, the projects out there are working hard to streamline the launch of securities. Unlike ICOs, STOs require a whole new infrastructure and a different approach. STOs need a team of lawyers who are familiar with the securities legislation within the jurisdiction, advisors and relevant regulators to give it the go-ahead. The whole STO process can be very tedious but if done right, can reap immense rewards, for both, individual investors and the projects themselves.
Let’s discuss some of the projects currently providing a launch pad to issue security tokens.
1. Polymath
2. Securitize
3. Harbor
4. Securrency
5. Swarm
Polymath (ST20 Token)
While Polymath is an ST20 Token (Utility Token), it provides a platform to launch security tokens and is currently, one of the most popular platforms in the market. Polymath introduces traditional financial securities to blockchain. Their process is seamless and provides step-by-step guide including creating and issuing tokens, and the fundraising stage.
The platform is made of four layers, which define compliance and the generation of tokens:
· Protocol Layer
· Application Layer
· Legal Layer
· Exchange Layer
Harbor (R-Token, ERC-20 with additional on-chain features)
The main aim of Harbor (R-Token) is to simplify the tokenisation process and make compliance easy and transparent. The founding members created Harbour when they were trying to raise funds via an ICO but were faced with multiple compliance and technical challenges.
Harbour token is a standard ERC-20 token coupledwith additional layers tailored to compliance. Built within the on-chain are the essential requirements such as AML, KYC and certification of assets.
R-Token is an open source platform. Harbor’s goal is to issue smart contracts that envelope the regulatory services and to standardise security tokens. These can then be freely issued and exchanged as long as the requirements are met.
Securitize (CAT20)
One of the most reputed platform within the STO issuance platform is Securitize (CAT20). Securitize is the latest offering in this space.
Securitize has the ability to integrate third-party apps that operate on Ethereum blockchain which enables the projects to work with third party developers.
The development team is committed to enhancing the platforms security for funds and capital investors as well as asset managers.
Securitize provides a cradle to grave solution for projects looking to undertake Security Token Offerings.
Their on-chain solution provides a register of users that hold the DS Token together with all KYC information along with jurisdiction, accreditation and expiry dates.
Securitize is also compatible with Harbor and Polymath tokens.
The main elements in this ecosystem are:
· DS Tokens: ERC-20 compliant tokens, extended with the capabilities of the DS Protocol.
· DS Apps: Smart Contracts designed to manage specific lifecycle events for a Digital Security. Examples for this are issuance DS Apps, exchange-specific DS Apps, voting rights DS Apps or dividend issuance DS Apps.
· DS Services
o Trust Service
o Registry Service
o Compliance Service
o Communications Service
Securrency
By far the most unique STO platform is Securrency.
Securrency is not just a security token issuance platform. It is also a currency, exchange, bond and exchange traded fund shares.
Securrency provides a simple mechanism to issue tokens with a single click. Organisations whichdo not understand blockchain can use their offering with ease. Moreover, it is blockchain agnostic and provides an API and an abstraction layer called InfiniXChange. InfiniXChange lets you choose a blockchain of your choice.
They also have RegTex engine which performs KYC and AML in more than 160 countries on not only fiat but also cryptocurrency wallets.
Liquidity remains an issue for most of the projects. With Securrency, using their “network effect”, investors can raise funds faster and their automated model can help with tokenisation in no time. It allows the users to tokenise their assets hassle-free regardless of the asset types.
Swarm (SRC20)
The Swarm token is based on SRC20 protocol. The project aims to tokenise assets such as real estate and crypto hedge funds amongst many others.
Swarm provides a platform to launch security tokens based on blockchain. The protocol (SRC20) is an extension to ERC20 token with the ability to add features such as legal rights, trading restrictions, asset description, etc.
The Swarm platform is composed of three primary layers:
· Core – Governance, legal, security
· Services – Fund, syndicate, etc.
· Application – Crypto hedge fund, real estate, energy, etc.
Swarm also aims to develop AI which will enable users to deploy bots within the Swarm platform.
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