2017 saw the meteoric rise of cryptocurrencies such as Bitcoin, Ethereum and hundreds of other initial coin offerings (ICOs) to prominence as speculation caused prices to skyrocket. Bitcoin and Ethereum especially drew a huge amount of international interest as prices soared to thousands of times their initial values in a single night.
Sensing a way to make a quick buck off investment-hungry millennials, less scrupulous parties began offering low cost alternatives of dubious security and legitimacy, leading to a blowback on cryptocurrency’s reputation for legitimacy and causing the SEC to begin getting more heavily involved in regulating ICOs and the companies that distributed them. According to blockgeeks.com,
“This shocked regulators like the SEC and put them into overdrive, regularly going after potentially fraudulent offerings and actors from Alex Tapscott to DJ Khaled and Floyd Mayweather. The SEC even went after companies outside the US, such as Kik (which is based in Canada).”
To combat this problem, companies instead began offering Security Token offerings (STOs), or blockchain-based investment contracts. These STOs, seen as a far more stable and legitimate mechanism of investment, began taking off during 2018, and created a new digital asset class that could be used to purchase almost any real-world commodity.
Blockgeeks further postulates that, despite ICOs headstart, STO’s greater level of security will pave the way for it to fully replace ICOs in the near future:
“2017 saw just 5 STOs, and BlockState reports that just around a billion dollars has been raised so far (as of early 2020). However, the tides are changing as ICOs are being replaced by STOs. STOs raised around $450 million of that figure is 2019, while ICOs raised just $370 million in the same year. As a matter of fact, it’s predicted that ICOs will virtually disappear in 2020, while STOs will continue to grow.
As the saying goes, “follow the money,” and since companies are turning to STOs over ICOs, it’s clear that security tokens are winning out, at least in the blockchain space.
… Security tokens will likely fundamentally revolutionize compliance, as security tokens can represent any financial asset, whether it’s equity, debt, or a real asset, and as such, they can improve compliance for any asset.
Currently, it seems that no security token project has forfeited the use of an additional KYC/AML party for compliance. It’s always “better safe than sorry” when it comes to securities regulations, but it’s possible that one day, all KYC/AML measures will be baked into digitized assets themselves, negating the need for an additional party.”
The RealT crypto estate exchange, seeing the potential of a highly liquid method of investment in an industry famous for its illiquidity and lack of youth participation, seized on the opportunity provided by security tokens and began an ambitious strategy of buying up pieces of real estate whose value could be digitized and sold to any number of willing investors. This fractional ownership principle meant that investors could utilize their cryptocurrency holdings to invest into pieces of real-world land investments, with the value of the real estate and its rents being passed to them in corresponding percentages of ownership.
To stabilize the price and improve the liquidity of their proprietary security token, named RealToken, the company announced it was partnering with the digital exchange service Uniswap in November of 2019. According to the press release made by RealT, the partnership ensures that the security token (operating in Ethereum’s open financial system) maintains compliance with FEC rules:
“Through a landmark partnership between RealT and Uniswap, the first digital asset representing a traditional security launched on an open finance exchange Monday, November 4, 2019. The exchange pair on Uniswap is between Ether (ETH) and the RealToken tied to RealT’s flagship property, 9943 Marlowe Street in Detroit, Michigan. RealToken holders can now go to Uniswap.Exchange and instantly buy or sell Marlowe RealTokens with ETH. This RealT-Uniswap integration has created the quickest way to buy or sell real state properties in the world.
The listing of RealTokens within Uniswap is significant because it demonstrates a security token operating inside of Ethereum’s open financial system, while still maintaining compliance. All business and compliance logic that is incorporated within RealTokens is retained in Uniswap.”
The use of Uniswap’s exchange program creates a security buffer of liquid tokens, which allows for a stable valuation for each RealToken, rather than the value fluctuating with buyers entering and exiting from the investment. It additionally allows for maximum liquidity, creating a store of tokens that new investors can buy from and cash into at any point in the future. With security tokens, the possibilities for opening up new avenues of investment to younger people who have been pushed out of traditional methods of wealth accumulation are nearly endless, as any real life commodity’s value can be digitized, fractionated, and sold 24/7. With the added security and assurance of compliance with SEC rules, the danger of buying into fraudulent digital ponzi schemes is highly mitigated, making cryptocurrencies once again a highly attractive option available for young investors.