Security token offering

Last updated

A security token offering (STO) / tokenized IPO is a type of public offering in which tokenized digital securities, known as security tokens, are sold in security token exchanges. Tokens can be used to trade real financial assets such as equities and fixed income, and use a blockchain virtual ledger system to store and validate token transactions. [1] [2]

Contents

Due to tokens being classified as securities, STOs are more susceptible to regulation and thus represent a more secure investment alternative than ICOs, which have been subject to numerous fraudulent schemes. [3] [4] [5] Furthermore, since ICOs are not held in traditional exchanges, they can be a less expensive funding source for small and medium-sized companies when compared to an IPO. [6] An STO on a regulated stock exchange (referred to as a tokenized IPO) has the potential to deliver significant efficiencies and cost savings, however.

By the end of 2019, STOs had been used in multiple scenarios including the trading of Nasdaq-listed company stocks, [1] the pre-IPO of World Chess, FIDE's official broadcasting platform, [6] [7] and the creation of Singapore Exchange's own STO market, backed by Japan's Tokai Tokyo Financial Holdings. [2]

Controversy regarding ICOs

Though sharing some core concepts with ICOs and IPOs, STOs are in fact different from both, standing as an intermediary model. Similarly to ICOs, STOs are offerings that are made by selling digital tokens to the general public in cryptocurrency exchanges such as Binance, Kraken, Binaryx and others. [8] [9] The main difference stands in the fact that ICO tokens are the offered cryptocurrency's actual coins, entirely digital, and classified as utilities. New ICO currencies can be generated ad infinitum, as might in some cases their tokens. Additionally, their value is almost entirely speculative and arises from the perceived utility value buyers expect them to provide. [10] Security tokens, on the other hand, are actual securities, like bonds or stocks, tied to a real company. [11]

In terms of legislation, some jurisdictions do treat STOs, ICOs, and other cryptocurrency-related operations under the same legislative umbrella. [12] In general, though, STOs are placed under securities legislation (together with traditional IPOs), and ICOs under utilities, with the differentiation being made mostly on a case-by-case basis. [13]

The main debate surrounding security tokens is, thus, the legal differentiation of what can be qualified as a utility instead of a security. Generally, legislation understands that if a passive financial return is expected from the investment, then it is classified as a security. This way, even if the offering company understands their tokens are merely a utility asset with no expected return investment, if it can be proven otherwise then the ICO becomes an unregulated STO, passive of legal punishment. Moreover, this assumption of utility has been abused by some STO offering companies to sell securities without regulatory compliance (maliciously labeled as ICOs). [14]

This legal ambiguity has led to some ICO offerers being prosecuted by the SEC as a security offering part, though their tokens were announced as utilities. Such companies include messaging apps Kik and Telegram, the former being sued by the SEC for over $100 million and the latter delaying their offering plans after similar prosecution. [15] [16] [17]

Regulation

One of the main selling points of cryptocurrencies such as Bitcoin has been the decentralization aspect, by which no government can influence or control the currency. By extension, a cryptocurrency is not directly affected by a specific country's jurisdiction, sociopolitical environment, or economic events. [18] Such a lack of regulation has led to the rising of large-scale crypto-related criminal activity, ranging from terrorist funding to tax evasion, most of which go untracked and unpunished. [19] [20] Similarly, ICO scams have been an increasingly troublesome matter, causing billions of dollars in losses and damaging the cryptocurrency market's value as a whole. [21] [22]

So far, STOs have been regulated and legalized in many countries where ICOs have not, due to fitting in many already pre-existing regulations regarding securities. [23] [24]

JurisdictionStatusComments
European Union RegulatedRegulated by MiFID II. Newly issued security tokens must fulfill requirements of the Prospectus Directive. [25]
Germany RegulatedMiFID licenses are issued by BaFin.
United Kingdom RegulatedCategorized by the FCA under the category of Specified Investments. [26]
Switzerland RegulatedRegulated by FINMA and subject to the same laws as traditional securities. [27]
United States RegulatedSecurity tokens are subject to the SEC under the same laws as traditional securities. [23]
Canada RegulatedMust obtain approval from the CSA. [24]
Brazil RegulatedSTOs must be registered and approved by the CVM. [28]
Australia RegulatedLegal under the regulation of ASIC. Traditional and tokenized securities are treated differently. [29]
Israel RegulatedMust follow the legal framework provided by the ISA and are subject to the same laws as traditional securities. [30] [31]
United Arab Emirates No RegulationNo federal regulations, but very well-defined legislation at regulator-level. Both ADGM and DFSA have provided some form of guidance on Security Tokens. [32] [33]
Thailand No RegulationLegal approval of ICOs has already been made by Thailand's Securities and Exchange Commission. STO application criteria expected to be released soon. [34]
Singapore RegulatedMust receive approval from the MAS and be compliant with the Securities and Futures Act. [35]
Japan RegulatedRegulated under the FIEA.
Hong Kong RegulatedRegulated under a framework provided by the SFC. [36]
China BannedSTOs and ICOs are banned and constitute illegal financial activity. [12]
South Korea BannedSecurity tokens are under the same prohibition as standard ICOs. [37]
Malaysia RegulatedMust receive approval from the Securities Commission Malaysia and Labuan Financial Services Authority [38] [39]

See also

Related Research Articles

A cryptocurrency exchange, or a digital currency exchange (DCE), is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. Exchanges may accept credit card payments, wire transfers or other forms of payment in exchange for digital currencies or cryptocurrencies. A cryptocurrency exchange can be a market maker that typically takes the bid–ask spreads as a transaction commission for its service or, as a matching platform, simply charges fees.

<span class="mw-page-title-main">Cryptocurrency</span> Digital currency not reliant on a central authority

A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It is a decentralized system for verifying that the parties to a transaction have the money they claim to have, eliminating the need for traditional intermediaries, such as banks, when funds are being transferred between two entities.

Ripple is a real-time gross settlement system, currency exchange and remittance network that is open to financial institutions worldwide and was created by Ripple Labs Inc., a US-based technology company. Released in 2012, Ripple is built upon a distributed open source protocol, and supports tokens representing fiat currency, cryptocurrency, commodities, or other units of value such as frequent flier miles or mobile minutes. Ripple purports to enable "secure, instantly and nearly free global financial transactions of any size with no chargebacks". The ledger employs the native cryptocurrency known as XRP.

Coinbase Global, Inc., branded Coinbase, is an American publicly traded company that operates a cryptocurrency exchange platform. Coinbase is a distributed company; all employees operate via remote work. It is the largest cryptocurrency exchange in the United States by trading volume. The company was founded in 2012 by Brian Armstrong and Fred Ehrsam. In May 2020, Coinbase announced it would shut its San Francisco, California headquarters and change operations to remote-first, part of a wave of several major tech companies closing headquarters in San Francisco in the wake of the COVID-19 pandemic.

<span class="mw-page-title-main">Cardano (blockchain platform)</span> Public blockchain platform

Cardano is a public blockchain platform. It is open-source and decentralized, with consensus achieved using proof of stake. It can facilitate peer-to-peer transactions with its internal cryptocurrency, ADA.

An initial coin offering (ICO) or initial currency offering is a type of funding using cryptocurrencies. It is often a form of crowdfunding, although a private ICO which does not seek public investment is also possible. In an ICO, a quantity of cryptocurrency is sold in the form of "tokens" ("coins") to speculators or investors, in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ether. The tokens are promoted as future functional units of currency if or when the ICO's funding goal is met and the project successfully launches.

EOS.IO is a blockchain protocol based on the cryptocurrency EOS. The smart contract platform claims to eliminate transaction fees and also conduct millions of transactions per second. It was developed by the private company Block.one and launched in 2017. The platform was later released as open-source software.

A cryptocurrency bubble is a phenomenon where the market increasingly considers the going price of cryptocurrency assets to be inflated against their hypothetical value. The history of cryptocurrency has been marked by several speculative bubbles.

Binance Holdings Ltd., branded Binance, is a global company that operates the largest cryptocurrency exchange in terms of daily trading volume of cryptocurrencies. Binance was founded in 2017 by Changpeng Zhao, a developer who had previously created high frequency trading software. Binance was initially based in China, then moved its headquarters to Singapore shortly before the Chinese government imposed regulations on cryptocurrency trading. Binance subsequently left Singapore in late 2021 and after that, had no official company headquarters.

Cryptocurrency and crime describes notable examples of cybercrime related to theft of cryptocurrencies and some of the methods or security vulnerabilities commonly exploited. Cryptojacking is a form of cybercrime specific to cryptocurrencies that has been used on websites to hijack a victim's resources and use them for hashing and mining cryptocurrency.

OKX is a global cryptocurrency spot and derivatives exchange and the second biggest crypto exchange by trading volume, serving over 50 million people globally. It was founded by Star Xu in 2017, who is also the CEO as of 2023. The President is Hong Fang and the CMO is Haider Rafique. OKX is owned by OK Group, which also owns the crypto exchange Okcoin.

<span class="mw-page-title-main">Justin Sun</span> Grenadian diplomat and tech entrepreneur

Justin Sun is a Chinese-born Grenadian cryptocurrency entrepreneur and business executive. He is the founder of TRON, a blockchain DAO ecosystem. Sun once served as Permanent Representative of Grenada to the World Trade Organization (WTO) in Geneva.

An Initial exchange offering (IEO) is the cryptocurrency exchange equivalent to a stock launch or Initial public offering (IPO). An IEO is the process of digital asset procurement through an established exchange for the purpose of raising capital for start-up companies. Exchanges act as a middleman between investors and the startup, profiting from fees generated by services rendered during the due diligence process and funding phase. IEO's and initial coin offerings (ICO) share similar characteristics with, however, an IEO can be seen as an evolution from the ICO due to legal influence and an increase in financial regulations within the cryptocurrency market.

Paxos Trust Company is a New York–based financial institution and technology company specializing in blockchain. The company's product offerings include a cryptocurrency brokerage service, asset tokenization services, and settlement services. ItBit, a bitcoin exchange run by Paxos, was the first bitcoin exchange to be licensed by the New York State Department of Financial Services, granting the company the ability to be the custodian and exchange for customers in the United States.

Decentralized finance offers financial instruments without relying on intermediaries such as brokerages, exchanges, or banks by using smart contracts on a blockchain, mainly Ethereum. DeFi platforms allow people to lend or borrow funds from others, speculate on price movements on assets using derivatives, trade cryptocurrencies, insure against risks, and earn interest in savings-like accounts. DeFi uses a layered architecture and highly composable building blocks. Some applications promote high interest rates but are subject to high risk. Coding errors and hacks have been common in DeFi.

Stacks, formerly Blockstack, is an open-source platform to enable smart contracts, DeFi, NFTs, and apps for Bitcoin. Stacks blockchain is a "layer" for Bitcoin similar to the Lightning Network. In addition to smart contracts, the Stacks project provides open-source software for authentication, and data storage.

<span class="mw-page-title-main">Solana (blockchain platform)</span> Public blockchain platform

Solana is a blockchain platform which uses a proof-of-stake mechanism to provide smart contract functionality. Its native cryptocurrency is SOL.

The general notion of cryptocurrencies in Europe denotes the processes of legislative regulation, distribution, circulation, and storage of cryptocurrencies in Europe.

<span class="mw-page-title-main">Celsius Network</span> American cryptocurrency company

Celsius Network LLC is a bankrupt cryptocurrency lending company. Headquartered in Hoboken, New Jersey, Celsius maintained offices in four countries and operated globally. Users could deposit a range of cryptocurrency digital assets, including Bitcoin and Ethereum, into a Celsius wallet to earn a percentage yield, and could take out loans by pledging their cryptocurrencies as security. As of May 2022, the company had lent out $8 billion to clients and had almost $12 billion in assets under management.

Tokenomics, also known as token economics, is an emerging field concerned with the economic properties of agent-driven systems that use cryptographic tokens that are typically created and managed on blockchain-based distributed ledgers.

References

  1. 1 2 Browne, Ryan (8 January 2019). "Apple and Tesla shares on the blockchain could be the next big thing in crypto". CNBC. Retrieved 2019-11-26.
  2. 1 2 Shimada, Yu (14 November 2019). "Singapore brings Japan into Asia's first digital securities market". Nikkei Asian Review. Retrieved 2019-11-26.
  3. ↑ Chen, Qian (21 November 2019). "The good, the bad and the ugly of a Chinese state-backed digital currency". CNBC. Retrieved 2019-11-26.
  4. ↑ Allison, Ian (26 November 2019). "Tokenized Real Estate Falters as Another Hyped Deal Falls Apart". Yahoo! Finance. Retrieved 2019-11-26.
  5. ↑ Michaels, Dave (26 November 2019). "Crypto Startup Calls It Quits After a Regulatory Reprieve". The Wall Street Journal. Retrieved 2019-11-26.
  6. 1 2 Murphy, Hannah (21 November 2019). "World Chess announces plans for 'hybrid IPO'". Financial Times. Retrieved 2019-11-26.
  7. ↑ Jolly, Jasper (21 November 2019). "World Chess to issue digital tokens in stock market flotation". The Guardian. Retrieved 2019-11-26.
  8. ↑ "Binaryx: Crypto Exchange. Bitcoin Exchange and Digital Assets".
  9. ↑ "Blockchain & Cryptocurrency Laws and Regulations | Hong Kong | GLI". GLI - Global Legal Insights - International legal business solutions. Retrieved 2021-09-02.
  10. ↑ Wolf, Martin (12 February 2019). "The libertarian fantasies of cryptocurrencies". Financial Times. Retrieved 2019-11-28.
  11. ↑ "Security token offerings: The next phase of financial market evolution?" (PDF).
  12. 1 2 França de Mello, Leandro (24 November 2019). "Desvendando a extensão das regulações impostas às criptomoedas na China" [Uncovering the extension of regulations imposed on cryptocurrencies in China]. Money Times (in Brazilian Portuguese). Retrieved 2019-11-27.
  13. ↑ "Guidance on Cryptoassets" (PDF) (Press release). United Kingdom. Financial Conduct Authority. January 2019. Retrieved 2019-11-26.
  14. ↑ Rooney, Kate (6 June 2018). "SEC chief says agency won't change securities laws to cater to cryptocurrencies". CNBC. Retrieved 2019-11-27.
  15. ↑ Badkar, Mamta (4 June 2019). "SEC sues messaging app Kik over $100m ICO". Financial Times. Retrieved 2019-11-27.
  16. ↑ McIntosh, Rachel (18 October 2019). "SEC vs. Telegram: Will Gram Tokens Ever Be Distributed?". Finance Magnates. Retrieved 2019-11-27.
  17. ↑ Rooney, Kate (16 November 2018). "In bigger crackdown of crypto abuses, SEC goes after unregistered coin offerings". CNBC. Retrieved 2019-11-27.
  18. ↑ Baldwin, Rosecrans (26 November 2019). "Cryptocurrency Will Not Die". GQ. Retrieved 2019-11-27.
  19. ↑ Popper, Nathaniel (18 August 2019). "Terrorists Turn to Bitcoin for Funding, and They're Learning Fast". The New York Times. Retrieved 2019-11-27.
  20. ↑ Helmore, Edward (27 July 2019). "IRS warns crypto holders: dodge tax and we'll hand out stiff punishments". The Guardian. Retrieved 2019-11-27.
  21. ↑ "Cryptoqueen: How this woman scammed the world, then vanished". BBC News. 24 November 2019. Retrieved 2019-11-27.
  22. ↑ Morris, David (27 November 2019). "Crypto Needs Journalists More Than It Wants to Admit". Fortune. Retrieved 2019-11-27.
  23. 1 2 "The Laws That Govern the Securities Industry" (Press release). U.S. Securities and Exchange Commission. 1 October 2013. Retrieved 2019-11-27.
  24. 1 2 "Canadian securities regulators provide additional guidance on securities law implications for offerings of tokens" (Press release). 11 June 2018. Retrieved 2019-11-27.
  25. ↑ Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC
  26. ↑ "Cryptoassets: our work" (Press release). United Kingdom. Financial Conduct Authority. 23 January 2019. Retrieved 2019-11-26.
  27. ↑ "FINMA publishes ICO guidelines" (Press release). Swiss Financial Market Supervisory Authority. 16 February 2018. Retrieved 2019-11-26.
  28. ↑ "Initial Coin Offerings (ICOs)" (Press release) (in Brazilian Portuguese). Securities and Exchange Commission of Brazil. 16 November 2019. Retrieved 2019-11-27.
  29. ↑ "Initial coin offerings and crypto-assets" (Press release). Australian Securities & Investments Commission. May 2019. Retrieved 2019-11-27.
  30. ↑ "Israel market regulator sees room for cryptocurrency trading". Reuters. 6 March 2019. Retrieved 2019-11-27.
  31. ↑ Beedham, Matthew (6 March 2019). "Israel regulators support 'heavily regulated' cryptocurrency trading platform". The Next Web. Retrieved 2019-11-27.
  32. ↑ "ADGM Publishes Detailed Guidance on Digital Securities". ADGM. 5 September 2019.
  33. ↑ "DFSA Starts 30 Day Public Consultation on Security Token Regulations". The National. 29 March 2021.
  34. ↑ Chudasri, Darana (13 March 2019). "SEC approves first ICO portal, still unnamed". Bangkok Post. Retrieved 2019-11-27.
  35. ↑ "Securities and Futures Act" (Press release). Singapore Statutes Online. 1 April 2019. Retrieved 2019-11-27.
  36. ↑ Lee, Georgina (7 November 2019). "Hong Kong sets out regulatory framework for virtual asset trading platforms, emphasises investor protection". South China Morning Post. Retrieved 2019-11-27.
  37. ↑ Lee, Jung Min. "Blockchain & Cryptocurrency Regulation 2020 Korea". Global Legal Insights. Retrieved 2019-11-27.
  38. ↑ "Securities Commission Malaysia Act 1993 - Acts | Securities Commission Malaysia". www.sc.com.my. Retrieved 2020-11-29.
  39. ↑ "Legislation - Legislation | Labuan FSA". www.labuanfsa.gov.my. Retrieved 2020-11-29.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.