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Underrated STO: Everything can be tokenized

2021-02-02 22:49

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Writing: Rimo

Editor: Runchen

Original source: Republic Chinese

Analyses the STO

After the birth of STO, it seems that it has not attracted enough attention from the market, and it has become relatively silent in 2020. With the arrival of the "first year of institution" in 21 years and the maturity of industry supervision, there is still a huge space for imagination in multi-asset swap and expansion of ecological scenarios.

What is a STO

STO currently covers a wide range of market definitions and is as composable as LEGO. First of all, from the perspective of its full English name of Security Token Offering, S stands for securities and aims to supervise digital assets under the regulatory framework of securities law. Tokens are referred to as "tokenization", "tokenization" or "digital security" by many people. Therefore, STO is also given more concepts and imagination space, such as digital security, security Token offering, tokenization and digitization of assets, etc.

"In some countries (such as the United States), STO refers to the sale, issuance, and distribution of security tokens," said Republic CEO Kendrick, who has many years of experience as a securities lawyer. As for how to define security tokens, Kendrick stresses:

"If some tokens, essentially similar to the company's shares or investment agreement, says that the token is in the nature of" securities ". Specifically, if some tokens, investors expect to reap the benefits in the future, and the token value enhancement depends on its research and development team to continue as a going concern, the legal system in many countries, the tokens are likely to be classified as a kind of securities."

With the extension and development of the concept of STO, its actual definition has also been greatly expanded. If more asset classes are introduced, it can even be understood as a series of on-chain or real assets that confirm rights and "fragment transactions" on the blockchain.

Looking back at the development of the crypto industry, the development of STO is actually a bit similar to the hot & NBSP; DeFi In the early stage, many people defined it only as "Open Finance". After its explosive development in 2020, people gradually got used to calling it decentralized Finance. Now it can refer to various decentralized agreements and applications, and the definition of DEFI is not limited to the financial framework.

Therefore, whether it is DEFI or STO, simple concepts will burst out with the development and combination of the market, and then evolve into more modular display forms. For example, some projects put forward STO+ NFT, STO+ DEFI, STO+DAO and &NBSP including real assets and on-chain assets; All kinds of new concepts and experimental directions such as Token.

Republic. Co

The characteristics of the STO

The background of STO's birth is under ICO, but different from the barbaric growth mode of ICO, STO has been injected with regulatory genes since its inception. Therefore, legal compliance is an important prerequisite of STO, and also its most important characteristic.

Secondly, with the aid of STO model, many issuers or individual can be more flexible, the purpose of the implementation of the asset refinancing than traditional securities in the form of a technical breakthrough, using block chain to achieve cross-regional, cross exchange high liquidity, allows the company to come into contact with a wider range of investors, the more liquid, more on the broad market, fair competition.

In addition, STO tokens with economic incentive mechanism and functional role, compared with the traditional securities of its economy and asset attributes will be more flexible, can be redefined property and production relations, promote ecological parties to work together, to achieve ecological incentives between companies and users, allows users to get part of discourse, in order to realize more practical application value, enjoy the company benefits, to expand this kind of similar equity and economic incentive to ecology, thus forming a more benign development.

The role of the STO

As a new innovative investment and financing model based on block chain, STO breaks traditional forms such as bank loans and private equity, and provides a more powerful operating system for both issuers and investors. At the same time, as the "advanced version" of ICO, STO can effectively contain the chaos in the market and make up for the lack of supervision. Under the supervision framework of securities regulatory authorities of various countries, relevant exemptions or registration can be recorded.

For issuers, some startups have long raised money through bank loans and private placements, while venture capital has mostly been raised by selling equity. If SMEs raise capital through bank loans, they often face difficulties in approval and high loan interest rates, while private equity is time-consuming and exhausting, requiring investors to be found, follow-up and details to be worked out.

With STO, issuers can expand financing channels, reach more ordinary investors, automate transactions with smart contracts, and even facilitate cross-border settlement and payment scenarios for enterprises.

In addition, by eliminating the intermediaries of securities firms, law firms, investment banks and so on, SOs can significantly reduce the economic and time costs of issuers. Traditional securities need intermediaries to complete registration, and a series of process of liquidation, STO declaration process and procedure will be more convenient, similar Reg D way of STO issue exemption, issuers do not need through the disclosure of financial information to complete the complex process trival, can greatly shorten the time needed to complete the finance and economic cost of the project.

Republic. Co

For investors, especially individual investors, investors who have completed KYC/AML and other relevant conditions on the platform can reach a wider range of investors through the way of on-chain transfer of STO.

In addition, the offering of STO under the regulatory framework can effectively prevent fraud and market manipulation, and fundamentally ensure the interests of investors and the fairness of the transaction.

STO as a form of fundraising can eliminate the information asymmetry between the issuer and the investor, so that the two parties to establish a direct and effective contact.

Market size & Current situation of the development of

The STO can will include real estate, private equity, games, derivatives, cash, art and so on a series of assets to be tokens, and through the form of securitization introduces chain assets under the chain, so its potential market is huge, but given involves more fields, the present status of the STO overall market development scale and may not be able to use the exact digital measure, so will depend on the part of the market segment for simple track measurement and contrast.

From STO In terms of real estate segment, according to the December 2020 report released by Security Token Market, the measurable Market value of tokenized real estate reaches $25,751,178, up 1.26% from the previous month, and secondary market STO token volume was $179,861, down 4.47% month-on-month.

Republic. Co

From the perspective of Chinese art market, according to the report of China Commercial Industry Research Institute, according to the transaction volume, the market size of Chinese art platform has increased from 3.658 billion yuan in 2015 to 13.437 billion yuan in 2019, with a compound annual growth rate of 38.4%. It is estimated that in 2024, the transaction volume of Chinese art trading platform will reach 30.723 billion yuan, with a compound annual growth rate of 18.4%, and the transaction volume of art information platform in 2024 will reach 393 million yuan, with a compound annual growth rate of 16.2%. If the share of 0.1% of assets is conservatively estimated for tokenization, then, it is estimated that The asset size of China's art market may break through in 2024. 3 billion yuan.

In terms of traditional investments, Crunchbase data shows that despite the global outbreak, the total amount of venture capital investment in North America in 2020 increased by about 7% from 2019 to more than $150 billion, the highest ever. Using the same 0.1% ratio, the potential market for tokenized investment in North America is $15 billion.

A group of academics including Peter Roosenboom, professor of finance at RSM, Thomas Lambert, assistant professor of finance at RSM, and Daniel Liebau, lecturer in fintech at RSM and Singapore Management University, have jointly published a research report on the new security token offering (STO) market, which examines & NBSP; 185 "real" STO samples.

The report notes that about a third of these cannot be considered strictly STO. Instead, they are either stablecoins or ICOs masquerading as STOs. The report also records three basic facts. First, the STO market developed after the end of the ICO market bubble, and STO-related activity began to increase from the end of 2018. Second, most STOs fail to raise funds successfully, indicating that the market is still in its infancy and therefore still very immature (many companies may not be ready to launch an STOs). The third is that STOs are scattered around the world, concentrated mainly in the US and in jurisdictions where securities laws apply.

STO distribution of samples from Q2, 2017 to Q1, 2020 were taken

Source: Rotterdam School of Management

STO oversees the territory

As mentioned above, the prerequisite for STO is to make further progress in the interaction of supervision. Although the current industry supervision system is not perfect and there are differences between different countries, phased policy guidance still has certain guiding significance for the market, and the gradual improvement of supervision also contributes to the progress of the STO industry.

Just this past mid-December 2020, the SEC filed formal charges against Ripple and two of its executives for over $1.3 billion in unregistered securities offerings. The incident reverberated in the crypto industry, with many platforms, including Coinbase, the largest trading platform in the United States, announcing the removal of XRP trading, and prominent institutions, including Grayscale, saying they would no longer own XRP assets.

Looking back at the development process of the industry, SEC has repeatedly explicitly punished many projects, and the supervision of STO, including the entire crypto industry, has never been relaxed. However, supervision also helps to reduce risks and ensure the healthy development of the industry.

Judging from the relevant STO policies issued by various countries and regions at present, developed countries such as the United States, Europe, Canada and Singapore have relatively complete rules and open attitudes. At the same time, due to the securities property of STO itself, it is naturally suitable to take the lead in making a breakthrough in a place with complete financial and securities system and clear supervision, which also reflects that STO has a certain correlation with the financial development degree of a country.

STO attitude more strict in China, Thailand, Japan and other countries have expressed STO systemic investigation and supervision, as a whole is neutral, in most developing countries, due to its own development is relatively backward, and the impact of the external volatile international situation, the emerging industry regulation is in a state of more passive.

Hong Kong in the last two years of STO movements are active in the field of regulation, such as Hong Kong's securities and futures commission after is to conform to the requirements of virtual assets trading platform in the regulation of "sand box", in 2020, the SFC licence OSL, tradable BTC, ETH, and filtered type securities tokens, OSL has become the first licensed virtual assets in Asia trading platform.

Republic. Co

Various STO participants

The whole ecosystem of STO is composed of multiple participants, mainly including issuers, investors, issuing platforms, trading parties (Security Token trading platform, trading and liquidity agreement), technology providers, legal advisory agencies and other parties.

The issuer refers to the Token holder and the asset provider, while the transaction party refers to the place where the Token trades, including Polymath, tZero and other platforms and various agreements. The service party includes institutions such as Polymath, Republic, Securitize, etc. As an intermediary between the issuer and the investor, it is also an indispensable part of the STO ecology.

Take Republic. Co as an example. The company was founded in 2016. After six years of development, it has become one of the world's largest investment platforms. The platform's business covers startups, equity-based crowdfunding, real estate investment, e-sports and game investment, and underwriting in the middle and late stages.

Republic. Co has established deep cooperative relationships with the world's top venture capital funds and family offices, including A16Z, YC, ZhenFund, NGC, etc. Republic is also the first project funded by AngelList and Binance, with investors including Blockchain Ventures, AlgoRand, NEO, ZhenFund, NGC, FBG and other well-known investment institutions from home and abroad.

In 2020 alone, Republic. Co has completed projects for 157 companies. $150 million in financing. These include private equity, equity crowdfunding, real estate financing, game financing, coin-rights financing, etc. These include numerous unicorns, such as Robinhood, SpaceX, etc.

In 2021, Republic will launch Republic Note, a digital security under regulatory guidance. When a project is successfully withdrawn, Republic will cash out Carried Interest from the project and use it to pay dividends in Taiwan dollars. More than 12,000 investors from 25 countries have participated in Republic Note's public offering.

Obstacles in the market

As an emerging market, STO's projects and market performance in the longer term still need further observation. First of all, the attitude of the regulatory level still plays a key role in the development of STO. If the review becomes stricter, the progress of compliance may become more complicated, or the market sentiment may be directly affected.

Second, the high liquidity might cause the market price of assets volatility, STO although accelerated the pace of start-up financing listed, inside short time increased a lot of ST holders, but due to a startup in the initial stage, many uncertain factors in the company's future development, many start-ups due to reasons such as poor management is faced with the collapse of risk, low degree of the completion of the project, these potential setbacks are likely to lead to asset volatility.

On the other hand, different exchanges have adopted different ST asset standards, and the liquidity of the market has been severed. Cross-exchange ST transactions cannot be carried out, which will limit the transaction circulation of assets.

STO requires a complete set of securities logic, which involves the cooperation of all parties, the standard of assets and the coordination of transactions. Therefore, it also puts forward high requirements for technology. The underlying infrastructure of the whole system also needs constant iteration and improvement.

Future directions can be combined

STO + NFT

As a non-homogeneous token, NFT has seen significant growth in the crypto space, and there are high hopes that it will follow Defi as another important track for future rapid growth.

From the point of the field, in the real world, including art, collectibles, etc, all entities can use STO chain, it is a natural fit for the development direction of NFT, if NFT before the introduction of chain by STO compliance procedures, the NFT assets will have the rights of the compliance certificate, can be a lot of solving the problem of the legal rights and interests of NFT, ensure the true and the actual ownership of assets, etc. STO allows more off-chain assets to be mapped into the blockchain in the form of on-chain NFT, realizing the coordinated development of the two markets.

STO + DeFi

STO can bring real, valuable capital from the traditional financial world to DEFI, and for the DEFI industry, these institutional level compliance capital access can help move the market in a healthier direction. Such as some entrepreneurial teams for the initial capital is generally used for the purpose of the development of the project, hope that the future can realize more benefits, if using the STO screening, can help turn to the speculative investment value discovery process, better serve the project after financing and development of the industry, not tokens to "cash out", but rather seek to form a positive cycle of the whole industry.

STO+DAO

STO QueRenQuan assets both shares, if coupled with tokens, flexible properties, giving its widening economic incentives and governance function attributes, then maybe can redefine the productive relations, realize ecological incentives between companies and users, allows users to participate in corporate governance process, access to part of the voice, to further promote the company's fair and transparent.

Large institutions + STO

Large and traditional institutions are also actively trying to enter this vast market with the help of STO to help the industry further "out of the loop".

Digital securities trading platform Fusang Exchange has previously expressed its hope to launch the Ethereum blockchain based digital bond product "Longbond SR Notes USD FEB 2021" jointly with China Construction Bank Corp Labuan (CCBL), but the launch date is currently delayed.

Singapore's DBS Bank has also said that it not only wants to support trading of crypto assets such as bitcoin, but also hopes to use blockchain technology to provide an ecosystem of funds through STOs and secondary markets.

conclusion

Block all break traditional chain field provides new cognition and innovation, it is a place full of imagination, STO tried to block chain way subverts the traditional financial regulatory thinking, with the help of a Token way of promote the assets of the new development under the framework of compliance, let more under the chain of assets in the form of more fit into the industry, make truly valuable assets can better the precipitation in the industry.