Q1 2019 data shows the ICO market is “essentially dead.” STO volumes are starting to pick up slowly, but the market is still early stage.
Bye-bye ICOs, hello STOs. We have all heard the chorus by now: ICOs are dead, and STOs are the future of token-based fundraising.
Here is some data to back up the first claim: According to TokenData, ICOs have raised $118 million in the first quarter of 2019. That’s about 58 times less than the $6.9 billion that was raised in Q1 2019. Moreover, out of 2,500 projects monitored since 2017, only 45 percent successfully raised funds. Additionally, only 15 percent of issued ICO tokens are trading at or above their ICO price.
Pretty daunting, isn’t it? The Wall Street Journalhas concluded the ICO market is now “essentially dead.” And looking at the data, that’s probably true.
An “STO market” does not yet exist
The rise and fall of ICOs is not much different from the hype cycle digital currencies have gone through. The question is what the future of token-based fundraising will look like. Security Token Offerings, maybe?
So far, the “security token market” is almost non-existent. The traditional, non-tokenized private security market absorbs approximately US$ 50 billion in new supply on an average day, which proves there is a massive buyer base for securities. The tokenized market, however, attracts about zero percent of this buyer base.
While we have seen some STOs in different markets, the industry is still nascent and an absolute niche phenomenon. Even professional investors do mostly not understand the concept of security tokens and can’t be bothered with it. At least for now.
Many projects lack quality
Most STOs we have seen so far were startups that had initially planned an ICO but had to change gears after the regulators in many jurisdictions have put down their feet.
Jay Clayton, Chairman of the US Securities and Exchange Commission (SEC), said that virtually every ICO he has seen qualified as a securities offering and the SEC is “not going to change rules just to fit a technology.”
That resulted in many ICOs relabeling their offerings as STOs. However, to conduct an STO, an entirely different set of requirements, a different team, and a different strategy is required. It’s a different ball game altogether. Thus, it’s no surprise that many of these “quick-and-dirty” STOs failed.
Besides the regulatory reasons, STOs are also often used by startups that have failed to pass due diligence by professional venture capitalists. As a result, these firms try to use a tokenized channel as their “Plan B.” But just as in any other market, investors buying a security token want to buy a solid investment, not a startup with no revenue, poor governance, unclear business models and no investor representation.
STOs need to offer an attractive value proposition
The technology might be new, the terminology might be different, but the concept of fundraising remains the same. To conduct an STO successfully, firms need an attractive value proposition – just like it has always been the case with any other fundraising method.
Besides that, STO issuers need to offer a clear exit strategy. Secondary security token markets are still underdeveloped. Thus, investors want to know not only how to buy a token, but also how to sell it. Moreover, as the reputation of anything related to crypto markets has taken a hit, token issuers should disclose detailed information to investors, that allow them to price the risk-return profile.
No doubt, in the long-term, asset tokenization will play a huge role in financial markets. But for now, we are still early stage; very early stage. STOs are not an easy undertaking. Firms cannot expect to dump their token on the market and sell out in no time. An STO needs careful planning, a clear value proposition, and substantial marketing efforts.