Security token markets still lack liquidity, and many STOs have had a rather poor performance so far. Regulatory roadblocks and a focus on the wrong marketing channels are key reasons.
For those working in the blockchain space, it all makes sense: STOs are a cost-effective tool to raise funds and bring liquidity into traditionally illiquid asset classes. It’s a no-brainer, security tokens are the future of financial markets.
And while that does indeed make sense, outside of our small world, most people don’t even know what an STO is. Even professional investors don’t have a clear grasp of it. They may have heard the term, but many don’t understand how it works or what the advantages are.
So when some say, STOs have so far not lived up to their expectations, maybe those expectations were unrealistic in the first place. A new technology, a new concept, how can anyone believe this is going to be easy?
Lack of liquidity: Just a few exchanges actually trade security tokens
According to Polymath, more than 100 security tokens have already been created. But they are not liquid. Volume is tiny, and most tokens are not even listed for trading.
There are several reasons for that: Firstly, to list security tokens, an exchange needs to comply with all regulatory requirements that every other securities exchange needs to comply with. That means licenses, KYC and AML procedures, and other compliance processes need to be in place – building that up requires a lengthy and costly process. Moreover, regulators in many jurisdictions drag their feet on granting licenses, because they are not sure themselves about the legal implications.
Secondly, many jurisdictions require regulatory holding periods for securities. First and foremost the U.S., which is the largest securities investor market worldwide. For that reason, most security tokens are not yet available for trading in the U.S., as they are still in a regulatory lock-up.
Thirdly, the key value proposition of security token markets is global liquidity. In theory, European investors could as easily invest in a public company based in Australia as they could in the U.S. However, for that to happen, all participating nations would have to agree on a global framework, which is not very likely to happen anytime soon.
Marketing is key: Projects focus on the wrong distribution channels
Besides regulatory roadblocks, many projects struggle with their marketing campaigns. Even given the right infrastructure, selling any asset still requires a counterparty willing to buy it. Right now, such buyers are rather thin on the ground.
Way too often, STO projects market to the wrong customer base. They reach out to the crypto community, trying to attract tech-investors that are already active in the space and thus understand the technology.
However, the customer base for security tokens is way broader than that. Anyone who is investing in traditional securities should be interested in buying security tokens; given that he understands that it’s the exact same investment.
Dovey Wan, co-founder of blockchain holding company Primitive Ventures, says, “A real estate security token offering should be led by an existing real estate or REIT firm, where supply inventory can be guaranteed, and demand can come from existing channels.”
Thus, to get access to the right customer base, projects need to leverage traditional securities sales channels. A company launching a real estate security token offering could corporate with real estate agencies that sell investment properties. If a token consist of an equity offering, cooperating with equity dealers might be the way to go. The product is the same, so why not using the channels that already have an existing customer base and an established and trusted brand.
Outlook: Security token markets will develop, but slow and steady
With all that said, the value proposition of security tokens is exciting, and the long-term benefits are compelling. A decade ago it would have been challenging to visualize where Bitcoin stands today. Likewise, most investors today don’t understand the potential of security tokens.
But there are many positive signs. Regulators have already begun to see the opportunity and try to create more legal certainty. That’s a slow process. Liechtenstein’s Blockchain Act was a key milestone on this journey, but its implications are locally limited for now. To unlock the true potential of digital markets, other countries need to follow and work towards an international regulatory framework. We need a global Blockchain Act.
Moreover, with established exchanges breaking into the space, and holding periods of the first tokens in the U.S. expiring this year, we will see the early beginnings of a regulated secondary market. Openfinance has just announced it will list the first security tokens for trading within this quarter and make them available to non-accredited U.S. investors.
Thus, the naysayers are as always too early. This market is still tiny and early-stage. It will take time until security tokens can attract critical mass. But as soon as that happens, an avalanche will break loose.
In the meantime, it is paramount for STO projects to understand that overnight successes will be unlikely. Marketing an STO is hard work, takes time and patience, and a clever sales and distribution strategy.