If 2017 was the year of the initial coin offering (ICO), 2019 is shaping up to be the year of the security token offering (STO).
An STO is basically like an asset-backed ICO. This can be for a stock, a bond, a fund or a real estate investment trust.
When traditional securities are issued, they come with a certificate, either in paper or digital form. In an STO the security is recorded on the blockchain and represented by a token.
So, STOs have all the advantages of an IPO – legal rights, compliance with regulators, entitlement to company profits, etc. And all the advantages of an ICO – immutable, stored on the blockchain, easily tradeable, and perhaps most importantly, programmable.
For instance, with an STO you could write a smart contract that ensures each token pays out a certain interest rate or dividend.
(I covered this idea of smart-contract securities in detail in my essay on smart bonds last year. You can read it here.)
So, as you can imagine, STOs have fast become a major buzzword in certain investing circles.
However, unlike the ICO craze of 2017, investors and commentators alike are looking on this one more cautiously.
At Paris Blockchain Week there was a panel discussion dedicated to STOs. The mood in that discussion, and indeed when anyone mentioned STOs, was kind of strange.
Generally, all the financial experts that came to Paris Blockchain Week took it as a given that every traditional financial asset would eventually be tokenised.
But none of them were really excited about this. They simply saw it as an inevitability. And they were extremely wary of scammers cashing in on the upcoming STO craze.
You may remember that the ICO craze started off with unbound enthusiasm and cries of “new paradigm!” But by the time 2017 was out, ICO had become a dirty word, synonymous with scams and shady deals.
That’s not to say there aren’t good ICOs still going on today. There are. But people are much, much more wary of them now, especially after the crypto winter we’ve just had.
Tokenising the Mona Lisa
A possibility of STOs that has many people excited is the tokenising of physical assets. For example cars, property, art and land.
During the STO panel discussion, Dr. Omri Ross, the chief blockchain scientist at eToroX, said: “The possibility to invest in a fraction of real estate is very interesting. I’m not excited about an STO, I’m excited about tokenising great things, like the Mona Lisa, etc.”
And indeed, tokenising real estate has already begun. There was a lot of fuss last December when a developer in Manhattan announced it would be tokenising one of its developments.
A luxury Manhattan condo development is getting a new digital home on the worldwide Ethereum blockchain. The building, a completed 12 unit construction with 1700 sq ft units located on 436 & 442 E 13th St in the East Village, is the first major asset in Manhattan to be tokenized on Ethereum. The property has recently been appraised at more than $30M.
However, one of the draws of property investing is that you own the property. If you and 1,000 other people own 1/1,000th of a house, you don’t really own it do you? It’s not like you can stay over. You only own 1/1,000th of it.
So if a house is owned by 1,000 people, surely it would really be worth less than if it was owned by just one.
If, say, a house was valued at £1,000,000, I would not be willing to pay £1,000 for a token worth £1,000th of it. I could never live in it, I could only every collect a 1/1,000th share of the rental income.
And with so many different owners, you could easy end up in a “tragedy of the commons” situation.
If you’re not aware of this saying, here’s a short explanation from Wikipedia:
The tragedy of the commons is a situation in a shared-resource system where individual users acting independently according to their own self-interest behave contrary to the common good of all users by depleting or spoiling that resource through their collective action.
And tokenising great artworks just seems like a way for people to show off… own 1/1,000th of the Mona Lisa for $830,000… own 1/1,000,000th of the Mona Lisa for $830.
I guess that may appeal to the same people who buy certificates for land on the moon. But personally, I can’t see the benefit.
In fact, I imagine that tokenising these kinds of assets – art, classic cars, original recordings, etc – will end up losing a lot of people a lot of money.
When the hype dies down, people will realise that a 1/1,000,000th share of a famous artwork or a Ferrari F40 isn’t really worth anything.
Tokenising stocks and bonds, on the other hand, is going to revolutionise the finance industry.
In that same panel debate, the speakers compared it with the digitisation of the stockmarket in the late 80s. Tokenising securities is simply the next step along that journey.
Societe Generale issues the first covered bond as a security token on the Ethereum public blockchain
And in another stroke of good timing, one of the world’s major banks this week announced it had issued the first ever covered bond recorded on a public blockchain.
From Societe Generale:
From On 18 April 2019 Societe Generale SFH, a subsidiary of Societe Generale Group, issued EUR 100m of covered bonds (“obligations de financement de l’habitat” or “OFH”) as a security token, directly registered on the Ethereum blockchain. OFH Tokens have been rated Aaa / AAA by Moody’s and Fitch and have been fully subscribed by Societe Generale.
This operation is the first pilot project developed by Societe Generale and Societe Generale FORGE, one of the 60 internal startups launched via the Internal Startup Call, the Group’s intrapreneurial programme. This startup experiments disruptive business solutions using blockchain technology to develop new digital capital market activities.
This live transaction explores a more efficient process for bond issuances. Many areas of added value are predicted, among which, product scalability and reduced time to market, computer code automation structuring, thus better transparency, faster transferability and settlement. It proposes a new standard for issuances and secondary market bond trading and reduces cost and the number of intermediaries.
If you’ve been a regular reader over the last year or so, you might have noticed a change in my crypto articles.
Last year, I was mainly talking about possibilities. I was showing what could be created with this new technology. But nothing was really happening in the real world.
This year, almost everything I write about is going live, with real applications from major industry players.
While the mainstream press was only reporting crypto asset prices crashing, developers and businesses continued to work tirelessly behind the scenes.
In fact, a number of speaker at Paris Blockchain Week said they hoped crypto asset prices stayed low for at least another 12 months, so developers could continue to build.
They said when prices start to go parabolic, no one wants to work – they’re all planning their retirement.
This time around, if it really is this time around, the bull run is going to be powered by real-world adoption. And it’s going to take a lot of people by surprise.
If you’d like to find out how to invest in crypto – and get all my research on what I believe are the most promising crypto assets out there – you can take out a trial to Frontier Tech Investor here.
Not only will you get full access to my Crypto Wire service, but you’ll also get full access to Eoin Treacy’s Frontier Tech Investor, and Nick O’Connor’s tech investment book: The Exponentialist.
Until next time,
Editor, Exponential Investor