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Security Tokens and STOs: A New Financial Frontier

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Security Tokens & STOs

There were a lot of promises during the 2017 ICO boom. Brand new start-ups offering utility tokens that had no utility, on a blockchain that was not needed.

2018 was a wake-up call for the cryptocurrency community. An indication that the ICO status quo was not written in stone and that valid alternatives needed to be explored.

One of the most promising alternatives to the ICO and Utility token is that of a tokenized security or more commonly known as a “Security Token”. Could Security Token Offerings (STOs) and these assets eventually become the new norm in a more reputable ecosystem?

In this post I will attempt to answer that question and give you a general overview of the security token industry.

What is a Security Token?

A security token is a token that derives its value from the value of some underlying asset. This can be anything really from a share certificate, a bond, commodities, property etc.

Due to the fact that these are tied to some underlying asset, they are subject to regulations that govern securities. In the US these are the strict issuance rules that are outlined by the SEC.

So, when you buy a security token you are buying a share in an asset of some type. You are buying the rights to the future performance and cash flows from that asset.

Security Token vs. Utility Token
Security Token vs. Utility Token. Image Source

These are in contrast to utility tokens which were not developed for investment purposes (despite them being marketed as such). Utility tokens give the holders the ability to access and purchase future services on some decentralised blockchain.

ICOs to STOs

While utility tokens are issued in the unregulated and often wild west ICO markets, Security tokens will be issued in much more controlled and reputable Security Token Offerings (STOs).

While ICOs often feared falling fowl of SEC rules on securities, the STO will issue completely within the regulatory framework. They will go through all the applicable licensing and legal frameworks such as Regulation D, Regulation S, Regulation A+, and Regulation Crowdfunding.

Why do this?

While ICOs were a revolutionary way for blockchain start-ups to raise financing, they also attracted some bad actors and general opportunists. If we couple this with the relative inexperience of most of the investors, it created a number of negative externalities.

Pulling off a dubious ICO or developing a shoddy product is much less likely when the founders went through the regulatory rungs required to conduct an STO. It creates a safer environment for participants to invest in start-up companies.

Security Token projections
Potential for Security Tokens. Image Source

Moreover, it can be seen as a stamp of approval for the project.

It will be easier for a start-up to make a case to investors about their project, roadmap and most importantly, team members. One would feel more comfortable investing in a team that has completed the required compliance procedures than in one that has made some promises in a white paper.

So, in essence, the STO will have the best of both worlds. They will be reputable and have certain protections that regulated securities have all while still being inclusive enough to average retail investors.

Improving Traditional Finance

Apart from being more reputable than a standard ICO, security tokens also have benefits over more traditional means of raising financing.

  • Decreased Issuance Cost:
    For one thing, because security tokens are issued through the use of blockchain technology and smart contracts, the need for numerous transactional middlemen decreases. These numerous layers of participants who all feed at the trough increase the cost of the issue dramatically. So, if issuing tokens cuts out the middlemen then you can decrease costs
  • Faster Execution:
    Following on from the above example, these middlemen also tend to slow things down. They will have to inevitably sign documents, refer to council, seek authorisations etc. All of this will have to be done manually which will also increase the time that it takes before these can eventually hit the market. Automated issuance will drastically reduce this.
  • Large Market Opportunities:
    Generally, when it comes to early stage investment, it is usually reserved for a limited subset of investors in a particular region. With security tokens, you open the investment to anybody from any geographic region. A small retail investor in Africa can just as easily buy into a US STO than the Silicon Valley based VC firm can
  • 24/7/365 Trading:
    The cryptocurrency markets are continuous. Unlike with traditional financial markets that have to close for the day (equity and Bond markets) or those that have to close on the weekend (forex & commodities), crypto assets can be traded every hour of every day.
  • Easier Storage
    Security tokens possess all of the same benefits of cryptocurrencies. For one, they are very easy to store. All you merely need in order to prove ownership of the token in question is access to the private keys.
  • More Liquidity
    Just like cryptocurrenices, Security tokens are also easy to trade and transfer. A mere transaction on the blockchain is what is needed to hand over the token to another party. They could also be traded on exchanges thereby further increasing their liquidity. This is particularly relevant for those examples where the underlying asset is physical in its nature (think property, commodities, artwork etc).

So, security tokens are not only well positioned to pick up the baton ICOs left off, but they could also be a serious disruptor in traditional financial circles.

The Security Token Ecosystem

While security tokens are still a relatively new phenomenon, there are quite a few companies and projects that are building interesting solutions and ecosystems.

One of them is Polymath which is a project that is developing a platform for companies to issue their very own STOs. This platform will provide for a framework whereby issuers can use standardised templates to issue the tokens.

Strangely enough though, they have their own utility token called the “POLY”. This is an ERC20 standard token that was issued through an airdrop. The POLY token will be used on the platform as “fuel” to pay for services that are attached to the issue (compliance, legal etc). I have previously covered Polymath (POLY) if you wanted more information.

Polymath Overview
Overview of Polymath Network and Templates for Issue. Image Source

Another interesting securities token project is that of tZero. tZero is a blockchain subsidiary of Overstock Inc. and they will be issuing the tZero token. They completed a massive ICO private sale that began last December and ended in August.

tZero was able to raise a total of $134m with the majority of the funding coming from GSR Capital, a Chinese private equity firm. This ICO was designed so that it could comply with SEC regulations and is one of the reasons that they were allowed to continue the raise.

With a similar model to Polymath, tZero is developing a platform whereby companies can raise funding. However, they are also building out an exchange on top of this where people can trade security tokens in a decentralised fashion on top of the blockchain.

tZero Roadmap
tZero Roadmap as Presented in Earnings Reports. Image Source

There is also the prospect that large cryptocurrency exchanges such as Coinbase could eventually offer SEC regulated securities. This was on the back of their purchase of a range of broker dealer firms. It would give Coinbase the required broker dealer licences which would allow them to manage the trade in these assets. According to Asiff Hirji, Coinbase COO:

Ultimately, we can envision a world where we may even work with regulators to tokenize existing types of securities, bringing to this space the benefits of cryptocurrency-based markets — like 24/7 trading, real-time settlement, and chain-of-title

Given the size and influence of Coinbase in the cryptocurrency world, this is could supercharge the adoption of Security Tokens.

Tokenizing the Future

There is no doubt that cryptocurrencies and ICOs have paved the way forward for a more decentralised and inclusive financial ecosystem.

However, as with any nascent technology, there have been some challenges. The unregulated and unrestrained growth of the ICO and the subsequent fall have exposed some of these challenges.

Through the use of security tokens and STOs, numerous projects are trying to shape a new financial paradigm. Investing in new and exciting technology does not have to come with the risks that are often associated with an ICO.

There are already a number of STOs that are going through the regulatory steps required for potential listings in 2019.

While 2017 was the year the ICO, could 2019 be the year of the STO?

Featured Image via Fotolia

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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5 stars on average, based on 10 rated postsNic is an ex Investment Banker and current crypto enthusiast. When he is not sitting behind six screens trading Bitcoin, he is maintaining his numerous mining rigs. Twitter: @nicrypto




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2 Comments

2 Comments

  1. tkr2099

    November 26, 2018 at 10:36 pm

    Thoughts on Own (CHX)? I keep reading it’s an up and comer in the STO space.

    • Nic Puckrin

      November 27, 2018 at 3:41 am

      Have not heard about it before but definitely looks like a solid project with a strong use case. They seem to be focusing more on the share register niche though where which is probably their core competency. The other projects I mentioned like tZero and Poly have a much more broad focus. Will be interesting to see how things progress…

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Altcoins

Litecoin Price Analysis: LTC/USD on a Potential Launchpad for Another Rocket to the North

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  • The Litecoin (LTC) price remains elevated, as the bulls look at continuing the strong recent run higher.
  • Coinbase Wallet announces support for Litecoin, joining the likes of bitcoin (BTC), bitcoin cash (BCH), Ethereum (ETH) and Ethereum Classic (ETH).

LTC/USD: Recent Price Behavior

The LTC/USD bulls have resumed upside momentum, following brief and minor pullback observed in the session on Thursday. At the time of writing Litecoin is seen trading up in minor positive territory, with gains of around 1.5%. It is worth noting, since 8th February the price has gained as much as 60%, with the high print up at $53.65 produced on 20th February.

The big chunky jump north came after the price managed to escape a narrowing daily range block formation. LTC/USD was moving within the confinements of this for 11 January to 8th February. The breakout higher was very much explosive, given the prolonged period it has traded within. In terms of the initial spike observed on the 8th, it was a gain of around 45% in a single session.

Coinbase Wallet to Support Litecoin

Coinbase, the leading U.S. cryptocurrency exchange, announced it will now support LTC on their native Coinbase Wallet. This will allow users to store their LTC directly on the app. The fifth largest cryptocurrency by market capitalization will be joining the likes of bitcoin (BTC), bitcoin cash (BCH), Ethereum (ETH) and Ethereum Classic (ETH).

Users of the Coinbase Wallet are going to have the ability to download a required update with Litecoin support in the coming weeks via the Apple Store or Google Play Store. Storing LTC will be immediately available upon the completion of the update. Users will need to choose the ‘Receive’ option; this can be observed on the main wallet page to deposit LTC into the wallet.

In the official blog announcement, Coinbase said:

“The new Wallet update with Litecoin support will roll out to all users on iOS and Android over the next few weeks. LTC support is activated by default — all you need to do is tap ‘Receive’ on the main wallet tab and select Litecoin to send LTC to your Coinbase Wallet.”

Technical Review – LTC/USD

LTC/USD daily chart.

The Litecoin price has stabilized at heights above the psychological $50 price mark. A near-term area of demand is seen from the $50-$47 price range, which is helping keep LTC/USD propped up. The next upside targets for the bulls are seen just above a supply zone tracking from $55-$57. It last traded up at these heights back in November 2018. Should the bulls manage to maintain upside momentum, then eyes will be on a return into $65 territory, where the next area of supply is tracking.

In terms of support, as detailed earlier, immediate relief is found within the $50-$47 range. If this fails to hold, then a potential chunky wave of selling pressure would likely come into play. The next demand area to the downside runs from $42.50-$39.50; price last traded here between 9-16th February. LTC/USD had briefly consolidated within this zone before a further squeeze to the north occurred.

Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

 Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 126 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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Analysis

Crypto Update: Coins Hold Their Ground as Bulls Take a Breather

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The major cryptocurrencies settled down following yesterday’s Litecoin-led pullback, and as the coins respected the key trendlines and support levels, odds favor the continuation of the short-term uptrend. The leaders of the rally remained strong amid the shallow correction, and although the long-term setup remains clearly bearish, the traders could enter smaller speculative positions, still using strict risk management rules.

While the top coins haven confirmed the short-term swing lows yet, the coming days could see new highs, with all eyes on the $4000-$4050 zone in Bitcoin and the $160 price level in Ethereum. The majors still have to form a pattern of higher highs and higher lows on the long-term charts to change the long-term outlook, so our trend model remains on sell signals on that time-frame. That said, the overbought short-term momentum readings are quickly being cleared, so the short-term outlook remains positive.

BTC/USD, 4-Hour Chart Analysis

Bitcoin has formed a bullish consolidation pattern in the past day, and the $3850 level has been clearly supporting the coin, leaving the relatively weak short-term uptrend firmly intact. The MACD indicator is still pointing to an ongoing correction, but our trend model remained on a buy signal on the short-term time frame, and the uptrend could soon resume.

Despite the positive immediate outlook, the $4000-$4050 resistance zone is still very strong, and further consolidation is also possible before a successful break-out. A move above that zone could open up the way towards the $4450 level, but even that wouldn’t change the bearish long-term setup in the most valuable coin’s market.

XRP/USDT, 4-Hour Chart Analysis

Ripple has been trading near the $0.32 support level in the past 24 hours, still being relatively weak compared to its major peers.  The coin remains stuck below the dominant declining short-term trendline that it tested during the recent upswing, and our trend model continues to be on a short-term sell signal.

Below the primary support zone, further levels are found near $0.30, $0.28, and $0.26, while short-term targets for a possible break-out are still ahead near $0.3550, and $0.3750, but traders should still stay away from XRP

Litecoin, Ethereum, and EOS Look Ready to Lead Again

LTC/USD, 4-Hour Chart Analysis

While Litecoin entered a correction after touching the $51 resistance level yesterday, the pullback has been contained so far and even the steep short-term uptrend line remained intact. Given the extent of the recent move higher, even a test of the $44 level would leave the break-out intact.

A move above the primary resistance zone could lead to a rally towards the $56 level, and as Litecoin has been leading the market during the current counter-trend advance, its performance should be monitored closely. Below $44 further strong support is found near $38, and $34.50, and our trend model is back on a short-term buy signal while being bearish from a long-term standpoint.

ETH/USD, 4-Hour Chart Analysis

Ethereum is still trading in a bullish short-term correction pattern near $145, working its way through the overbought short-term momentum readings. The short-term uptrend is clearly intact, and although a deeper pullback is still possible traders could already enter new positions here.

With the long-term downtrend in mind, strict risk management rules are still essential here, even as Ethereum is one of the strongest majors from a short-term technical point of view. Support levels below $145 are still found near $130 and $112, while above $160, the next major resistance zone is ahead near $180.

EOS/USD, 4-Hour Chart Analysis

EOS is still the strongest major from a short-term technical standpoint, and although it continues to be overbought according to the key momentum indicators, aggressive traders could enter positions here. Buying pressure is apparent in the coin, but a deeper pullback towards the $3.50 level is still in the cards. Support is also found near $3.80 and $3, while resistance is ahead near $4 and $4.50.

Featured image from Shutterstock

Disclaimer:  The analyst owns cryptocurrencies. He holds investment positions in the coins, but doesn’t engage in short-term or day-trading, nor does he hold short positions on any of the coins.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.7 stars on average, based on 469 rated postsTrader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.




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Altcoins

Binance Coin Price Analysis: BNB Bulls Maintain Elevation Following Testnet Launch for Binance DEX

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  • Binance Coin on Friday is holding healthy gains of around 3% in the early part of the session.
  • The decentralized exchange Binance DEX testnet was launched earlier this week. Binance will be looking to gather user feedback before an official roll-out of the platform.

Binance’s BNB price continues to somewhat outperform several of its peers. BNB/USDT is trading up over 3% in the early part of the session on Friday. Since the start of February, the BNB bulls have enjoyed a strong move north, having gained around 80%. The price is currently trading in proximity to its highest levels since October 2018, entering a zone that is known for sellers. The next significant technical barrier for the bulls is within reach; for greater upside it must be broken down.

Binance DEX Testnet Running

Earlier this week, Binance, the world largest cryptocurrency exchange by traded volume, launched the testnet for its decentralized trading platform. Binance DEX has been made available for public testing; users can create crypto wallets and start familiarizing themselves with the platform’s interface. The platform is running on the Binance Chain, which is their proprietary blockchain.

Furthermore, the company released a blockchain explorer for the testnet; this allows users to search by an individual block, transaction, asset, address and order ID via the blockchain. The community will be able to participate as individual nodes, in addition to holding their private keys.

Binance has noted it will need to start gathering much feedback from its community on this current testnet. The company can then look at the timeline for a major final step of rolling out the decentralized exchange.

The CEO and co-founder Changpeng Zhao commented following the announcement:

“With Binance DEX, we provide a different balance of security, freedom, and ease-of-use, where you take more responsibility and are in more control of personal assets.”

Technical Review – BNB/USDT

BNB/USDT daily chart.

Given current upside momentum, the areas of resistance must be noted as potential barriers to disrupt this bull run. Firstly, a supply area can be observed just ahead tracking from $10.90 up to $11.63. The BNB/USDT bulls faltered here on several occasions in August, September and October 2018. The damage occurred after the rejection in October, which gradually went on to lead to a steep bearish trend that commenced in November. The price went on to drop around 50%, throughout November up to early December.

Another chunky wave of buying pressure would likely come into play, should the bulls break the mentioned supply. Furthermore, eyes will then be on a return back towards the $14-$15 price range. BNB/USDT last traded up at these heights back in August 2018, just before the bear market kicked in again with intense selling pressure.

Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 126 rated postsKen has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.




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