Crypto Capital Markets Update: STOs

What is happening with STOs?

STO update
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Regulator-compliant Security Token Offerings (STOs) first appeared after the “death” of Initial Coin Offerings (ICOs) in late 2018 to restore confidence in crypto. And accelerate the pace of transformational change in the world of finance.

In 2019, I wrote the article ‘Tokenisation: crypto is preparing for prime-time finance‘ for the digital edition of the CISI Review. What has happened to STOs since then?

This article is an overdue STOs update.

Recent developments

The adoption of STOs has faced several challenges. One of the main ones has been the lack of good publicly available data, making them unattractive to most investors. Another one has been their quality. But now it seems that the demand for STOs is finally soaring.

Clifford Chance, a multinational law firm headquartered in London, published a report in October 2020 that says that STOs are increasingly being seen as an alternative to mainstream debt and equity fundraisings. The report also says that STOs are typically structured to sit within securities law frameworks. This means much greater certainty for both fundraisers and investors, resulting in enhanced liquidity.

Furthermore, STOKR, a security token broker, raised 4.6 million USD from large investors in a pre-series A round in March this year. The round followed on from STOKR’s announcement of the launch of Mazzanti’s security token offering (STO) on its platform.

Mazzanti, an Italian supercar manufacturer, will provide a 50% revenue share in the sale of a special edition “hypercar”. However, equity tokens appear to be the favourite among STOs. (Equity tokens are a sub-category of security tokens and you could describe them as a digital representation of shares in a company.)

Meanwhile, Sumitomo Mitsui Trust Bank, one of Japan’s largest banks, has completed its first asset-backed security token issuance pilot. The bank has converted Japan’s first certificates of ownership backed by securities into security tokens and is conducting a trial on the digital asset issuance platform Securitize Japan, a unit of Securitize Inc, a US-based digital securities issuance platform, according to CoinDesk.

Blockchains for STOs

Ethereum is the preferred blockchain to issue security tokens, according to sources. (As it was for ICOs.) However, we like one of the main alternatives: Stellar. Primarily because it is more energy-efficient, i.e. sustainable than earlier generation blockchains.

To be fair, Ethereum plans to move to the more sustainable consensus mechanism called proof-of-stake (PoS) from proof-of-work (PoW). Getting PoS right is a big technical challenge that will likely take a long time to implement fully. Possibly years. But it is a welcome move.

Final thoughts

We still believe in STOs. They are here to stay as an additional funding option for businesses of all sizes as well as tradable markets (higher risk/ higher reward) for institutional and independent traders. They are not quite prime-time finance yet, but they will be an option to consider for many businesses in the future. Especially as regulators around the world make progress on security token regulation.

The institutional interest and investments in Bitcoin and other crypto-currencies of late definitively helped boost confidence in security tokens.

(Disclosure: the author owns lumens, the Stellar blockchain’s cryptocurrency that trades as XLM.)


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Mauro Tortone

View posts by Mauro Tortone
Mauro helps financial services, technology and mobility businesses manage change and leads the Strategy & Finance practice. His expertise is in strategic change, capital markets and more. Mauro has over 25 years of experience working with banks such as UBS and Deutsche Bank, smaller financials, fintechs and others across Europe, the US and Asia. He sat on the CISI Corporate Finance Forum Committee for ten years and is passionate about sustainability.
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