With the crypto market down in the doldrums, just months after the ICO boom of 2017. It’s becoming more obvious that Initial Coin Offerings are not the killer use case that blockchain desperately needs, to firmly cement its place in the global economy. The multitude of ICO related scams that popped up in 2018, estimated at ~$100 million, left investors wary of such projects. Cash-starved entrepreneurs with audacious ideas are increasingly turning towards private investors instead of an ICO. As investors, entrepreneurs are crypto-enthusiasts alike actively search for blockchain’s killer use case, Security Token Offerings (STOs) are exhibiting incredible promise.
Security tokens picking up the pace
Enterprises have raised as much as $2 billion till date, despite the lingering ‘crypto winter’. In Jan of 2019 alone, STOs have reached 45% of the number of STOs in Q4 2018. At the current pace, it could even cross Q4 2018 highs.
Number of STOs, quarter-wise
The number of ICOs however, have suffered as a consequence of authorities imposing stringent regulations on ICO sales. In January of 2019 alone, a 200% depreciation in ICO numbers were observed, when compared to January 2018. Indicating the performance of ICOs has become lackluster. This is not to suggest that there will not be any successful ICOs in the future, but market sentiments don’t look to be in favor.
Institutional investors dive in
Professionals investors are taking a more benign attitude towards security tokens. This is largely attributed to the fact that security tokens are compliant with regulatory norms and it also grants investors rights over the company’s tangible assets like stocks or bonds. Professional investors can be useful for startups as well.
For startups, it’s easier to raise funds from professional investors than through a public sale. As conducting a public sales right now means navigating through a regulatory minefield which is time and capital intensive. Startups can also leverage the key connections, a professional investor can provide, to accelerate their company’s growth. This isn’t to say that a public sale is completely pointless, it still holds significance because a public sale is more than just raising capital, it’s about building a community of users who are excited about the technology and the company. A brief look at private funding data from the past few months reiterates this trend.
During the past four months, despite the reigning bearish sentiments, Capital raised through private funding reach unprecedented levels. Startups managed to raise an incredible $1.54 billion which is 36% higher than funds raised through ICOs sales.
Tokenized assets the future?
Traditionally the process of buying and selling assets in the form of securities is often cumbersome and expensive. To a great extent, this is due to the large number of intermediaries involved in processing a transaction. More importantly, each transaction has to be done through a trusted intermediary, who takes a fee on each transaction.
Blockchain technology could, right off the bat, enables direct peer-to-peer transactions which eliminate the need for a trusted intermediary. In addition to this, tokenized sale of assets like real estate and fine art could potentially bring much-needed liquidity into the market. This is because blockchain can enable users to transfer real-world assets by re-assigning ownership all without the need for a third party facilitating the transactions. This itself is revolutionary, as this simple change can dramatically reduce the time and cost of trading securities.
Could crypto become more exclusive?
As mentioned earlier more startups are opting to raise funds from private investors instead of going through the complex process of conducting a public sale. Blockchain was meant to break down barriers and democratize the current bureaucratic system that gives power to a select few. This empowering the grassroots ethos of the technology is what made the technology popular in the first place, but recent developments indicate this core belief is withering away and quickly being replaced in favor of a wealthy few.
Light at the end of the tunnel
In light of this trend, the crypto community don’t have to be alarmed. As public token sales are more than just a fundraising mechanism, it’s also a way to create a strong community of users. Tokenized securities, on the other hand, are poised to drive a new era of wealth creation, one that is likely beneficial for users.
Written by: Gregory S Mathew