In the very first days of the blockchain, you would be hardpressed to find more than a few technologists willing to say a kind word for regulation.
Bitcoin’s Genesis Block, after all, includes the text of the financial crash headline from the London Times. If the world’s banks, despite millions of pages of financial law and legal regulation, could bring the economy to a halt, perhaps it was time to try something new and different. Although 2018 was a challenging year for the blockchain and cryptocurrency communities, there was good news too. One such development was the recognition of regulation.
A 2018 bust followed the boom days of 2017. In the last year, many coins failed due to regulatory challenges; Basis, for example, returned investors’ money after recognizing that U.S. laws would prohibit its operation. Basis stalled despite good intentions and smart investors, but other projects failed for more sinister reasons: Considering the laws broken and the lies told, it was no shock to learn that the AriseBank had its CEO arrested. Now, as the industry matures and we learn from 2018’s mistakes, security tokens offer a new way forward. Because security tokens are designed from the ground up to adhere to established laws, they hope to bypass both the regulatory challenges of Basis and the bad faith of AriseBank. Because they more easily fit within
And because securities law mandates scrutiny of executives, AriseBank-style scammers — their CEO had prior criminal convictions — are more likely to be weeded out before they could harm investors. Since security tokens pair the assurance of traditional securities with the flexibility and speed of the blockchain, they’ve become a major source of excitement in the community. Blockchain’s advocates and detractors alike have long called it the Wild West of the tech world. But just as law, order, and railroads arrived in the West after a period of chaotic growth, so may security tokens represent a maturation of blockchain. For its first decade, blockchain was associated with cryptocurrency. Security tokens, by digitizing ownership of everything from art to intellectual property to real estate, represent a significant expansion of the blockchain’s capabilities.
If 2018 was the year that the blockchain community began believing in security tokens, it was also the year that these tokens’ genuine challenges became apparent. Domestic securities laws are complicated enough; security tokens must function in such a way that they do not infringe the rules in any investor’s territory. In the short run, this may mean establishing geographical restrictions on token holders. Similarly, prospective buyers of security tokens may have to pass certain financial thresholds, like the accredited investor check in the United States. While some may argue that this tradeoff represents an abandonment of blockchain’s democratic roots, it is proof of the technology’s utility and versatility. Another challenge for would-be security token offerers is building a team. Blockchain developers, as we know, are in high demand and short supply.
Yet a security token firm does not succeed just on the basis of its developers; it requires individuals with deep knowledge of international finance and securities law. Security tokens could make complicated, slow, and opaque transactions simple, swift, and transparent, but this process of improvement requires a full understanding of the status quo and how rules may be interpreted.
Success in blockchain has always required expertise in multiple fields, including economics, cryptography, finance, and computer science. Security tokens, by definition, require that firms add legal insight to the core team’s strengths. While meeting external requirements, some of them based on laws promulgated well before the digital revolution, will be a major concern for security token holdings in 2019 and beyond, some questions about this new asset class have arisen in the blockchain community itself. Just as video endured a format war in the 1980s (VHS or Betamax?) and personal computing dealt with one in the 1990s (Windows or Macintosh or Linux?), there are debates in the blockchain world about which blockchain is most suitable for constructing complicated assets like security tokens. Some favor the bitcoin blockchain as the most secure, most venerable, and best known, while others argue that others like ethereum there, faster and perhaps more flexible, would be a superior choice.
I expect we will see successful implementations off multiple chains in the next few years, with potential consolidation happening thereafter. As security tokens gradually enter the financial mainstream, another challenge may arise. Because blockchain allows for the direct exchange of values between two parties, security token transactions will have fewer middlemen and, potentially, fewer safeguards. Tokens have abundant advantages, including quicker settlement, fractional ownership rights, 24/7 trading, and potentially greater access to liquidity, but the blockchain and financial industries have a duty to inform the investing public of the inherent tradeoffs.
As the infrastructure for token trading matures and as security tokens grow more familiar, it’s likely that these disadvantages will grow ever smaller. I doubt that anyone will want to return to the old way of doing things. After all, the plumbing behind traditional equities trading is decades old. That blockchain has come so far in its ten years is a wonder. It has moved from theory to practice to a
Making predictions about blockchain is notoriously difficult, but if there’s one thing that the last decade has shown us, it’s that the blockchain community will not cease questioning systems and looking for things to fix. Security tokens are the latest demonstration of this continuous cycle of self-improvement and technological innovation.