Today when we think of loan or a financial product, the
first thing that comes in our mind is bank. You want to have mortgage, go to
banks, you want to have credit card, go to bank, you want to make a deposit,
you go to bank, you want to wire, you go to bank. Though many may argue that
they use online banking but that’s still a bank and unless there is a very
strong reason for you to go to a 3rd party, you try to consolidate
financial matters through one single institute & the first choice is bank.
Their brand power, accessibility & trust factor is
unprecedented. 3rd party vendors are not more than your corner
convenience store where you go when you need something in emergency, but
weekly/monthly grocery is through Walmart or any big retail store. While price
is certainly a factor, availability everything under one roof is also very
convenient. Same is the case with bank however as opposed to big shop pricing
discount services at bank are often expensive as opposed to 3rd party. There is a premium to exchanging currency or do a wire transfer. Though
lot of it is attributed towards the fact that they can charge that premium
without churning a big chunk of their business, but the other factor is high
operational expense that they’ve to occur. While our parents were used to
banks, we’re using a combination of services to well fit our need, but it’s diluting
the dependence on bank. As the shift grows banks have to take a different
approach competing with startups & they’re well poised to do so.
While they’ve the customer base, well capitalized and have
the infrastructure & regulatory clearance.
They however may lack the thirst to innovation & are slow to move. I
however think that the best approach for them is to partner up with startups
& built a marketplace.
Now while banks have their own arrangements and partnership
for every product they offer, they do operate more like a close loop system,
but I think it’s time to change it. They should instead turn into a hub to
offer multiple services. May be like Amazon but white label. At the moment
they’re operating more like United Airways but what if they shift their model
to Expedia with a white label badge. You want to transfer money from A to B,
you’re presented with 2 options. Be there in 4 hours, it’s cost $10, be there
in 2 days, cost $1. On backend banks have APIs of startups which provide those
services and banks can use those startups to find the most efficiency way to
perform a specific service. Win for banks and win for customers. Customer churn
rate will reduce and banks will keep their branding.
There has been recent cases where banks have partnered up
with startups providing them the branding but if they do it well, they should
just actively pursue it as a business line. I don’t expect big banks to buy
into this idea soon, but the one that does will emerge as a winner and won’t
provide space to startups to displace them.
My bank of future will have very few branches and will have
partnered up with 100s of startups offering services and competiting for best
quality & cost.
I wrote about Trust & it’s importance in the last
blog post here. I’ll try to cover more on Open Financial also known as decentralized financial systems AKA DEFI. You can pickup thee
term as per your liking but as much they’re interchangeable they’re also subset
of each other depending on the reference that you apply.
An open system can be decentralized or
centralized depending on your definition of centralization & same with
openness where it could have so much high barrier to entry so it’s not truly
open. Example is being a bitcoin miner where you can’t participate unless you
run a very sizeable operation. Theoretically it’s decentralized but there are
couple of entities that control majority of the hashing power.
Trust in finance is super important
& that’s the basic of any transaction.
When you look at all the financial
system around us, we believe they’re open, but they’re not regardless if
they’re in developing or developed country. They’re operating more like silos. They
do interact but with permission very inefficiently. If you had to transfer
money from one bank to another bank in us, it’s quite doable but you’re at the
mercy of bottle necks involved in every party involved in the transaction. I still have restrictions in performing
multiple tasks that require branch visit. We do have SWIFT, Interac, SEPA &
other systems which are comparable to protocols but they’re inefficient with no
visibility into the process. There’s a
reason why majority of the world is unbanked because cost of banking is high.
There is an argument that unbanked don’t need a bank because they are poor but
in fact they’re poor because of barrier to financial tools.
To bring down cost of banking or access
to other financial tools, unbundling of the system has to be done & DeFi
makes it possible. I’ll give you example of how that can be done. Right now if
you look a the process of loan origination, there are mainly 3 parties at a
financial institute that make it happen. They’re
Debt issuer makes the business case for
the loan, while underwriter assess & approves the risk & loan, and debt
raiser finds the money to fund the loan. Though they all belong to same
institutes but there is a friction between them since they’re responsible for
their own departments. Now hypothetically what if all three work independently
and are able to scout outside their institute, that’ll ultimately benefit the
customer. Chances of success are much higher due to participation of more and
more players. Now the biggest pain point here is trust. Would they trust each
other now that they’re dealing with outsiders ?
That’s where DeFi & protocols become
important. Now I’ve simplified it a lot, but this is how it’s supposed to work.
E-Mail is based on Simple
Mail Transfer Protocol
(SMTP) which is common across the globe
so your interface can be whatever you like it be but for transmission it has to
follow SMTP standards.
I’ve been particularly excited about
Decentralized exchanges & protocols which empower small players to build
interesting applications. ERC20 based tokens on top of ethereum were a success
which lead to thousands of applications being built serving different used
cases. While different chains don’t talk to each other at the moment, but
that’s going to change in coming days.
No one size fits all and that’s the case with
financial apps too. Needs are different based on demographics so niche apps are
required to serve them well. While protocols are scary for the majority but there isn’t any neeed to be paranoid about the
utility. What percentage of people around us knows how does SMTP work. They
just use gmail, Hotmail etc. It wasn’t possible to transact online without using a 3rd party.
Decentralized exchanges make it easy. Now we have tools to hedge, lend, borrow
that are gaining popularity on the internet as well. I am very excited about
this development because it opens up the financial world to everyone with
internet access, which is billions of us. Local, national, international all
can enjoy the tools without any discrimination.
Coming back to trust issue where I laid the
importance of trust in financial transactions. Protocols make this job easy
& playing field for every participant. As long as you satisfy the protocol
rules, you’re in. Your app doesn’t need to have a track record of centuries or
decades to participate. Rules of pedigree are broken here.
Status quo enjoys the trust, regulatory
barriers & support of the top movers & shakers but soon their kingdom
will be challenged. There’ll be a revolt by the millennials where they’ll move
to alternative options which probably will be built on decentralized financial
system which is open, non-discriminatory and fair to to every one. It’ll be a
war where incumbents have to innovate, competitive to a very rare breed of
smart and intelligent engineers globally who’re building tech apps to serve the
customers much better. I expect majority
of the incumbents to give up or find intelligent ways to build partnership
& integrate into the decentralized system.
Some of these things might look alien, tails from utopia
but there is serious work in progress where transactions are growing with more
and more participation from community and institutes alike. Tech companies have
tendency to go parabolic once they find market fit & I expect this the case
here as well.
Bitcoin is considered to be too sacred when it comes to critisism in cryptocurrencies. Bitcoin minimalism has developed a cult culture where anything that comes remotely close to taking away the dominant position from bitcoins in cryptocurrency is hit with criticism. While I don’t disagree with the BTC dominance, it is hurting the growth of ecosystem. Altcoins also known as shit coins have diluted the space but they’ve a reason to exist.
My involved in the industry span over 7 years & have witness bitcoin narrative being sold shifting from transfer of value to store of value. Ethereum was at one time referred to as bitcoin 2.0 though the function & use case was totally different. As much as I love bitcoin, matter of fact is that bitcoin wont’ work with security tokens & there has to be a different chain to accommodate this use case.
Here are few of the reasons why Security tokens have a different trajectory from bitcoins.
Bitcoin is decentralized & there isn’t any restriction on who can own, transfer or mine bitcoin. There is absolutely no KYC or filter to censor any one. With STs, there is a set of regulation that gets tagged along & impossible to be imposed with bitcoins. If some thing can’t be audited & controlled, it won’t fly with regulations.
Bitcoin till date have kind
of stigma attached to that which has refrained multiple brand names and status
quo to stay away due to additional risk that may have a bad reward/risk ratio in
their books. For STs, blockchain should
come clean with no prior baggage
There is a sizeable quantity of bitcoin that are lost forever due to one reason or another. Similarly there has been incidents of hack or private keys loss. In traditional world, if you lose your certificate you can get a duplicate, but in blockchain if it’s gone once, it’s gone forever. STs must have a mechanism to reverse & fix these transactions
Reason why Bitcoin is now
referred to as storage of value is due to limited functionality. There is very
little which you can do with your bitcoins. Yes there has been forks to improve
some of the desired features or sidechains, but overall it’s like running a
bullet train on existing track. You’re losing efficiency. STs need creative functionalities which will
need an entirely new chain
Lack of KYC
With STs every stakeholder
is identified, and this process is enforced. With BTC that’s not possible and there
isn’t any discrimination between any of the participants.
This list isn’t exhaustive
but just gives a rough overview why there would be a new chain(s) that will
serve the next layer of Security tokens. Once this has been realized among the
industry, there would be more R&D into developing those protocols.
general consensus about ICO is that the days of ICO (Initial Coin Offering) are
over post 2018 crash, IEO (Initial Exchange Offering) is generating similar
kind of buzz wave. I can see lot of co-relation
between ICO & IEO when it comes to FOMO, interest, price manipulation etc.
Major difference between IEO & ICO is IEO is supported by an exchange while
ICO has to get listed on an exchange. Due to ICOs performing really bad in 2018
mainly due to lack of liquidity IEO does covers that portion rally well. While there
are only handful IEOs executed, results are very encouraging for initial buyers
with returns resonating to ICOs in early days. I expect it to follow the same
hype cycle of ICOs but on a relatively smaller scale.
cover this more in detail.
is an IEO?
exchange offering is administered or conducted on the platform of a digital
exchange also called cryptocurrency exchange on behalf of the startup that
looks for funds for its newly issued tokens.
ICOs generally use their own website or 3rd party tools to conduct the
token sale process which isn’t link to exchange. Post-sale, exchanges get involved
where they determine if they want to list the token or not. Through IEO, exchange
listing risk is mitigated.
facilitation however come with a price tag which is either a fix fee or percentage
or combination of both depending on the arrangement between token issuer &
exchange they’re using. Generally the fee structure varies from 50k USD to 500k
in fixcost plus 5-10% of the total sale.
struggling exchange business, this can provide much relief to their operations
if done correctly however they won’t like to conduct lot of them to keep the
are IEO and ICO different?
I’ve mentioned the major difference between ICO & IEO, here are the fine prints
In case of ICO, fundraising is conducted at the
token issuer’s website while IEO makes use of the platform of the digital
exchange that conducts the token sale.
The crowd sale counterparty for ICO is the
project developer but in IEO, it is the cryptocurrency exchange.
The smart contract is managed by the company or
startup conducting the token sale for ICO and in case of IEO; it is the cryptocurrency
exchange that manages the smart contract.
In ICOs, the marketing budget needed by
fundraising companies is significantly high. The project would have to invest
many resources to get the attention of the public and investors. In Initial
Exchange Offering, the marketing budget is relatively low as the exchange
actively markets the tokens of the startup.
There is no screening required before a startup
can launch an ICO but is required in IEO and the exchange screen the company
before it allows it to fundraise on its platform.
Another difference is that only after the
funding gets completed, ICOs mint their token while tokens are generated by the
project and sent to the exchange platform in case of IEO.
IEO promises higher Liquidity, transparency and
protection than does ICO.
Vested interest of exchange provide some level of oversight over the project.
crisis for ICOs
“When Binance?”is possibly
one of the most asked question in telegram channels because investors are
looking to offload their purchased tokens for multiple returns and moving onto
the next one. As if running the project itself isn’t a hard task, exchange
listing consumes both human & financial capital.
Creating a token is super
simple but listing it is super hard specially on big exchanges. Though there
are probably more than 300 exchanges globally, 1% of them own 90% of the volume
& that’s where the competition comes in. Not just that exchanges are
charging for exchange listing fee, the volume need to be significant else there
is a danger that the token will be delisted. To avoid that firms do pay up for
market making, which isn’t just ethically & legally questionable but also
financially expensive. Orphan tokens end up in decentralized exchange or tier 3rd exchanges where volume is close to nothing. As per few reports only 1 out of 5 tokens
was able to be listed. Number for tier 1 exchange is probably 1 out of 15.
It cost anywhere from $100,000 for tier 2/3 to $3M
for tier 1. There has been claims of charging $5M – $8M during the bull markets
as well. Exchange rather than specifying it as listing fee, they call it due diligence
cost. In all honesty, they’ve to perform the due diligence because they can get
into trouble by offering something that could be fraudulent.
State of IEO:
first ever cryptocurrency exchange that embraced IEO was Binance and launched
its IEO platform Binance Launchpad. BitTorrent (now bought by TRON) conducted a
token sale on Binance Launchpad in January and raised $7.2 million in a short
span of 15 minutes & generated 4X returns within days . Fetch.AI was the
second IEO on the same platform that hit a hard cap of about $6 million in 22
seconds. The Binance Launchpad was a success and how could other exchanges miss
out such a lucrative opportunity (they charge listing price and a percent of
the fund raised) as they started launching their own IEO platforms.
Singapore based major exchange Huobi jumped into the ring by launching its own
IEX platform. However, to look different from its competitors and to attract
more investors, they named their fundraising model DPO Direct Premium Offering
and is prominent for allowing users purchase crypto at a price lower than the
market price. KuCoin wanted to “reveal the hidden blockchain gem” and launched
their KuCpon Spotlight. The Malta Based exchange OKEx announced about the
launching of their platform OKJumpstart for holding IEOs on March 13. Bittrex
IEO is an upcoming IEOs scheduled to be launched in the first week of April.
vs. IEO. Which one is preferred?
in July 2013, Mastercoin held the first ever ICO initial coin offering which
was vigorously followed by many Blockchain projects fundraising in the same way
however ICOs have many flaws slowing down the progress of fundraising and this
engendered the need for other means of fundraising like STOs Security Token
Offerings and now IEOs which has actually created a buzz in the crypto world.
people might argue that IEO is the same old wine in a new labeled bottle but
that is not true. Though both IEOs and ICOs share the same rationales of IPOs
Initial Public Offerings, both are fundamentally different. What makes IEO
unique is that the project has to pass through a comprehensive assessment by
the exchanges in order to curb problems face by ICOs-Scams. This way, IEO
becomes riskless for investors to put in their money unlike what the scenario
had been during the ICOs craze when investors would invest in any ICO including
those who could offer even a white paper. This is the reason why majority of crypto
experts prefer IEO over ICO.
of RAID IEO is a best example here. Bittrex had recently cancelled the IEO for
RAID project just hours before the start of token sale. The reason behind why Bittrex
cancelled IEO for RAID was the termination of partnership between the e-gaming data
analytics platform OP.GG and RAID. Bittrex considered the partnership between
the companies an important part of the project and the termination of the
partnership simply made the token sale redundant and not in the interest of the
consumers of Bittrex.
Advantages of IEO
biggest advantage of IEO for the team/project is quick access to vetted
investors and hence funds just like the companies that after launching their
IPO initial public offerings get their name listed on NASDAQ exchange and get
access to funds. Couple of days ago I read in an autonomous research that ICO issuers
have no other option but to pay an amount anywhere from $1 million to $3
million to get their tokens listed on an exchange. Further adding, there are
additional costs as well like they have to spend on running marketing campaigns
and hiring advisors. Since exchanges still charge high listing fees and share
in the funds raised for conducting IEO, the startup/team behind the token get
time to focus on the project development and not on marketing and fundraising.
is an open secret that exchanges earn a lucrative amount of money in the form
of listing fee and share in the funds raise which further depend on the size of
the platform. In addition, IEO participants after creating an account on a
particular exchange might still roam around and ultimately become regular
investors who participate in IEOs face the least risk. They simply create an
account on an exchange and can participate and purchase tokens in any IEO launched
on the exchange instead of creating many accounts and dealing with a number of
wallets on different exchanges. Leading exchanges such as Binance make sure the
projects pass a vetted process of assessment before the token sale gets
conducted on the exchange because they do not want to loose costumers by
getting their reputation spoiled by cooperating with an illicit or fraudulent
project which means there is always a higher degree of trust in case of IEO. However,
in case of ICOs, you could be at risk if you are not good with spotting scams
and dubious projects. A legitimate exchange will never host scams so if you are
a member with one, you would face the least risk. Initial Exchange Offerings
IEOs allow investors to take part in Initial Coin Offerings ICOs with low risk.
Non-compete between exchanges
When a token is launched independently
there isn’t any affiliation with a specific exchange so it can be listed on
multiple exchanges exposing itself to lot of users. My concern is that if a
token was sold through a specific exchange there may be reluctance for other exchanges
to list it specially the competition one. While goal of crypto is to build an
open financial system, this may lead to a silo approach.
Lack of volume
While IEO does guarantees exchange
listing, it doesn’t guarantee a volume. If the volume drops a lot, there is a delisting
marketed as utility tokens, there is a chance that they’re a security in
multiple jurisdiction. In that case they would have be classified under Security
Tokens, which I’ve covered in detail here.
While there is a guarantee that
it’ll be listed on exchange, the firm offering the token may delay listing due
to any factor. Major factor would be product not being ready or bear market.
Lack of lock-up period
In case of traditional IPOs,
there is generally a lockup period for early investor but so far there isn’t
anything like this in IEO. This can
create a pump & dump scheme, so buyers beware & don’t buy into any
to become an IEO participant?
need to follow five steps to take part in IEO.
Throughout the last year,
the fame of ICO has dwindles to great extent but they still are the main mediums
for fundraising for many cryptocurrency projects. So first of all you need
to be sure if an IEO is going to take place by checking the website of the
You need to know about the
exchange that will conduct the IEO. If you are already registered on the
exchange and have a wallet, you move on to the next step. If not, you need
to create an account on the exchange in order to participate in IEO
because a token issuer may sign an agreement with only one out of many
exchanges and in that case, you would have no other option but to create
an account on the exchange.
You need to complete your
KYC Know Your Costumer which is an anti money laundering AML procedure.
Once you are registered with an exchange, you would have to go through a
sought of verification procedure to reduce security risks. You need to do
it as soon as possible because it may take the exchange some time to get
your identity confirmed.
Now you need to find out
the crypto option that is available. You normally have the options for ETH
Ethereum and BTC Bitcoin over the exchanges except for some in the likes
of Binance who go with their own tokens.
Finally, you need to wait
for the time until your Initial Exchange Offering IEO starts. Make sure
you are present minded and do not miss the token sale for it might only
last for couple of minutes or may be less (the case of Fetch.AI).
The next fundraising boom?
Back in 2017 & 2018, ICO engendered a fundraising boom
in the crypto space but a notable number of ICOs were conducted by scammers,
looted investors who blindly trusted every ICO and this was the sole reason why
ICOs lost their glory and prestige. In addition to ICOs with dubious nature,
ban on ICOs in countries like China, Macedonia, Nepal and Ecuador exempted a
big source of funding for the startup and companies who wanted to fundraise for
their tokens. Since IEO ensures provision of high level trust, security,
project credibility and instant fundraising, it is no doubt going to engender
the next fundraising boom in the crypto space and hence will become the
standard model for raising funds.
said that, one might argue that there is nothing like a perfect crowdfunding
model/mechanism because since Mastercoin till the present day IEO, we have been
seeing so many crowdfunding mechanisms with ICO the most prominent among all but
due to the arrival of IEO, even ICO looks in hot water. Things can change. We
have seen things getting flipped 180 in matter of days. Who knows about the
future? The life span of IEO could be shorter than that of ICO as well. It
depends on how advanced the new crowdfunding mechanism is. A more advanced CFM
than IEO will no doubt dwindle the prospect of survival of IEO. But for now, the
perks and benefits promised by IEOs are way too lucrative to be ignored and as
a result, it will take priority over ICO but I still think STOs are the way to
go for any similar offering.
The velocity of an object is the rate of change of its position with respect to a frame of reference and is a function of time. Simple example is car travelling at 100 mph. Though it’s a concept of kinematics, relevance can be derived in economics and more specifically in tokenomics.
In tokenomics, price of token is directly linked to usage. However, usage isn’t the only metric & this is where velocity comes into play. Gyms operate on a 100X principal to be profitable. They’re looking to get 100 times memberships than the capacity because they know not everyone is going to show up at same time, but if they do they’ll in trouble. What if a single membership is valid for 1 person at any given time & people can share it. This will lead to 99% drop in their memberships collapsing their 100X model.
Basic premise with respect of membership is that it’s linked to an individual person vs individual usage & isn’t transferable. In case of tokens, this model does have a flaw because they’re so easy to transfer. Take an example of gym where a company issued 1000 tokens for a gym with a capacity of 10 people. Now there is an intermediately company which bought 10 tokens & setup a rent-seeking program where users can rent whenever it’s needed. In this case, gym business has been screwed. None of the users have incentive to hold membership because they can borrow it whenever they want.
This is where the concept of token velocity comes. Since the basic promise behind holding a token is that you get something in return. Now the question is whether these returns are perpetual or one time. If it’s one time, then there isn’t any incentive for the owners of the tokens to hold them but if they can be flexed over time, they would have incentives to hold them as long as they see the benefit.
Similar to automotive mph term, here it’s uot which stands for “usage over time”. More usage in a short span of time leads to higher demand & lower usage over the same time would lead to lower demand. Usage is directly correlated to demand & result into price changes.
One Time Returns could be:
– Accepting cryptocurrencies to facilitate customers or attracting a new set of customers. Seller don’t have to hold it because the benefit has been reaped & is one time only
– Accessing a network to perform a single usage action without preserving your history. Example would be buying a concert ticker which is one-time event. You may attend other concerts but there would absolutely no correlation between both of them
– Proof of Work (PoW) tokens, miners can immediately sell it because the output has been achieved
– Transfer of value where a company requires a payment in specific token and you only purchase it for that specific payment.
– Stake in decisions that you’re passionate about. More like a voting power. Example would be uber drivers earning tokens & have a say in the company policies based on how many rides he has completed and similar rights for the riders.
– Right to participate in a network without transfer privileges. Example is having a membership to a club where you can’t transfer your membership. If you decide to give it up, it’s burned and never available again.
– Identity management in the network. You may use Facebook once a day however you want to preserve who you’re & despite the concert example given above your identity does matters
– Novelty or exclusivity where there are only a specific number of people allowed into the network. Once it’s closed, you can’t participate anymore.
– Pedigree building where companies incentivize long term holders. More like a loyalty give away. So, if you’ve a token of a movie theatre for 5 years, you’re allowed to book the best seat
– Profit Sharing. If the network is growing and sharing the economic upside with the token holders, they’ll hold the tokens to reap the benefit. It’s similar to dividend paying stocks
– Price appreciation. If there is an economic upside with holding tokens that’s based on fundamentals, users would like to hold the tokens. All praise to the rising sun however it does lead to plateau or crash after a while if the fundamentals aren’t there.
– Secondary benefits such as discount at a restaurant if you hold a specific gym membership
– Discounted network spent where if you earn tokens within the network & spend it back into the network, you get a discount. Example would be Airbnb allowing host to get 100% off on the fees AirBnb charges if you spend you don’t withdraw your earning.
– Discount on company products if you’re holding their tokens. So if you’re amazon token holder, you get 50% discount on the profit that amazon makes off that sale
Since tokens do allow frictionless transfers, they would come up with schemes to reduce token velocity. With higher token velocity, they’ll struggle with building an ecosystem and it’ll have a negative impact on their pricing. It’s the network strength & demand that can allow them to decrease token velocity. Ultimately if a token is so strong that it does start acting as an asset class that’s where the companies will be able to grow exponentially. Companies will have to look into the velocity problems to encourage long term holders for non-speculative reasons.
A securities offering (or funding round or investment round) is a discrete round of investment, by which a business or other enterprise raises money to fund operations, expansion, a capital project, an acquisition, or some other business purpose. A securities offering (or funding round or investment round) is a discrete round of investment, by which a business or other enterprise raises money to fund operations, expansion, a capital project, an acquisition, or some other business purpose.
would be a process to move traditional assets to blockchain & evolving the
way assets are issued, traded, held & transferred. It’s a work in progress
with blocks built around it to support the ecosystem.
There are many steps involved in security tokens but here are the 6 basic ones
1 – Asset
First step to find out the asset that you want to tokenize.
They could be anything from gold to equity to real estate. For sake of ease, I’ll
use the Real estate example since that’s the most lucrative asset class that can
be used in STOs. There is an economy of scale that isn’t available to retail
investors plus it’s considered to be the safest among majority. Results are not
the greatest but significantly low risk/reward along with the perception of
physical asset makes it the favourite.
Real estate is a 265 Trillion dollar asset class & only 1% of it is semi-liquid or available to retail investor through complex REIT structures
It’s combination of pitch deck & business plan. Once you’ve finalized an asset, you’ve to put down all the pros/cons, risks & rewards on paper. Make sure you’ve kept a contingency & buffer in all your calculations. Rewards always is late since things always cost more & take more time. Be super conservative while putting together the numbers. If you’re able to pull off better results, you’ll make your investors happier but if you’re not able to perform, you’ll have many unhappy customers. As they always say “under promise & over-deliver”. While you may have in-house capabilities, it’s very important to have an independent outside assessment of the project. Brand name accounting or valuations firms are expensive, but they’re well known & does add a high degree of trust in the offering.
3 – Technical
While Blockchain may looks like an alien term to many, it’s fairly easy to launch an STO from technical stand point. It’s almost like setting up an email account. You would need basic information & token platforms have written extensive guides on it. I’ll compare token platforms in a separate blog post. It would be good idea to connect with each of them & assess them. It shouldn’t take you more than 3-4 days in this step. Just make sure you’re credentials are protected
4 – Legal
This part should be taken super seriously since you can land
into lot of trouble by not having proper legal advice on your offering. Security
offering is overseen by multiple regularity bodies but the most important is Security
Exchange Commision ( SEC). Ontario Security Commision ( OSC ) oversees activities
involved in Ontario. There are similar organization in every jurisdiction.
While offering Security tokens, you’re not just limited to your incorporation jurisdiction
but also the investor or even the asset existance. Example is you’re a Canadian
Citizen tokenizing a building in Sydney while you’re firm is incorporated in
Singapore & your investor is an American Citizen based in Barbados. Now you’ve
to make sure you’re not breaching terms of either of the jurisdictions, in this
case Canada, US, Australia, Barbados or Sydney. To simplify it, you’ve to set a
high bar for participants & a good security lawyer would be able to guide
you through. Keep around 30-45 days for this step.
Here are couple of things that you would’ve to deal with while
launching an STOs
Determine the best structure for the STO
Review & draft the rights, dividends language used
Preparing a compliant private placement memorandum ( PPM)
Preparing a purchase agreement for the buyers
Investor qualification questionnaire involving KYC/AML & accreditation process if required by the offering
Filing the report with the SEC or respective regularity authority
Now you’ve to get people interested in your STOs. While you
want to be aggressive in reaching out to as many people as possible, you may be
limited by who you can offer this because of the accreditation limits imposed
Here are the accreditation requirements
An annual income of over $200,000 individually,
or $300,000 with a spouse, maintained over the previous two years and with the
same expectation for the current year.
Net assets worth upwards of $1 million, excluding
the primary residence (unless more is owed on the mortgage than the residence
An institution with over $5 million in assets —
e.g. a venture fund or trust.
An entity made up entirely of accredited
Recently few liberal policies have been
introduced to allow non-accredited investors to participate, but it does have its
own limitations. Transparency should be the top priority & there isn’t
anything like limited information.
Investors are generally lazy & for REITS
they’re fairly conservative. Your marketing plan should be so clear, concise that
it doesn’t requires a PhD in finance to understand it. Provide as clear &
concise information as possible. I’ll share some templates on building a good
prospective, but here is a good guideline on what to include
Legal disclaimers and any other key legal notices
The details of your product
An overview of the industry you operate in
The architecture of your product (technical)
The model of your business and your structure
How you intend to market your solution
What your Tokens are backed by, including any other forms of security that are applicable
Details on how the Token can be used and the economics behind it
The members of your team and who your technical advisors are
6 – Fund raising
Once you’ve the marketing plan ready, you’re now ready to launch. While it probably be an online process, you should’ve built a momentum offline. There is nothing worse that launching an offering with 0 contributors. Good rule is to have at-least 25% capital committed before hand. Once you’ve launched it, there should be an influx of early contributors to build the momentum. More tips on this specific topic in upcoming blog posts. It’s very important to have a way for investors to ask questions. You can host webinars or Ask Me Anything (AMA) sessions. In case of ICOs companies were keeping a full time community manager to manage social media & messaging apps, but that may be excessive in case of STOs.
Be transparent, conservative, concise &
Over communicate with the buyers.
KYC/AML check on your buyer
3rd party audit of your offering
Use vague language,
Provide assurance of guaranteed result
Offer a high risk/reward ratio product
Solicit investment from non-accredited investor unless you’ve
Sell without legal preparation
I hope this’ll post would’ve
helped you in getting ideas on process required to launch an STO. This guide
isn’t extensive, but I am launching a podcast & book that would entail lot
of information. Subscribe on my website to be informed when it does launch.
While the entire process looks fairly complicated, I am happy to give my feedback or chat about your ideas. Use the link below to contact me.
Thoughts of storing your cryptocurrency wallet is a scary one for the majority. There has been countless stories on how people funds were stolen with no chance to recover. Have you even looked at the process to send bitcoin from one person to another.
Number of digits that you’ve to write is insane. It’s literally impossible to type them & then only option is to copy/paste. I even still till this date, have to verify couple of times & also sweat till the funds arrive in the right place.
From trading cryptocurrencies, storing or sending funds & understanding the basic concept, we are missing out on a very wide audience due to complexities involved. Not many people go out to make their life miserable in pursuit of a better solution. As many have spoken about similarity between internet & cryptocurrency early days, I’ll recall my experiences here as well.
I got my first computer on June 9th 1998 which was a Pentium I with MMX technology. I vaguely remember the specs which were a 28.8 kbit/s, 2GB HDD, 4MB graphics card & a nice casing. I remember I had to source & wait for individual items since I was living in Peshawar.
Most interesting was the idea to get connected to internet.
Getting an internet connection was fairly straight forward but there wasn’t many free email or website providers. I remember registering a domain in 1998 through network solutions who sent me a bill later. There weren’t too many options when it come to free email & my ISP ( internet service provider) was proud of offering one for a very low monthly fee.
Here are some interesting things that I can recall
Internet was by the hour in addition to monthly subscription fee
There was different pricing for off-peak & peak hours.
I had to pay my landline company every-time I initiated a connection
You can’t use the telephone line while you were connected to internet
There was a minimum usage once I connected to the internet so even if I logged in for 2 minute, i’ll be charged for 15 min.
There was a famous handshake sound produced whenever the connection was being established. I hated it since I didn’t want any one want to know.
I wasn’t sure if I’ll be able to get through since the ISP had a fixed capacity. It wasn’t uncommon to hear & very frustrating
It took 30-60 seconds to connect. Not to mention it took couple of minutes to turn on my computer
Internet speed was around 14.4 kbit/s. In comparison today I am using 1gbps internet. 14.4 28.8 kbit/s is 0.0000144 gbps. It took over 90 minutes to download a 10MB file. Today it’s less than a second.
While Internet explorer was the default browser, I preferred netscape navigator. Netscape is considered to be “best tech product of all time”. I’ve gone from Firefox, chrome to Brave now.
There was no wi-fi so no more using the internet in the washroom.
Interestingly there are still couple of million dial-up internet users in North America today. To be honest, it wasn’t a great experience to use internet at that time, but it grew exponentially because it offered something never before. You can send emails, get updates in real time and do a video conferencing.
I got introduced to internet when it was already penetrating into house hold however still the experience wasn’t the greatest but the alternatives were even poor. In early 90’s it was super limited to a small group of geeks who had to jump hoops to get anything to work.They were versed with the concepts of TCP/IP, FTP, SMTP, POP3 , HTTP, IMAP etc, but it’s not something that was a barrier for me to enter.
Internet was written off by many pundits around that time but it has totally redefined how we live our lives. It has removed barriers in building and sharing ideas. It’s very easy to imagine now how you can order a taxi from your phone, but it looked like a fairy tales 2 decades ago. I am confident that blockchain will be able to remove barriers to build innovative financial products for the masses. Technology has direct co-relation with the improvement of human lives & once the impact reaches globally, we’ll live in a much better world.
We’re still in early days of discovering & solving problems for the financial world. Blockchain is an important component of that discovery. It’s an evolution & I am excited to experience it. We’re getting better day by day !
How many of you experienced the dial-up internet. What’s your favourite memory ?
Security Token Offering can be best defined as a “Public-Private” security offering that utilizes regulatory body framework such as Securities and Exchange Commission ( SEC ) or Ontario Securities Commission ( OSC) to offer investment products via blockchain technology.
A securities offering (or funding round or investment round) is a discrete round of investment, by which a business or other enterprise raises money to fund operations, expansion, a capital project, an acquisition, or some other business purpose. A securities offering (or funding round or investment round) is a discrete round of investment, by which a business or other enterprise raises money to fund operations, expansion, a capital project, an acquisition, or some other business purpose.
STOs would be a process to move traditional assets to blockchain & evolving the way assets are issued, traded, held & transferred. It’s a work in progress with blocks built around it to support the ecosystem.
Background of Security Tokens:
Blockchain, cryptocurrencies, bitcoins, smart contracts aren’t alien terms anymore. Information is at all time high but there is a fair bit of noise on the benefits with thousands of companies finding the use cases for this revolutionary technology. While there has been interesting technical progress, there hasn’t been a killer case which would attract industry wide adoption. Exciting news on how the industry is progressing is a weekly affair but it rarely has put a dent on world economy more than pure speculation. Bitcoin did emerge as a libertarian movement with a promise of banking the unbanked, revolution against the status-quo, decentralized system with no manipulation but so far there is very little to show. Despite all of these there isn’t any reason to write-off this industry, because we’re still in infant stages. It’s a work in progress for last 10 years & it may take maybe a decade before utopia dream is fulfilled. Digitisation had a lot of impact on our daily lives in multiple sectors but financial industry is far from perfection when it comes to frictionless banking. I still have to go to bank to do a wire transfer & it takes couple of days for funds to get to other end at a exorbitant cost. Counter-argument would be that the banks are already digital & majority of the people don’t go to the bank anymore, so we’re on the right track. I take cryptocurrencies as an experiment lab or a sandbox where ideas can be tried, tested & could be launched into masses if successful. Current regulatory environment is fairly conservative when it comes to investment product or any other financial instrument. It’s either due protection of consumer or status-quo, that’s a different discussion, but it is what it is.
We’ve seen the exponential rise in cryptocurrency valuations, institutional interest through acquisitions & whopping billions dollar of raise in Initial Coin Offerings ( ICOs). ICOs could be simply explained as pre-prepaid credits in a game that was sold before the game was launched. It was fine till recently there were issues with this model.
The game was never launched
these credits were trade-able way-before game launch leading to speculations & hype.
That ended about 10,000X returns in few cases & 99% loss in value from All Time High(ATH) in extreme cases.
Fear of Missing out ( FOMO) is a common term in which a person gets into a deal without due diligence because time clock is kicking in. Majority of the time it doesn’t end well. This FOMO lead to retail investors buying useful tokens of every kind. Doge currency was created to make fun of these tokens but that lead to 1.5B in valuation while the creator clearly mentioned that it’s a joke. In an another case a person clearly mentioned that he is creating a useless token with no use however people still bought them. Around that time Ripple CEO was worth more than CEO of Facebook. While these tokens were marketed along the lines of prepaid tokens, they clearly weren’t. This is where Security Exchange Commission (SEC) & other regulatory bodies jump in.
Despite the legal language used in building analogies around network usage, setting up non-profit foundations in friendly offshore jurisdictions, taking shelter behind fancy buzzwords such as open-source software movements, decentralisation, blockchain 99% of them are securities & I’ve doubt about the remaining 1%.
There is a famous duck test,
“If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck”
This term was popularised in the US during the cold war in 1950 when Richard Cunninghand Patterson Jr, US ambassador to Guatemala at that time accused Jacobo Arbenz Guzman government of being Communist. These were the exact words “Suppose you see a bird walking around in a farm yard. This bird has no label that says ‘duck’. But the bird certainly looks like a duck. Also, he goes to the pond and you notice that he swims like a duck. Then he opens his beak and quacks like a duck. Well, by this time you have probably reached the conclusion that the bird is a duck, whether he’s wearing a label or not” In 1946, Supreme Court heard a case that set the precedent on what’s a security
It is an investment of money
There is an expectation of profits from the investment
The investment of money is in a common enterprise
Any profit comes from the efforts of a promoter or third party
If either of the above points satisfies during a financial transaction, whole new set of requirements kick-in. Entity is bound to register with the Security Exchange Commision ( SEC) regardless of whatever they think they’re. SEC only however generally looks over cases that involves US entities but other countries follow similar guidelines in their jurisdiction. Despite billion in funding ICOs have very little to show. Lack of investor rights, governance structure & geographical restrictions people are left with these useless tokens, but SEC has intervened in multiple cases leading to fines, capital return & other punishment. I expect them to rise, however despite all this drama, there is a very good case for issuing tokens that are actually securities but still have the benefits that a token provides. There is where Security tokens come into play which will have the legitimacy of a Initial Public Offerings (IPO) but flexibility of ICO ( Initial Coin Offering ). Welcome Security Token Offering (STO).
There is a capital scarcity when it comes to private markets for small & medium business (SMBs) . Just to talk in terms of numbers, there are 28 Million small business in the US vs 3671 publicly traded companies. Number of public companies is decreasing year over year & this trend will continue to drop due to complicated nature of managing public market listings. SMBs are the backbone of any country economy & 70% of new job creation is due to them, but still they suffer growth due to lack of capital available. There are Venture capitalists, predatory lenders, angels & limited public after JOBS act, but that’s still a very limited segment. If they are able to access debt in return for a fractional ownership in the firm, that can be traded back & forth, it will get them out of the capital drought. It could be debt, equity, convertible note or combination of these but important point is access. This could lead to trillions of dollars in economic benefits.
Real estate is considered to be the best & safest asset class however it’s expensive to own. We’ve Real Estate Investment Trust ( REITs), but they’re still fairly out of reach for the masses. Real estate globally is worth around 265 Trillion but only 1% is accessible through these complex REIT structures. Security Token offering can remove lot of overhead making it flexible, simple & convenient for average investor to participate in an potential economic upside event. Lot of investments currently require the investor to have an accredited investor status despite there isn’t any relationship between IQ & wealth, but net worth does serves as a barometer for qualification of investor acumen. There is an argument that it’s not an acumen test but more of a ability to sustain loses. If that’s the case why isn’t a test before entering a casino or any high-end luxury store. No one gets inquired of his/her financial health at the gate while entering these establishments. If these high-risk or luxury establishments aren’t bound to do a background test on the consumer ability, why should a potential upside event be restricted ? Regardless of whatever I think, it’s a law which I respect & abide. This is where I think Security Tokens will make a lot of sense since they can solve major issues around public markets abiding with the current financial structure yet flexibility of tokens.
Here are the 20 major reasons to make a business case for Security Tokens to exist
Elimination of 3rd party services
Real-time ownership reconciliation
Expansion in the offering options
Larger investor base
Front running avoidance
Ownership Proof/ Title
90% of the assets in the world are illiquid. It’s not possible to get in/out quickly without accruing significant slippage and/or paying a significant fee.Though liquidity is referred to as speed at which you can trade an asset, however it’s much more than just the speed in practice. Another parameter is also cost. Example is that you may be able to sell your house within 24 hours but that’ll be generally classified as a distressed sale & will lead to a loss in comparison if you wait. Price difference delta between distressed sale & regular sale is the liquidity discount that you’ve to offer. Other impact of these sale is that it lowers the bar for fair market value ( FMV) of similar houses in the vicinity.
In comparison you can trade Microsoft stocks at market value during business hours without having any major impact on the market prices by paying a very small fee. Now there are fractions if you’re a whale and cause market crash. Take this further with cryptocurrency which you to trade even a fraction round the clock.
Total world assets are 700T, but less than 10% of them are liquid. If Security Tokens are able to turn them liquid, there would be trillions dollar worth of economic activity generated.
2. 24/7 markets
Majority of the traditional exchanges operate between business hours such as 8 – 4:00 am in the morning with respect to local time zones. They’re closed during the holidays so if you want to make a move while having Saturday dinner, that’s not possible. Tokens on the other hands are tradeable 24/7. Due to the nature of STOs, it would be possible to trade them round the clock even on Christmas eve.
3. Fractional Ownership
It’s impossible for 95% of the world population to diversify into more than 2 investment classes due to high unit costs but if there is a mechanism to buy a small ownership, it’ll attract a whole new set of investors effectively increasing liquidity & raising premiums. Now in case of equities, there are options to buy them from public markets & similarly you can buy publicly-traded or private market RIETs but an estimated 99% of the real estate assets isn’t available through either of these tools. There would also be ability to make profits when the markets are going down rather than just buy & hold strategy and capture the gains with appreciation. Retail investors are unable to balance their portfolio to de-risk their investments across multiple assets, but availability of vast set of liquid assets would allow them so. Ultimately, it’ll lead to more efficient markets
4. Immediate settlement
There is a time difference between when the actual trade is executed & settled. Example is buying a house today but paperwork, transfer of funds & ownership might take 4-6 weeks. Even in stock exchanges, though you’re able to trade immediately, it’s usually 2 business days (T+2) before the owner get his hands on the purchase. It used to be 3 days but reduced to 2 in 2017. With STOs there should be a possibility of execution & settlement at the same time.
5. Elimination of 3rd party services
Blockchain has the potential to increase settlement speed for securities, but it’s more complicated than a comparison to cryptocurrencies. The degree to which these processes can be automated through interoperable smart contracts will determine the gains in settlement speed. There is a moral hazard with the usage of these companies since they can manipulate with insider information & little oversight on governance matters. With an open system, there’ll be a more transparent, fair & balance playing field.
6. Real-time ownership reconciliation
Even though the trade Trading books are balanced by the end of day. It’s costly & not optimistic. After stock issuance, there is a bundle of paperwork that goes in producing friction that leads to inefficiency. Contractual features including but not limited to liquidation preferences, depositories and depository participants management and drag-along rights etc could be easily calculated making it simple for the participants to decide their risk-reward ratio. Through STO, there would be a chance to have a real-time asset reconciliation in a transparent manner.
7. Cost reduction
There are massive costs associated with operating the exchange which could be reduced by having a lean-operated STO exchange. These smart contracts will reduce the complexity, costs and paperwork with managing securities (collecting signatures, wiring of funds, mailing of distribution checks, collection of W-2s, Sending K9s, etc).
8. Compliance automation
KYC & AML policy are the two most basic compliance things any financial institute has to take care of. There are two major frictions in the current system
Legal Restrictions Financial institutes have to filter out the people who’re ineligible to be involved in the transaction mostly due to regulation. These restrictions could be due to buyer financial profile, industry, jurisdiction of transaction/seller/buyer or past history etc. Failure to abide can lead for serious repercussions. It slows down the onboarding process.
Complex chain of stakeholders There is a chain of stakeholders who’ve to be on the same page during the transaction. Lawyer, government, accountant, exchange is to name the few and all of them have their own of reconciliation which leads to inefficiencies in terms of cost & time. Unless & until all of them can match up their record, it doesn’t go through.
With blockchain, every transaction can be downloaded or broadcasted in a standard format in real time which should be able to make this process more efficient. Customers can get an ID that is verifiable by any party in real time at time of settlement. Currently, you’ve to create an account in every exchange that you use but in future you only provide ID if requested.
9. Expansion in the offering options
Currently there is a very rigid set of requirements to be listed on these exchanges, but in future it might change because companies would be able to innovate on compensating their investors. Staking, proof of work, token burn, forks are few of the unique innovations that has been used to reward investors by the current token offerings.
Financial institutes are generally a storage for your assets and issue you I Owe You(IOU). This increases the risk just if incase a FI goes into default. Beauty of cryptocurrency is that owner can hold the private keys & no 3rd party can seize them. With STOs, investor would have ability to control and take custody of the tokens. He isn’t obliged to store them with any 3rd party if he doesn’t want to. In unforeseen condition such as war, he can transport them himself.
11. Vested Stock
There might be interesting structure for the long-term holders if they lock up their tokens. This effectively reduce the sell-pressure & encourage the company to thing big & focus on long term strategy. Firms can issue more stock in shape of interest to vested folks where if you lock the token for suppose 12 months, you can 2% in extra tokens towards end of year.
12. Pedigree proof
It’s really tough to invest into the top funds or private REITs because they keep it private. Mostly it’s because they don’t want to deal with the headache of onboarding & dealing with new Limited Partners or backers. It’s a relationship play. In regular markets, it’s hard to establish trust & have inroads if you’re trying to get into these funds. Through STOs an investor would be able to prove that he already owns ABC stock for 5 years & that might break the ice. As an investor, I do have to sell companies on taking my money if there is a good interest. I usually do that by telling about my portfolio or testimonials from the founders I’ve worked with. Through STOs I can just show proof of ownership to build the pedigree. A company can also put a restriction to raise money from people who own specific tokens already to maintain the pedigree. Ferrari is a good example of maintaining the exclusivity since they don’t generally sell it to anyone & in few cases you’re required to show a track record of ownership before getting special editions.
13. Preferential treatment
There is a big disconnect between company stock holders & customers. If you work for a company they generally have perks for using their own products, but in case of stockholder no such perks exists. Now, through STOs it would be easy to establish proof of ownership & be entitled to some perks which can be restricted by how long you had them & point. I may buy stocks of airlines I travel on to get into the line first or utilize a dedicated lane at grocery store. Through STOs, businesses will be able to encourage their users to hold onto their tokens which results in stronger brand following.
In private capital, there are different classes of shares with “common” & “preferred” as being the most popular however there is option to have exotic stock structure. In public markets, it has to be the same but through STOs, there is an option to create different STOs for the same asset well suited for the investor type. Commonly investor is either looking at appreciation play or seeking dividends. Ideally he wants both but that isn’t possible in a practical world. Company can separate both type of assets by issuing two types of STOs at different price. You may want dividend so you can purchase stock at a different price than someone who just want to hold for long term. At the moment, it’s somehow built into the price but a clear separation would make much easier for retail investors & help company with their growth plan.
15. Debt restructuring
Debt financing have sunk ships for many businesses. Delay in permits or any other hurdle that temporary caused borrower to default on payment has lead to disaster for many. It’s not an ideal outcome for neither the borrower nor a lender however options are limits. Through tokens debt can be restructured very easily automatically. Imagine you gave someone a loan but he is unable to pay the payments such as in house cases. In this case the bank takes over the entire asset, but what instead of that, bank keeps on adding the default payment towards the loan. In STOs, upon debt issuance, tokens of the assets are pledged towards the loan & in custody of the lender. Effectively borrower is buying back those tokens. If borrower is unable to buy back token at a scheduled time, lender will repossess tokens worth that missed payment providing better breathing space in tough times. It’s fairly complicated in current scenario but through smart contract all of this enforceable & Security Tokens would be really effective at this.
16. Global assets
Access to majority of the assets is limited by geographical limits. It’s impossible or very difficult to invest in Africa from Asia for a retail investor. Approximately 97% of the global assets are inaccessible for entities outside the geographical limits. Security Tokens do eliminate that by empowering companies globally to build an STOs and raise capital. There would be less requirements to issue STOs.
17. Largest investor base
In order to trade on New York Stock Exchange ( NYSE) or NASDAQ investor has to go through a set of stringent requirements which crypto exchanges on the other hand are able to onboard customers globally with excluding sanctioned countries of course. STOs will be able to open doors to these assets to investors globally. This’ll lead to more healthy competition.
Every company wants to list in NYSE or NASDAQ despite them US not being their biggest market. This being said, US economics has impacts on the company valuation which is totally uncorrelated to company’s operating jurisdiction. With Security Tokens, there would be a global set of investors with different sentiments leading to more stabilized markets.
19. Front running avoidance
Front-running also referred to as tailgating is the practice of a broker or trader stepping in front of large orders to gain an economic advantage. It’s a prohibited practice of entering into an equity (stock) trade, option, futures contract, derivative, or security-based swap to take advantage of a confidential information that has impact on price. Multiple times bad actors get away with it due to lack of data availability required to establish a proof. Another reason for this is unfair access to market for different participants. Blockchain treats everyone the same & the books are open, reducing the chances of front running.
20. Ownership Proof/Title
Whenever you’re acquiring an asset, you generally go for a title check or get a title insurance to make sure the asset is free of any liens or disputes. Blockchain can track back the ownership transfer from inception without the fear of record being forged.
Majority of the ideas here are not solely linked to tech but also are restricted due to regulation. I consider STOs as being the sandbox for next generation of Securities. They might eventually be offered by traditional exchanges or can operate totally separately where companies graduate from these STO exchanges into the top exchanges.
If Bitcoin is programmable money, then Security Token is a programmable ownership. They do add improvement to current security industry which may be frowned upon status quo but eventually be able to prove it’s worth & get institutional support.
Security tokens would new way to build, fund & grow companies & it’ll happen quicker than many people anticipate.