STOs are changing the rules of the game on the two biggest “industries” of our time: real estate and financial markets.
No longer will gatekeepers preside over what investments people can and can’t get into.
No longer will businesses have to go through endless intermediaries to sell stock in their own companies, or to issue corporate bonds.
No longer will the financial markets open and close at set hours.
No longer will you need a broker to invest in any kind of financial asset.
And no longer will you need to go through months of paperwork to buy and sell property.
STOs promise to combine the best of traditional finance with the best of crypto. And how do they do it? Well, as luck would have it, that’s what we’re looking at in today’s feature.
Security Token Offerings are upending the $294 trillion financial assets market
STOs are basically one avenue of DeFi.
So if you’re looking at that sentence and wondering what DeFi stands for, it’s probably a good idea to go check out last week’s feature, which was all about DeFi, and then come back here.
As I said at the end of last week’s feature:
“perhaps one of the biggest uses of DeFi, the one that’s really going to shake up the traditional financial world, is the tokenisation of real-world assets, like property, stocks and bonds.”
And that is what STOs are all about.
They are the mechanism by which real world assets are turned into crypto assets.
For example, if a company wanted to raise money by allowing people to buy shares in it, instead of a traditional Initial Public Offering (IPO) it could have an STO.
The shares would be represented by tokens on the blockchain, and each token would have all the legal rights of a normal share. They could even be programmed to pay-out dividends.
If you owned that token, you would legally own a share in that business.
So far, that might not sound so different to traditional finance. But here’s where it gets interesting…
Once an asset is tokenised, it can be traded like any other crypto.
So, just like cryptocurrency, it can be traded by anyone to anyone, at any time, over any distance – instantly and at virtually zero cost.
Not only that, but it can be stored just like any other crypto as well. So there is no need for brokerages to store it. You can store it on your computer, on your phone, on a usb-stick, or even on the cloud.
(Although, just like with all other cryptos, it would be silly to store it anywhere other than a hardware wallet.)
Plus, security tokens have another massive advantage over traditional financial instruments… they are programmable.
STOs can be used for much more than just stocks and shares
Because security tokens are programmable, they can represent any kind of financial instrument or asset you can think of.
Take bonds for example, which are another type of security based on debt.
Security tokens can represent these, too… and bring them into the 21st century.
Let me give you an example.
Say a company wanted to borrow money for an expansion. But it didn’t want to give away any equity to do so.
Traditionally, it would issue corporate bonds. Basically IOUs that promise a set amount of interest over a set amount of time.
In 2019, over $2.4 trillion of these bonds were issued[i]. $2.4 trillion in one year alone!
That is a crazy amount of debt. But it’s also making certain parties – the gatekeepers, aka the middlemen, aka the parasites – a crazy amount of money.
To create a corporate bond, you need to go through layers of brokers, asset managers and investment banks… with their cronies taking a cut at every level.
If these bonds were instead issued as security tokens, there would be no need for those cronies, and it would save a heck of a lot of money for companies and investors alike.
A company could have an STO and let individuals invest in its bonds directly.
These bonds could then be programmed to pay out a set amount of interest at set intervals, and then pay out the principal on the day they expire.
The only cronies needed would be some lawyers to make sure the STO was all legal and above board. After that, the blockchain would take care of the rest.
And that’s not all security tokens can be used for.
STOs are also set to disrupt the $217 trillion property industry
The global market for property – or real estate, as our US friends call it – is worth a staggering $217 trillion[ii]. It is bigger than the stock, bond and gold markets combined.
But from an investment perspective, it is very difficult to get into.
If you’ve ever bought property, you’ll know all too well the amount of paperwork and middlemen you must deal with.
At each stage of your investment there is another form, another survey and another person demanding their cut.
And that’s assuming you have the right connections and the right accreditations to get in on those property deals in the first place.
Security tokens can change all that.
The five biggest hurdles to property investing right now
1. High barriers to entry
Investing in property is not easy.
In order to get in on most property deals, you need an impeccable credit rating, large cash savings on hand, and access to the right people.
And if you want to buy abroad, you’ll also usually need to make a trip out there to visit the property in person.
2. too many middlemen.
Get over those barriers and you’ll be met by a small army of middlemen…
Solicitors, realtors, insurance providers, rental agencies, mortgage brokers, banks and local officials.
They all need to be consulted, and they all want their cut.
3. extortionate fees.
As well as the many middlemen’s fees, you can also expect to fork out thousands on surveys, searches and certificates.
4. unclear equity rights.
At the end of all that, it can be very difficult to work out what your rights as a new property owner actually are.
5. Lack of liquidity.
Most real estate investments are an all or nothing deal. You can’t just cash out a bit, you have to sell the whole thing… it’s a physical building after all.
And selling a property usually takes months, or even years.
Plus, in order to sell it, you’re going to have to deal with and pay off all those middlemen, all over again.
STOs solve all those property investment problems
Just as stocks and bonds can be represented by security tokens, so can property.
A building can be “tokenised” in an STO and represented by a set number of security tokens.
These tokens are basically be like shares. But instead of a share of a company, they represent a share of a property.
And what’s more, tokenised property can be programmed to pay out rental income.
And just like any other crypto, these tokens can be freely traded by people all around the world.
1. barriers to entry are massively reduced.
No longer do you need to put up thousands of pounds to invest. Instead of buying a £500,000 property, you could buy a share of one instead.
So you could basically invest as little or as much as you liked.
2. Middlemen are cut out.
Once the initial tokenisation is set up, the banks, lawyers, brokers and agencies no longer need to be involved.
All the paperwork is digitised and secured within the tokens themselves. So, as an investor, you never have to deal with these middlemen.
And they no longer get a sizeable cut should you decide to trade or sell your tokens.
3. Fees all-but disappear
Once the STO is setup, there are no more fees to pay.
Trading and selling your tokens is completely frictionless. A token transaction takes seconds and costs less than £1 to execute.
4. Fraud is (practically) eliminated.
Unlike in traditional property investing, you are dealing directly with the property owner.
The property owner is the one who carries out the STO. They provide all the important documents and carry out all the compliance. Then they issue the tokens themselves.
Once the STO is complete and the contracts are all encoded into the blockchain, it is impossible to tamper with them. And it is impossible to forge them.
So, as long as the STO is legit in the first place, the investment is very secure.
5. For the first time in history, property becomes a liquid asset
Once a property is tokenised, those tokens are just as easy to store, buy, sell and trade as any other crypto asset.
In fact tokenised property is even more liquid than traditional stocks and shares.
Remember, stockmarkets close every evening and re-open every morning. They don’t trade overnight, and they don’t trade at weekends.
Cryptocurrency exchanges trade 24 hours a day, seven days a week, 365 days a year.
Want to cash out 30% of your investment at 10pm on a Sunday night?
All it will take is a few clicks of your mouse, or a few taps on your smartphone.
As you can see STOs have the potential to completely change some of the biggest industries on the planet.
But not only just change them. Completely re-make them.
I wasn’t exaggerating at the beginning of this piece when I said “STOs will be the biggest disrupter of global financial markets in history.”
When I first said that, I’m sure you thought it was farfetched, to say the least.
But by now, after what you’ve just read, you might even agree with me.
However, there are many great ideas that never come to anything.
So, are STOs just another “great idea” that no one will actually use?
In a word, no.
Tezos has attracted $2.6 billion in STO money in the last year alone
Like most crypto creations, security tokens and STOs sound exciting, egalitarian and world-changing.
But that’s no guarantee they will ever take off.
At least it wouldn’t be… if they hadn’t already.
If you’re a regular reader, you might remember I reported on some very big STOs happening on Tezos back in 2019.
The Tezos Foundation announced on the 30th of October that it is teaming up with tZERO to tokenise £500 million ($646 million for my American friends) of UK property.
According to the Tezos Foundation, this will be the first property-backed security token offering (STO) in the UK.
Tezos is an interesting project. Not least because of the ICO drama and ongoing court case, which I could – and probably will – fill a whole feature with. But also because of the way it’s going about its business.
It seems to be mainly working with high-profile real-world financial projects and showing how blockchain technology can improve them.
From what I can see, it wants to be “the Ethereum” of STOs.
First there was the announcement in February it was working with Elevated Returns to tokenise $1 billion of real estate (source).
And then in July, the Tezos Foundation revealed it was working with BTG Pactual, Latin America’s biggest investment bank, to tokenise another $1 billion of assets.
Now with this latest announcement, it’s clear that Tezos is becoming a major player when it comes to STOs.
So that’s $2.6 billion in STOs happening on Tezos in the last year alone.
So they are certainly getting there, and fast.
In fact, a 2019 study BlockState projects that the STO market will grow to $8 trillion by 2025, citing the World Economic Forum and KPMG.[iii]
However, after trying to find any evidence of those predictions by the World Economic Forum or KPMG I came up short. And BlockState didn’t link to its references.
Still, there is no denying the STO market is already colossal, and growing at ever-increasing speed.
And as it’s all built on crypto, that means there will be a vast amount of money flowing through certain projects.
The $8 trillion question – which cryptos are STOs choosing for their offerings?
STOs are just one of the reasons why platform cryptos – as apposed to pure cryptocurrencies like Bitcoin – are destined for greatness.
And by “platform” cryptos, I mean ones that can use smart contracts.
By being able to use smart contracts, it means other things can be created on top of them – like security tokens.
In fact, you can build far more than just security tokens on top of these kind of cryptos. But that’s a topic for another day.
So, which platform cryptos are the STOs building on?
Unsurprisingly, some 94% of STOs are using Ethereum (at least, according to that BlockState study).
1% are built on NEO.
1% are built on Stellar.
And 4% are built on “other”.
I’m guessing that either Tezos makes up 99% of that “other”, or BlockState’s numbers are a little out of date.
As we’ve already seen, Tezos has billions of dollars of STOs built on top of it.
However, it’s clear that the main leader in STOs is Ethereum. Just as it is the main leader in ICOs.
In fact, 89 of the top 100 tokens (not security tokens) by market cap are built on Ethereum. (You can see them all here on coinmarketcap).
So it’s no wonder the vast majority of STOs would also be built on top of Ethereum.
Which means, if you want to cash in on the STO craze, Ethereum (and to a lesser extent, Tezos) is the way to go.
By owning Ethereum, you’re owning the network these STOs are being built on.
Or if you want to turn it into an analogy, you’re basically owning the “land” that the global economy will be built on.
And who’s to say how much that land could be worth in the long run…
Thanks for reading.
PS This was the third and final part of my crypto industry trends to watch out for in 2020. The other two were Central Bank Digital Currencies and DeFi.
If you missed them, here are the links:
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