The multiple promises of security tokens have been widely described by a variety of commentators in a series of articles extending back even prior to the so-called ICO boom of late 2017. As Smith + Crown has explored elsewhere, the ensemble of arguments in favor of the promise of a security token future, one that many saw as a virtually inevitable outcome, are built around several core ideas. These include the promise of increased liquidity, reduced transaction and issuance costs, fractionalized ownership, programmable compliance, the ability to democratize access to a wide range of non-traditional assets, and ultimately the ability to create new investment vehicles and company structures. Collectively, these advantages have repeatedly been described as virtually ensuring that security tokens play a central role in the future of capital markets.

Issuance and Volume Remain Underwhelming

While the above descriptions are broadly appealing, the realities of the security token ecosystem continue to be largely underwhelming. This is true when considered either through many of the traditional lenses through which investment and market activities are generally assessed--metrics as funds raised, completed issuances, and trading activity--as well as through the particular promises associated with security tokens. The charts below illustrate the continued underwhelming performance of the security token space.

The graphs above suggest the vision of security tokens has not come to pass. The flow and scale of transactions has not notably increased and remains dwarfed by traditional fundraising in crypto and outside of it. To be fair, the infrastructure required to enable this vision remains incomplete. Despite this, he past quarter witnessed a number of developments and announcements that demonstrate both that the groundwork for the security token ecosystem is still being laid and quiet momentum in laying it.

Q3 Developments: Quiet, Broad-Based Infrastructure Development

BnkToTheFuture announced it will launch a security token offering (STO) service, focused on corporate finance advisory.

announced it will launch a security token offering (STO) service, focused on corporate finance advisory. INX Limited aims to launch separate security and utility token trading platforms and will register as a broker-dealer and Alternative Trading System (ATS). The INX token, to be sold in the first instance of an SEC-registered security token sale, entitles holders to 40% of INX’s net operating cash flow and a 10% discount on security token trading fees. The offering is open to all investors, subject to a KYC process.

aims to launch separate security and utility token trading platforms and will register as a broker-dealer and Alternative Trading System (ATS). The INX token, to be sold in the first instance of an SEC-registered security token sale, entitles holders to 40% of INX’s net operating cash flow and a 10% discount on security token trading fees. The offering is open to all investors, subject to a KYC process. MERJ, the national stock exchange of the Seychelles, launched a tokenized sale of its equity via a blockchain-based IPO. 1.65m shares will be issued at $2.42 per share, valuing the firm at $25M. The shares are available for purchase through broker-dealer Jumpstart, custodian Prime Trust, and MERJ itself through November 2019.

Securitize, a leading provider of technology for the issuance of security tokens received approval from the Securities and Exchange Commission (SEC) to operate as a transfer agent for security tokens. Securitize also announced a $14 million series A round with strategic international investors. The list of backers further includes the Tezos Foundation and Algo Capital VC, which participated as part of collaborations to put digital securities on the Tezos and Algorand blockchains.

a leading provider of technology for the issuance of security tokens received approval from the Securities and Exchange Commission (SEC) to operate as a transfer agent for security tokens. Securitize also announced a $14 million series A round with strategic international investors. The list of backers further includes the Tezos Foundation and Algo Capital VC, which participated as part of collaborations to put digital securities on the Tezos and Algorand blockchains. Six major Japanese brokerages formed an STO Association to devise rules and guidelines for the issuing of security tokens, and to engage in lobbying efforts. The association will complement the efforts of existing trade associations such as the Japan Security Token Business Association that was formed in January and the Japan Security Token Association that was established in May.

Harbor, which recently pivoted from security token issuance to the tokenization of existing securities, issued ERC-20 tokens representing shares of real estate funds worth $100 million, previously managed through iCap Equity. Per iCap’s legal structure, the tokens are not tradable for 1 year. Harbor intends to facilitate a network of broker-dealers to execute secondary trades in this first year, after which point they will become freely tradable.

Major STOs in Q3:

Nottingham PBSA raised $1.24m using the Smartlands platform, with tokens representing equity in a student apartment complex in Nottingham, UK.

ReitBZ raised $3.3m for a security token backed by Brazilian real estate and managed by an established investment bank, BTG Pactual.

CitiBlock Capital raised $10m for a tokenized venture fund that will invest in the blockchain industry.

STO Vision: Too Early to Judge

A final assessment of the security token ecosystem throughout Q3 2019 remains challenging, for despite the decidedly underwhelming nature of the traditional metrics of the market such as fundraising and market liquidity, the range of important innovations remains substantial. This is true both geographically, where substantial developments were seen from Japan to the Seychelles, Europe and North America, and in terms of components of a robust security token ecosystem ranging from issuance and settlements to trading platforms and including new issuances, remains substantial. This mixed message perhaps suggests that while not yet living up the breathless promises made about the potential of security tokens to transform financial markets, the space bears watching as some of the trends identified above continue to develop.

What appears beyond doubt is that without the sustained appearance of developments like the ones noted below that have marked the last few months, there is little space into which security tokens might even develop. In this regard, interesting comparisons can be made between security tokens and the SAFT fundraising vehicle that also entered the crypto scene to much fanfare and was hailed as a future of fundraising, albeit with different applications and advantages. Despite the early enthusiasm around SAFTs, mentions of them in 2019 are most prominently seen in SEC enforcement actions; no one is quietly building infrastructure, alliances, and business models on a future animated by SAFTs. Such a comparison is coarse, to be sure, but indicates that as a fundraising vehicle, STOs are far from dead and still hold strong promise to emerge as fundamentally important over the long-term, perhaps on a longer timescale than early enthusiasts imagined.