Security token offerings (STOs) have become the talk of the town in the cryptocurrency industry, following initial coin offerings (ICOs) which attract investment by issuing cryptocurrencies.
Issuing a security token means converting assets into a form of cryptocurrencies offer them to invetors. These tokens have a similar nature with conventional financial products such as stocks, bonds and derivative products. STOs also divide and sell fixed assets, including stock and real estate, into cryptocurrencies so that retail investors can easily invest their money in them.
South Korea’s leading blockchain research center Chain Partners’ CP Research and Coinone Research Center have cited STOs as the major talking point this year in their reports released recently. They expect that STOs, which can be regulated by the Capital Market Act, will proliferate as countries around the world are strengthening regulations on cryptocurrencies.
However, the two research centers expressed mixed opinions on STOs. CP Research said that STOs can be a solution to liquidate assets that are difficult to liquidate, such as real estate and art works, while Coinone Research Center pointed out the risks of STOs, which focus only on securitization, calling for efforts to use STOs as a means of reforming the securities trading system.
CP Research predicted that this year will be the start of establishing STO infrastructure and the STO market will grow to US$2 trillion (2,245 trillion won) by 2030. However, it said that the inflow of institutional capital is essential for the growth of the STO market, predicting that the prerequisite conditions, including establishment of clear regulations, international standards, mature infrastructures and participation of traditional financial institutions with high reliability, will be met around 2025.
In particular, CP Research thinks highly of the growth potential of STOs which liquidate assets. It said that real estate, venture capital funds and art works have become already tokenized for the purpose of securitization.
CP Research also noted the entry of existing crowdfunding platforms into the token issuance market. They can relatively easily raise funds because they have already secured users. Especially, STOs are expected to solve the problems of liquidity, which are the major drawback of equity-type crowdfunding.
However, there is a clear consensus that it is hard for STOs to spread in South Korea. This is because regulators still say that cryptocurrencies and blockchain are two different things and they have not presented guidelines for cryptocurrency trading. Accordingly, domestic companies which are seeking to push into the STO market are going abroad.
Coinone Research Center also released a similar report. It seems clear that the year 2019 will be the year of emergence of STOs. However, it stressed that the liquidation of assets is not the point of STOs.
“STOs which focus only on the liquidation of assets will eventually create a lemon market where only worthless assets are traded. Concentrating only on the possibility of liquidation is a dangerous thought,” the research center said in the report. It pointed out that the excessive issuance of mortgage backed securities (MBS) was also a cause of the global financial crisis in 2007 and warned that STOs focusing only on the liquidation of assets can lead to a financial crisis in the end as well. Coinone Research Center called for efforts to reform the stock trading system through STOs. They noted that STOs can reduce fees, overcome the national boundaries, raise transparency and improve the contract fulfillment efficiency by introducing smart contracts.
The two research centers released the reports on STOs to push the South Korean government towards coming up with STO related policies. The two stressed, “The government’s clear regulations for STOs are needed.” Notably, Coinone Research Center, which warned of the risks of STOs, said, “We need more detailed and stronger regulations than now in a bid to solve the problems of the lemon market.”