While the crypto market seems to be going through a crypto-winter, it appears that the sun is shining quite well for the new security token / digital assets market. All the blockchain and crypto events that I go, it seems that everyone is declaring: “ICOs are dead, long live to STOs” (Security Token Offers).
Since I joined the security token market a couple of months ago, the market went from almost no one caring about security tokens to everyone wanting their own piece.
Although I truly believe the potential of this market, I also know that it will take some time to the market to take off and anyone in the market looking for short-term profits will be disappointed. A whole new market is being created, with many necessary pieces still under-construction and still many problems to solve.
Even though, I’m quite confident is that there is no turning back. Everything (asset or financial product) that can be tokenized, will be tokenized in just a couple of years. Luckily, I’m not the only one thinking that way, as many startups and large corporations are positioning themselves not to lose this next wave.
One of the biggest promises of the security token market is: “Freeze the investment not the investor”, implying that will create liquidity to assets with low liquidity or illiquid. However, a quick research reveals that still there isn’t any real trading of compliant security tokens in the market.
Due to that scenario, exchanges are one of the main topics right now as the kick-off of trading security tokens will propel investors in participating in STOs, which will generate more trading, creating a positive feedback loop that will accelerate this already fast-moving industry.
Using a parallel to the traditional stock market as well as the crypto one, it becomes quite clear that exchanges are not only a key player in the market but also a fantastic business opportunity. Just a few examples:
Nasdaq, Inc (NASDAQ Operator): Market Cap US$14.28 Billion
Intercontinetal Exchange, Inc (NYSE Operator): Market Cap US$ 44.96 Billion
Binance (largest crypto exchange): Expects to profit US$ 1 Billion in 2018
Coinbase (largest US crypto exchange): The last round of investment valued it at US$ 8 Billion
That been said, many players are trying to enter this market to become the next NASDAQ or Binance (or to not stop to be them).
Here follows a quick analysis of the different kinds of players entering the market:
Traditional Stock Exchanges:
As you would expect, the incumbents are not watching the disruption of the market happen standstill. Many of them understood that the market is moving toward a tokenized market; therefore, they are positioning themselves to not only try to survive but to be able to compete well in this market.
These players understand quite well how the financial market works, already have licenses to operate, and have the necessary money to invest. However, they move slow and aren’t as familiar with blockchain technology. They probably won’t lead this market due to being more afraid of damaging their main companies than to be a first mover; however, I believe they will be fast followers.
SIX Swiss Exchange: Announced in July 2018 that was launching a spin-off focused on digital assets, SIX Digital Exchange (link)
Malta Stock Exchange (MSX): Announced in September 2018 that it’s partnering with Binance to launch a security token trading platform (link).
- Nasdaq: Invested through Nasdaq Ventures in a digital asset tradings platform (link), ErisX, and is looking into launching its own platform (link).
- Intercontinetal Exchange, Inc (NYSE Operator): Is launching in January 2019 a digital asset exchange, Bakkt (link).
As you can see, they are exploring different forms of entering this market.
With the crypto markets going down and the ICO party ending, many crypto exchanges started to become more interested in this new thing called security tokens. A few years ago, most of the crypto exchanges operated without any license under gray areas. However, many countries started to regulate crypto exchanges demanding them to be more strict with KYC/AML and obtain the necessary permits, starting a run of the big crypto exchanges to find the best regulatory environment for them to operate.
Although crypto exchanges don’t have the experience dealing with regulation as the traditional exchanges, they were already starting to move toward a regulated environment, which might make it a little more easier for them to enter the security token market. Although regulation is their Achilles’ Heel, they move much faster and also have much more experience with blockchain and smart contracts than the incumbents. A few big players have not only the money but also a global scale, making them some good candidates to be leading players in the market.
Binance: As mentioned before, it is partnering with MSX to launch a security token trading platform.
Coinbase: The leading American crypto exchange acquired a few financial institutions to obtain the necessary licenses to start to trade security tokens (link). It is also making other moves in the market such as an investment in the security token issuance platform, Securitize, in November 2018 (link).
A new market means an opportunity for new entrants to compete for their spot under the sun. These new players are starting from day one as a security token exchange, giving them an advantage as all the systems and process are designed for this new market.
Many of them raised millions of dollars through ICOs (while it was still a thing, remember? So 2017 that…) to enable the development of their platform. Their lack of experience and track record are their biggest challenges to overcome.
Gibraltar Stock Exchange (GSX): The GSX was launched in 2014 as a stock exchange but it’s already positioning itself to be one of the leading players in this new market. In October 2017, it announced a subsidiary, the Gibraltar Blockchain Exchange (GBX), focused on utility token, later on, in July 2017, it confirmed a shift to focus to become a security token exchange (link).
Decentralized Crypt Exchanges:
The DEX, acronym for Decentralized Exchanges, has been a hot topic in the crypto world for a while. However, if you’re not from the crypto world, you probably never heard about them. They are basically exchanges that enable peer-to-peer transactions using the blockchain and smart contracts as a settlement engine, therefore enabling a more decentralized crypto economy while reducing the transactional costs and the hacking risk, as the users hold their cryptocurrency in their own wallets instead of an exchange wallet attractive to hackers due to its high amount hold.
As security tokens require that investors pass through a KYC/AML and also comply with some other regulations (such as the lock-up period and the number of investors restriction), the trading isn’t completed decentralized as it still needs to go through this process on a centralized entity, a whitelist. I don’t think they will be competing to become the leading exchanges; however, they might have an essential role as liquidity providers to the ecosystem.
A more accessible path to create a secondary market for security tokens are the private markets. The main advantage is that licenses are much easier to get compared to exchanges. I don’t think they will compete head-on-head with the exchanges (unless they decide to become one themselves), instead, they will complement the ecosystem by providing access to more investors.
HighCastle: An UK-based investment platform focused on alternative assets that is entering the security token market.
*There are already quite a few players in each category, the listed companies are just a few examples of this evolving market.
From the Amsterdam Stock Exchange in 1602 (the first stock exchange in history) to Binance, exchanges were always the heart of all the trading markets. The security token market won’t be different, creating a massive opportunity for different players to try to become the leading ones in this new market and become the NASDAQs of tomorrow.
It’s still too early to understand how this market will evolve but, as we have seen, different types of players will be competing head-to-head, each one with its advantages and disadvantages.
Exciting times are coming and it will be interesting to watch how this market will unfold in 2019.
Who do you think will be the NASDAQs and NYSEs of tomorrow? Will crypto exchanges such as Binance and Coinbase lead the way? Or maybe a new kid on the block will surprise everyone?