Security Token Offerings – Part II
In Part I – we covered the basics of STO. In this blog post we would focus on some of the operational and regulatory aspects related to STO’s.
The first one to discuss would be the subject of regulatory alignment. So great, you can launch a STO, can you do it anywhere in the world? Not so fast, jurisdiction matters a lot, where you launch is typically the region/country you are allowed to market & trade in that security token. What confers regulatory approval is a vast topic, it covers an entire gamut of areas like meeting basic KYC/AML rules, complying with restrictions in terms of audience to market the product to and who are usually exempt (like professional, sophisticated or qualified investors , etc.), marketing materials with facts & disclosures that must be produced, manage fund raising amounts involved (exceptions available under specific thresholds) and many other finer points to consider.
I would direct you to a recent FCA consultation paper around crypto assets1, its section 3.73 provides a good indicative list of permissions any issuer would need to navigate from a UK perspective. I have also found this site to be an excellent resource to learn about policies in some of the European nations 2
At this point I am not familiar with any equivalence granted between jurisdictions. Within the EU, countries do benefit from the general framework of regulations that cover securities, but otherwise if any security token is interested in operating in multiple regional markets, it would have to comply with regulations of each and every jurisdiction. It’s important to note that certain jurisdictions have taken an active role in defining and enabling the
eco-system for STO’s. There are different initiatives within EU nations as well as in Singapore, USA , etc. Countries like Malta are seen as taking an active role in setting up and encouraging this sector 3.
The second interesting point to consider is that once security tokens have been issued, what happens next? Fundamentally the security tokens would need an exchange or market to trade among token holders (very similar to what happens with your equities, you get to trade them on stock exchanges, where potential buyers and sellers can be matched based on supply and demand). If you are a crypto enthusiast, you would be familiar with exchanges like binance, Kraken, Poloniex , etc., which have been incredibly great in terms of allowing you to trade mainly in what are considered as utility tokens like BTC, Stellar, etc. For an exchange to start offering security tokens there are major legal requirements they would need to comply with, quite similar to what traditional stock exchanges do today. This is quite an emerging area, still a lot of foundational aspects being put in place — there are some exchanges who have started in a small capacity and others have plans to offer such exchanges in the near future as well. 3,4,6. It will be interesting to see if some of the existing exchanges can capitalise on their current user base and expand to offer security tokens as well.
So there you have it, all the building blocks are in place but as we can see this is still very nascent. Once we have a lot more regular STO offerings and a secondary market that is active with reasonable liquidity, STO’s will move a lot closer to achieving their promised potential. In part III – the final concluding piece I would like to highlight actual use-cases and whether STO’s have the potential to change & impact the current financial system.
Thank you for reading this piece.
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