Rise and fall of the ICO
The first ICO, Mastercoin, issued in July 2013. In July 2014, the newly-created Ethereum issued its own ICO, raising over $18M. By 2017, the number of ICO crowdsales had reached several hundred, raising billions of dollars in capital from investors and speculators.
Since their introduction, ICOs have been the main method of fundraising for start-up blockchain companies. They have been a popular alternative to traditional capital raising methods as they have allowed entrepreneurs to raise capital directly from the public without diluting the owner’s equity.
Another reason that many companies initially chose to launch an ICO was the (wholly incorrect) perception that tokens were not restricted to any particular jurisdiction and therefore were not subject to securities regulation.
Demand from speculators was unprecedented throughout 2017. This resulted in a significant increase in ICO launches. According to Fabric Ventures and TokenData, in 2017 over $5.6 billion was raised in token sales and by the end of the first quarter of 2018, another $7 billion was raised, with the ICO as the main means of providing capital for blockchain development projects.
However, by mid-2018, a widening investor base coupled with a number of high-profile fraud cases prompted global regulators, including the Securities and Exchanges Commission (SEC) and regulators in Asia – the main hub of funding, to sit up and take note. They issued official warnings to investors and took steps to clarify the regulatory status of ICOs or ban trading in them altogether. As a result, in the second and third quarter of 2018 the market for utility token sales came to a virtual standstill.
Enthusiasm for investing in blockchain projects has remained high. With more and more blockchain projects looking for funding, ICOs, as part of a larger token ecosystem are beginning to be issued in compliance with the relevant jurisdiction’s securities regulations, and this innovative capital raising mechanism has evolved into Securities Token Offerings (STOs).
Why tokenize securities?
The tokenization of assets and securities and the creation of regulated trading exchanges built on the Blockchain will have a significant impact on the securities market, delivering a quantum leap in speed, efficiency and cost reduction. Think of it in terms of the impact that the internet and email had on the world of traditional communications.
The tokenized securities world has a long way to go before it competes with the global equities market (estimated size $69 Trillion). However, as it is quicker and cheaper to trade fractionalized investments on a tokenized exchange, the speed of growth and rate of adoption of tokenized secondary markets such as those being developed by TZero, Sharespost and Open Finance Network is likely to be substantial.
Compliance requirements such as identity, KYC and AML can be automated within the STO system, as well as procedures such as dividend management and distribution. All of this reduces the cost and increases the speed of trading digital assets on a tokenized exchange, which bodes well for the general adoption of these parallel securities markets.
Forecasting exponential investment
While developments in blockchain technology and its adoption into the capital market system is still at an early stage, STOs represent a fast-growing, compliant component of a rapidly emerging capital markets infrastructure. They will be a key driver in facilitating demand and secondary market liquidity.
Looking ahead, the evolution of the ICO into the STO could mark the beginning of a revolution in access to capital for start-up businesses and entrepreneurs, injecting much needed capital into early stage technology companies and accelerating the growth and adoption of Blockchain technologies as a result.