Over the last 12-18 months there has been a growing crescendo of noise surrounding Security Token Offerings, also often referred to as Digital Assets. However, there doesn’t seem to be a clear understanding of exactly what the term means in some quarters and how the use of an STO will impact its issuer, exchange, investors, traders and a great number of others in the chain.

One of the most common errors I’m hearing is firms and individuals referring to an STO license or authorisation. Some countries have developed this concept, however in the major financial centres and for their regulators, no such asset class or product exists or is recognised as such, and that is because there is a fundamental misunderstanding of what a Security Token is.

A Security Token is quite simply the use of a new technology for the transfer and registration, as well as the legal framework of a Security. The Token aspect is nothing more than the technology underpinning the Security it supports. Therefore, the key aspect here is what is the security and what regulatory framework does it fall under. The use of an STO is to issue a currently regulated security using the new technology provided by Blockchain and Smart Contracts, Tokenisation. The FCA has taken this approach in the issuance of two circulars called the Crypto Assets Guidance Notes. Essentially stating that they are technology agnostic and that current regulations must be applied to any activity that falls under the existing regulatory framework. Therefore, any party taking part in an STO must pay close attention to the current regulations when looking at the activities and products they are playing with.

That’s the simple explanation, and it covers the current set of circumstances for the moment. However, as LDX has investigated the use of Tokenisation we have discovered the agility of the use of blockchain and smart contracts allows the development of new products that can solve a number of challenges in the financial markets. This will create a challenge for regulators very shortly. The current regulations pigeonhole a wide variety of products and activities, Tokens, we have learnt can cross a number of regulatory borders causing difficulty in applying the appropriate regulations. This does not mean that the new products will fall outside regulation, merely that the creators must be aware of the need for constant engagement with the regulator and interaction in helping them understand where the product is headed.

The irony is that the headaches the new innovative products are creating for regulators, stem from the fact that the original technology and products they are based on (Cryptocurrencies), were created to challenge the financial markets post the financial crisis, which itself stemmed from deregulation. We have come full circle.

So what is the future of STO’s. LDX and a number of people believe they are the future of the markets. However, we also believe that it is key to behave in a sensible and responsible manner to allow this market to flourish. The agility of smart contracts and the cost saving potential of blockchain pose a huge opportunity and challenge to the current markets. So it is important to ensure the STO market does not leave itself open to attack form incumbents or regulators in the traditional world.

We believe the regulators are right to keep a very careful eye on the development of this new market and the products developing in it. The ICO market has proven there must be proper oversight. However we also believe the regulators see the potential of the new world and are happy to facilitate its growth and development. So it is our belief that the regulator is a key partner in the future of the STO market, not an enemy to be avoided or challenged.

VJ Angelo, CEO of London Derivatives Exchange

Article from Crypto AM- Industry Voices.
https://www.cityam.com/wp-content/uploads/2019/09/Cityam-2019-09-24.pdf