2019 is the year of the Security tokens. We have had several ebbs and flows in the Blockchain industry over the last few years. Events of the past 18 months especially have shaken the industry into some serious introspection.
Revelations around the lack of controls and regulations around capital raising models have brought the industry into serious disrepute – in such a fashion that the merits of the Blockchain framework have been challenged. Being a passionate student and a commentator of the industry, I still believe, the model is intact, its the controls around it that have failed to stop human greed from causing havoc.
On the brighter side though, security tokens were seen as the bail out for the industry in many ways. Towards the end of 2018, there were a lot of talks that the model has merits, and as soon as the year opened, we have had the news of DX Exchange platform launch.
The DX Exchange platform allows bluechip stocks traded in NASDAQ on Blockchain using security tokens – this would cut out the middlemen, and when rolled out across markets, would save Billions. The disintermediation that the model brings to the table, will also put several business models dependent on Wall street at risk.
Why is this a better model than an ICO? Is this just another hype? Is this a perfect model that will create the new inclusive Capital markets?
I believe, ICO was the wrong start to the right journey. Being an early stage Venture Capital investor, I understand that valuing a startup is more of an art than science. There are very few data points. So when a business that has no way to value itself goes on Blockchain, the intrinsic value behind the tokens will be challenged by the traditional financial services industry.
Blockchain purists will argue that the new capital markets driven by Blockchain wouldn’t need traditional financial services principles AS-IS. However, what we are trying to do with Blockchain is a massive change in the way we exchange value, and that can only happen by collaborating with the incumbents.
If value has to move from traditional markets to the Neo Market, it can’t happen without key stakeholders in the traditional markets understanding the value of the Neo Market and embracing it. Security tokens can make that happen.
DX stressed that its digital stocks are classed as derivatives — with the underlying asset being equity of 10 Nasdaq-listed firms — and that its platform is regulated under the European Union’s Mifid II directive
With Security tokens, the problem of intrinsic value is resolved. When you have a token that’s valued based on an underlying stock – most people who understand derivatives will get it. Of course, the tokenisation process, the exchange, its participants, operational details of managing transactions will have to be regulated and audited regularly to ensure that the security token industry gains credibility.
In doing so, we would have created a disintermediated Neo market on the Blockchain, but still largely within a traditional financial ecosystem. That is the first step, and I believe the right step for Blockchain in Finance.
Will there be scams? There will be – for sure. But I believe the worst of these scams are behind us, and with controlled progress, the Blockchain industry should see the adoption that it was meant to.
I am really hopeful that there will be a day when Mangoes from my farm in India and Buckingham palace will both go on Blockchain, and I will be able to trade some equity in the palace with Mangoes.
Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on Inclusion and a podcast host.