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Understanding STOs.

The Five Dimensions of Security Tokens - The Third Wave of a New Financial Internet

The Security Token Industry is evolving very quickly - but there remains a great deal of confusion.

There are definitely gray areas in both the marketing messages of vendors as well as the underlying business models. Futher, the messaging and business models mean are not at all “immutable” but rather are evolving as part of the larger security token ecosystem.

So what then are the key dimensions?

A key aspect of the third wave is the maturation of the industry, and the integrity of its practices and operations.

1) What are security tokens?

There are currently two definitions that you will hear about in the media and at events. The Security Token Academy codifies these definitions, generationally, as:

a) Security Token 1.0 (ST 1.0) - Regulated token offerings. From a U.S. perspective this often means using a regulatory offering "exemption" from the U.S. SEC. Most of the ICO offerings are using exemptions for "accredited" or wealthy investors - called Reg D (for the U.S.). Reg S are being used for international investors. From this point of view then ST 1.0 began in 2017.

b) Security Token 2.0 (ST 2.0) Some industry players are focusing on a new generation of security tokens that will streamline processing of identity management.

Specifically, KYC (Know Your Customer) and AML (Anti Money Laundering) mechanisms will be automated to different degrees based on a new layer of technology that can sit on top of smart contracts. Through the electronic codification of KYC and AML rules on a country by country basis, cross border transactions become more efficient and more viable. The Security Token 2.0 generation begins in 2018 and will evolve in future years.

Some of course may quibble about this 2.0 terminology believing it should be 1.5. But the elements of what will be in 2.0 are not necessarily all developed by vendors. Automation of dividend management, lockups, and more are also becoming part of the solution set. A key issue will be what will be the difference between 2.0 and a possible 3.0 generation of security tokens.

2) What are the Driving Forces behind Security Tokens?

a) Reducing regulatory risk. Using regulatory offering exemptions (e.g. Reg D or Reg S exemptions) was the initial step via ST 1.0. The ST 2.0 will facilitate compliance with KYC and AML.

b) Searching for a higher return or alpha. This dimension is more related to the (future) generation of KYC/AML enabled security tokens (2.0) and associated facilitation of cross-border trading and potential higher liquidity premiums

3) What are the high-level applications of Security Tokens?

a) Raising money for companies. Certainly, using security tokens to raise capital for startups and established businesses is a logical extension of ICOs and also of IPOs. In the U.S. alone, more than 650,000 companies are created each year. Wall Street, Silicon Valley, and Angel investors have not provided enough capital for startups. So regulated and compliant "Security Token Offerings" or STOs may enable a new source of needed capital. Although as much as $5.6 billion was raised worldwide by ICOs in 2017, the size of the 2017 U.S. IPO market was about $36 billion.

b) Using Security Tokens to help tokenize or securitize existing assets. The tokenization or crypto fractionalization of global assets is a huge potential opportunity. Global equity assets are valued at about $70 trillion, debt around $100 trillion, and real estate about $230 Trillion (about $180 Trillion in residential, $32 Trillion in Commercial, and the balance in agricultural, etc.) Raising money via ICOs has been a 2017 phenomena. Tokenization of existing assets via Security Tokens is a brand new area that will start to emerge in 2018.

4) What are the benefits of Security Tokens? (ST 2.0)

a) Efficiency. Some argue that replacing current paper-based systems and older technology (such as faxes, file transfer, email) could reduce the cost of administrating our financial systems. A 2016 Goldman Sachs report suggests that up to $6 Billion a year could be saved in the cash equities market.

b) Time. Reducing settlement times for stock trading has been an industry challenge. The industry is currently moving toward a T+2 (2 day) settlement time. Meanwhile, new Security Token Trading organizations will try and effect same day trading. Some people suggest that longer settlement times may provide an opportunity for manipulation and therefore a shorter, or same day settlement, might reduce the risk of practices such as naked short selling.

c) Liquidity. For many people improved liquidity is the key opportunity. For people locked into deals - such as long-term real estate deals - getting out of a deal can mean taking a "haircut" or incurring a liquidity discount. On the positive side, the industry hopes that improved liquidity (ie liquidity premiums) could be enabled in part due to more viable cross-border trading and investing powered by Security Tokens (2.0) 5)

Industry Operations, Timelines, and Ecosystems

a) Market participants include companies that help in the creation of tokens. Some tokenization companies may be advisory firms which are retainer-based. Other advisory firms may be registered broker-dealers charging a success fee, perhaps a forerunner of what might be considered to be "security token investment bankers". There may be other tokenization organizations have provided technical platforms, or will provide technology based solutions and protocols. In addition there will be Security Token trading organizations such as new Security Token ATSs and and Security Token Exchanges will enable both institutional and individual investors to trade these new tokens.

b) Timing - Much of the potential $5.6 Billion that was raised via ICOs in 2017 was raised in the U.S. by issuers using regulated ICOs using "Reg D". Reg D offerings are only available to U.S. accredited investors. These Reg D offerings often have a 12 month lockup period although some do enable buybacks originating from the issuer and sometimes from other investors. Because many of the 2017 lockups will be expiring in the second half of 2018, Security Token Trading organizations will start to emerge and operate (U.S. focus to some degree) starting in the second half of 2018.

c) Operational Issues - to be addressed by Security Token Trading organizations will include issues of custody, interoperability, backup, and industry cybersecurity. Conclusion - Security Token Industry to officially begin in 2018.

Although some early aspects the security tokens appeared in 2017 through a few Reg D offerings compliant with SEC Regulations, the broader Security Token enabled third wave will really starting in 2018 for three key reasons.

First, in 2018 we will see more and more U.S. token offering being compliant with SEC Regulations.

Second, the evolution of newer generations of Security Tokens will better enable identity management, cross border trading via KYC and AML mechanisms.

Third, the emergence of security token trading organizations in the second half of 2018 that will enable the trading of security tokens that are unlocked from 2017 Reg D restrictions.

So the key pieces of the Security Token industry are starting to fall in place in 2018. More components will need to be addressed, but 2018 is the year when major foundational elements will be established.

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Upcoming events (5+)

Security Token Offering Launch + Exchanges

AC Hotel New York Times Square

This Meetup will be all about institutional capital getting into crypto, security tokens, trends, noteworthy security token offerings, and bites from media houses. The Security Token Meetup is held to drive forward the conversation around technical, legal & regulatory opportunities and challenges associated with issuing, lifecycle events and the trading of securities on public ledgers. Building standards in this space provides the bedrock needed to ramp up adoption and establish regulatory compliance in this massive and emerging use-case for blockchain based public ledgers. Are Security Tokens the Future? Security tokens are now being touted as the future of ownership and the democratization of alternative investment, with the potential to digitize or “tokenize” all types of assets such as debt and equity in private companies, or even physical property like real estate and art. But the tokenization process of existing assets raises new questions and technical challenges. Critical features such as proof of ownership of the underlying assets and restricted transfers in a global environment are still quite experimental. In theory, thanks to on-chain securities lifecycles and secure wallets, clearing houses and central securities depositories may become obsolete. However, securities laws worldwide are complex and to some extent unfit for blockchain technology because they’ve been designed around a heavily intermediated space. Thus, Security Tokens Offerings are a two-fold challenge: Issuers will look for jurisdictions that recognize tokenized securities, but… Trading platforms and service providers can only build up the necessary infrastructure where the proper legal framework exists. In all likelihood, due to the wide spectrum of use cases; zero tolerance for shaky legal grounds; and limited pool of addressable investors; we won’t see mega STO rounds in the coming months. Instead, in our minds, smaller private placements backed by thorough disclosures will become the norm. By borrowing best practices from the private markets and relying on widely recognized fair valuation methodologies, the up-and-coming class of fully compliant security tokens might finally set reasonable expectations for digital assets.

Real Estate + Assets Tokenization

AC Hotel New York Times Square

Run along Crypto Thurdays. The Parcels Network is fully dedicated to educating professionals in the Industry as well as implementing and developing blockchain solutions standards for real estate. Parcels Services can tokenize real estate and assets, distribute tokens, and provide a regulated trading exchange platform dedicated to real estate for liquidity. TOKENIZATION OF ASSETS Each real estate asset could be divided into tokens, as a tokenized asset it will facilitate: crowdfunding with smart contracts, liquidity of the asset, transparency and security. TITLE AND CONVEYANCE The blockchain will facilitate digital deed, conveyance and title system in companies and governments with a legal and procedural protocol. PROPERTY DATA AND IDENTIFICATION The blockchain applications will bring transparent data of the real estate assets and the identification of the properties to build a real estate ecosystem. ACCEPT CRYPTOCURRENCIES FOR PAYMENT How to accept Cryptocurrencies as a modality of payment for real estate, how to escrow the cryptos and finalize the transaction. The world is changing and a good portion of domestic and international buyers and sellers are holding their wealth in Bitcoin. PARCELS REAL ESTATE DIGITAL ASSETS EXCHANGE - Tokenize real estate - Distribute your Tokens - Buy regulated tokens - Built your own portfolio - Ai Based Trading More info: www.parcels.network We invite all experts and enthusiasts. ------------------------------------------------------------------------------------------------- - Location: AC Hotel New York Times Square 260 W 40th St Fl 21 New York, NY 10018 b/t 7th Ave & 8th Ave Midtown West, Theater District - Cash Bar - Limited Space Only. Please do not click to attend, unless you are planning on attending.

Real Estate + Assets Tokenization

AC Hotel New York Times Square

Run along Crypto Thurdays. The Parcels Network is fully dedicated to educating professionals in the Industry as well as implementing and developing blockchain solutions standards for real estate. Parcels Services can tokenize real estate and assets, distribute tokens, and provide a regulated trading exchange platform dedicated to real estate for liquidity. TOKENIZATION OF ASSETS Each real estate asset could be divided into tokens, as a tokenized asset it will facilitate: crowdfunding with smart contracts, liquidity of the asset, transparency and security. TITLE AND CONVEYANCE The blockchain will facilitate digital deed, conveyance and title system in companies and governments with a legal and procedural protocol. PROPERTY DATA AND IDENTIFICATION The blockchain applications will bring transparent data of the real estate assets and the identification of the properties to build a real estate ecosystem. ACCEPT CRYPTOCURRENCIES FOR PAYMENT How to accept Cryptocurrencies as a modality of payment for real estate, how to escrow the cryptos and finalize the transaction. The world is changing and a good portion of domestic and international buyers and sellers are holding their wealth in Bitcoin. PARCELS REAL ESTATE DIGITAL ASSETS EXCHANGE - Tokenize real estate - Distribute your Tokens - Buy regulated tokens - Built your own portfolio - Ai Based Trading More info: www.parcels.network We invite all experts and enthusiasts. ------------------------------------------------------------------------------------------------- - Location: AC Hotel New York Times Square 260 W 40th St Fl 21 New York, NY 10018 b/t 7th Ave & 8th Ave Midtown West, Theater District - Cash Bar - Limited Space Only. Please do not click to attend, unless you are planning on attending.

Security Token Offering Launch + Exchanges

AC Hotel New York Times Square

This Meetup will be all about institutional capital getting into crypto, security tokens, trends, noteworthy security token offerings, and bites from media houses. The Security Token Meetup is held to drive forward the conversation around technical, legal & regulatory opportunities and challenges associated with issuing, lifecycle events and the trading of securities on public ledgers. Building standards in this space provides the bedrock needed to ramp up adoption and establish regulatory compliance in this massive and emerging use-case for blockchain based public ledgers. Are Security Tokens the Future? Security tokens are now being touted as the future of ownership and the democratization of alternative investment, with the potential to digitize or “tokenize” all types of assets such as debt and equity in private companies, or even physical property like real estate and art. But the tokenization process of existing assets raises new questions and technical challenges. Critical features such as proof of ownership of the underlying assets and restricted transfers in a global environment are still quite experimental. In theory, thanks to on-chain securities lifecycles and secure wallets, clearing houses and central securities depositories may become obsolete. However, securities laws worldwide are complex and to some extent unfit for blockchain technology because they’ve been designed around a heavily intermediated space. Thus, Security Tokens Offerings are a two-fold challenge: Issuers will look for jurisdictions that recognize tokenized securities, but… Trading platforms and service providers can only build up the necessary infrastructure where the proper legal framework exists. In all likelihood, due to the wide spectrum of use cases; zero tolerance for shaky legal grounds; and limited pool of addressable investors; we won’t see mega STO rounds in the coming months. Instead, in our minds, smaller private placements backed by thorough disclosures will become the norm. By borrowing best practices from the private markets and relying on widely recognized fair valuation methodologies, the up-and-coming class of fully compliant security tokens might finally set reasonable expectations for digital assets.

Past events (18)

Real Estate + Assets Tokenization

AC Hotel New York Times Square

Photos (17)