2018 is shaping up to be an uninspiring year for cryptocurrency investors and traders. The freefall that cryptocurrencies recorded this year contrasts sharply with the impressive gains that the market booked in the last two years. For instance, in January the total market cap of all cryptocurrencies was around $815B; by March that had dropped to $330B. The losses stopped but haven’t fully recovered; the total market cap for cryptocurrencies is currently around $440B.
Interestingly, cryptocurrencies are broadly divided into “Utility Tokens” and “Security Tokens”. Utility tokens, also called user tokens are created to provide owners with access to an exclusive set of products/services within the originating ecosystem. Most of the tokens in the market are utility tokens. Security tokens are created from a tokenization process representing the shares of a company. In other instances, security tokens might be backed by real-world assets such as precious metals, commodities, or real estate.
The value of utility token is dependent on the dynamics of demand and supply while the value of a security token is influenced by demand and supply as well as the value of the underlying asset. The freefall means that utility tokens could become worthless while security tokens still have some latent value in their underlying assets. This article provides insights into why cryptocurrency investors are starting to pay more attention to security tokens as the cryptocurrency industry continues to evolve.
The SEC is not playing nice with utility tokens
For most of the last two years, the U.S. Securities and Exchange Commission (SEC) has largely been content to maintain the status quo on the definitions for utility tokens and security tokens. Hence, cryptocurrency ventures that want to avoid regulations are quick to brand their coins as utility tokens when in fact such tokens are marketed as securities.
Now, the SEC is no longer playing nice with cryptocurrencies. SEC Chairman Jay Clayton explained why the SEC started its crackdown on cryptocurrencies in a public statement. In his words, “a number of concerns have been raised regarding the cryptocurrency and ICO markets, including that, as they are currently operating, there is substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.”
Earlier this year, several cryptocurrency firms and exchanges have been subject to SEC probes and inquiries. Overstock CEO and cryptocurrency evangelist Patrick Byrne revealed that his firm received a request for information from the SEC after it raised around $100M from 1,100 buyers of its token. Nick Ayton, CEO of the blockchain funding platform Chainstarter observed that the SEC won’t slowdown its crackdown on utility tokens being marketed as securities. In his words, “most exchanges are listing coins that are securities, and our view is a large number of these exchanges are going to be closed.”
The Elephant creates a reliable way to access security tokens
For potential cryptocurrency investors who are worried about the propensity for fraud, inexplicable volatility, and regulatory uncertainties –investing in security tokens from the onset might be the smarter line of action. For one, security tokens need to satisfy some basic regulatory requirements, they are less volatile since they are backed by existing assets, and the odds of fraud are minimized.
The Elephant is an enhanced blockchain platform that provides an opportunity to invest in the shares of pre-IPO private companies by tokenizing equity rights. People who have stakes in unicorns and high-profile private companies can sell their shares on the secondary market platform that The Elephant provides without necessarily waiting to exit at an IPO.
The Elephant provides an avenue to create dedicated partnerships that purchase such equity shares from the original owners. The purchased equity stakes are then tokenized for retail investors who in turn get dual access to the crypto space gain access to attractive investment opportunities and get to invest in equity-backed tokens. The Elephant by its dual nature as a security in itself and a platform to buy the tokens of pre-IPO real-world companies is an interesting project that is worthy of your attention.
The cryptocurrency needs institutional investors to survive
In the heydays of cryptocurrencies, institutional investors have largely disdained or ignored cryptocurrencies. However, the posturing has started to change after CME launched Bitcoin futures in December 2017. Now, institutional investors are showing interest in cryptocurrencies, but they are not quite ready to be fully committed. Institutional investors traditionally look for safe/stable/regulated investments even though the level of safety might vary along the risk-reward spectrum.
With the growing interest in security tokens, the cryptocurrency industry might find it much easier to cater to the needs of accredited investors who would love to invest in cryptocurrency backed by real-world assets. In contrast, there might be a noticeable drop in the number of crowdsales as security tokens backed by tangible assets become more attractive than utility tokens are that are usually only backed by a well-designed landing page and well-written whitepaper.