Andy Cheung OKEx on Twitter: the so-called “exchange security rank” shows no precise metrics but is misleading
The promise of putting securities on the blockchain has led to discussion about a host of potential benefits. These benefits include a reduction in costs, increased liquidity, automated compliance, rapid settlement, fractional ownership, increased transparency and more.
The reality is that security tokens require further development in terms of infrastructure, protocols and compliance before they will become widely adopted. Many benefits of securities tokens such as fractional ownership and increased liquidity do not actually yet exist.
This post discusses some of the current issues with security tokens and what it will take to gain mainstream adoption.
**No Standardized Protocol**
In order for Security Tokens to gain mainstream adoption, there needs to be a standard protocol that will allow investors, issuers, KYC providers, wallets, exchanges, regulators and developers to interface. While there are many proposed security token protocols such as ERC- 884, ERC-1400, Polymath’s ST20 and Harbor’s R-Token, there is no established industry standard yet. Just like the ERC-20 protocol standard paved the way for interoperability in the crypto ecosystem, a security token standard protocol will be required to do the same.
There is still a great deal of confusion surrounding the regulations for securities tokens. The SEC is attempting to deal with new questions surrounding blockchain technology. The existing regulation focuses on intermediaries and their roles and responsibilities. In many ways, this creates a fundamental tension with the blockchain and tokenization, which focuses on removing intermediaries. Regulations will need to be crafted in order to enable and facilitate this new technology. While regulatory changes occur slowly, there is a bullish sentiment from the SEC. According to Chairman Jay Clayton, “No conversation about recent efforts at the SEC to foster innovation would be complete without mentioning our approach to distributed ledger technology [ie blockchain], digital assets, and ICOs. Our efforts in these areas embody two key principles the SEC has followed for many decades— embrace new technologies that cut costs and provide new investment opportunities while continuing to require that our retail investors have access to the material information necessary to make an investment decision, including the key risks involved, as well as other fundamental protections.”
**Not Enough Liquidity**
There is a belief that security tokens will increase liquidity to assets. However, liquidity is something that is built over time. The securities token market will have to mature significantly before substantial liquidity exists. Liquidity providers will be required to address this issue. A standardized protocol, interoperability, and increased adoption will all be important factors in improving liquidity as well.
According to Jesus Rodriguez, Managing Partner at Invector Labs, “the vast majority of products first generation of asset tokenization platforms haven’t seen mainstream adoption because they lack the legal, technological and regulatory elements to enable key capabilities such as legal fractional ownership, dividend issuance, governance, etc.” In order to gain mainstream adoption, there is a need to build the security token infrastructure. A mature securities token market will incorporate dynamic protocols that can natively support different types of securities, high liquidity, streamlined KYC/AML, better custody solutions and on-chain governance.
There are technological barriers that require solutions before mainstream adoption will occur. The target demographic for securities tokens is high net worth, accredited investors. These investors are typically 50-70 years old and are generally not technologically inclined. The user experience and interface need to be simple in order to be accessible.
**Big Firms Are Not Ready to Adopt**
Major Wall Street firms are generally risk adverse, tending to adopt proven, newer technology. With the deep pockets of many Wall Street firms, it is not necessary to be a first mover into a space. Because of this, major firms will wait until the legal, technological and regulatory elements of security tokens are established. According to former Nasdaq Vice Chairmen David Weild “A big firm is going to look at it and want to understand that it’s been completely de- risked, that the legal framework has been established.”
More time is required before mass adoption of securities tokens is likely. On the protocol level, there needs to be an industry standard that is more programmable, interoperable and natively compliant. Accredited Investors will require education and incentivization to purchase security tokens and the process needs to be user friendly. The markets need time to build up liquidity despite the claims that liquidity is inherent in security tokens. Finally, the space needs to mature and become more established before the big firms will be willing to adopt.
In this video I explore Polymath [https://youtu.be/Tz-iz63-hLc](https://youtu.be/Tz-iz63-hLc) to see if it is solving real problems or just riding on the hype train.