Challenges of STOs

STOs have a lot of potential. It is quickly becoming the best hope for replacing ICOs to drive the blockchain industry's future growth. On the other hand, STOs face challenges as well.

Where to trade a security token is one of these challenges. Cryptocurrency has established secondary markets for providing liquidity post ICOs. For example, as of Jan 20, 2019, https://coinmarketcap.com/ showed that there are over 16,312 cryptocurrency markets. Secondary markets for trading STOs security tokens are scarce. So far, there are only a few reports on new security token trading platforms going live.

For example, https://www.overstock.com/ has recently announced that its tZERO security token trading platform would go live by the end of January 2019. An STO trading platform can be a newly built trading venue on an existing Alternative Trading System (ATS) or on top of a cryptocurrency market. For example, Binance, the largest cryptocurrency exchange by volume, is teaming up with some stock exchanges to enable security token trading. The lack of sufficient security token trading platforms will affect a security tokens' liquidity. In turn, it negatively affects the efforts in attracting investors.

Where to register an STO is another challenge. For issuing a security token, an issuer needs to file the offering with a regulatory agency somewhere, which implies that the issuer is subject to that country's securities laws, such as AML/KYC, and regulations. When security tokens are issued globally, the corresponding STO needs to be filed with the security agencies of related countries. If security laws and regulations contradict to each other, the question is how to resolve their differences.

Similarly, these countries' securities and exchange laws progress over time. It is nearly impossible for an STO trading platform to service clients on a global scale. Even if this were possible, the associated costs and efforts could be very high. Consequently, it may not make business sense to maintain a global security token trading venue. Solutions need to be worked out in order to support a security tokens' borderless characteristics.

A third challenge is the loss of decentralization. When an issuer files with a regulatory agency, the offering process is no longer decentralized. The government agency has control over the offering process, the security token, the company, and the project. The startup has to follow the relevant laws and rules in that country. This will make blockchain decentralization enthusiasts less in favor of STOs.

Whether STOs are supported by a government is an additional challenge on this list. In the US, SEC is taking supportive steps in accommodating fundraising methods such as STO since the regulation agency views the blockchain industry positively. However, many other countries have not taken the same stand. Some countries view STO less favorably. For example, in December 2018, the PRC government officially confirmed that STOs are illegal in China.