There are about 2000 new ICOs launched each month. Approximately only 3% of these will get financed. Many crypto contributors are beginning to consider alternatives to coins as the liquidity of those is decreasing as the number of ICOs are increasing.
There are currently several types of tokens that exist:
- Security tokens – may be also called assets token, which represents the share of a crypto investor in a company, however companies don’t want to register their prospectus or there is no properly licensed marketplace for crypto crowdfunding yet. Additionally, not many crypto investors want to do disclose their identity and subject themselves to the prevailing KYC/AML procedures.
- Utility tokens – payment token, coins and private currency, or another form of utility to be used within the platform network. A utility token is regulated as a Commodity in the United States and might be recognized as e-money in the United Kingdom.
- Voucher tokens – A face-value voucher is, in fact, a pre-sale of services, which might be regulated as reward crowdfunding or loyalty program bonuses and most likely will be subject to VAT. In some jurisdictions, this might be considered as a coin/cryptocurrency in case it appears on a crypto exchange.
Utility tokens are the most popular for now and most of them are sold without identity verification and KYC/AML compliance. But since more and more financial regulators, like the Securities and Exchange Commission, chaired by Jay Clayton, believes that nearly all ICOs should be considered as securities, so more companies unhappily have to consider issuing a very costly prospectus. On average this procedure will cost $500K, which is probably the amount that most real startups initially need for the launch of their business. These monetary considerations led to the creation of crowdfunding platforms, the JOBS Act in the US and the FCA regulation of crowdfunding in the UK. So, there is a crucial need for crypto fundraising to be undertaken properly through regulated platforms.
It’s very complicated to have unified regulation as the nature of tokens issued on blockchain is different (security, coin or voucher). So there is a question mark as to why financial regulators haven’t extended the crowdfunding legislation in line with the new crypto funding and clarified whether private cryptocurrencies should be licensed in the same way as e-money or loyalty program points within a network – most likely regulators avoid it due to risk of legitimising bitcoin and other altcoins.
According to the US SEC Chairman Jay Clayton, the Commission approach depends on whether it’s a security, and if it isn’t then the US jurisdiction is limited.
In the case that the US SEC consider the token to be a security issued at:
- Primary markets: the token needs to be compliant with placement rules (this is possible through the issuance of a prospectus or the issue of security tokens at a regulated platform).
- Secondary markets: the token need to be traded at registered platforms, which ensure KYC and AML compliance of the market participants.
- Intermediaries (broker-dealers, investment advisors) need to comply with KYC and AML rules.
As far as most businesses would be satisfied with the issuance of security tokens, it doesn’t necessarily mean that utility tokens (coins) should not exist. It is true that most traditional businesses and startups consider the issuance of token for crypto fundraising reasons, those are the most suitable for equity type tokens. Others still might use a token as a utility (gas) of the platform to receive points/coins and pay for services, to spend those points or coins within the network of partners who are part of the loyalty program and acquire the coins or points.
The supply and demand of ICOs are driven by the following:
- New technological ideas and startups need funding, while some want just be involved in new and ‘hot’ markets for profit.
- Crypto traders have the opportunity to trade their coins gaining profits on margin.
- While investing in security tokens, investors want to earn from a rapid growth of startup companies, сryptoholders want to exit and convert their cryptocurrency into real assets, which implies risk hedging.
The ICO market wouldn’t exist without the exchange and liquidity of tokens that exists there.
A lack of liquidity seems to be the main reason for the slow development of fiat fundraising. To date, only p2p platforms have a secondary market to resell loans. But there is no opportunity to resell the stocks which an investor has accumulated by investing in crowdfunding platforms. As result of such a situation, less than 5% of the alternative finance in the world belongs to equity-based crowdfunding and 95% of the turnover is at p2p lending platforms.
Considering the existing lack of liquidity of private securities and given the high complexity of cross-border investing, HighCastle has created an investment marketplace, designed to tokenize private securities and alternative investments with the use of HighCastle’s SmartNotes under the UK FCA legal framework once a license will be received.
HighCastle’s SmartNote is a blockchain-based financial instrument, which combines DLT with securities-backed notes, and empowers private and public businesses to raise capital by issuing tradable tokenized securities. This instrument allows investors to have only one bank account or crypto wallet and only one account at HighCastle to be able to diversify their investment portfolio between different regions, currencies, type of securities, industries, and projects.
Crowdfunding and other alternative investment platforms benefit from a partnership with HighCastle, through additional marketing of their projects, and making these projects available to investors from other geographical regions and crypto holders. Additionally, HighCastle provides them with a secondary market, which in turn increases demand for their projects.
Powered by Distributed Ledger Technology, it already provides access to over 9000 projects with a combined £ 3.6 billion in value and enabling £ 145 billion plus 1.7 trillion in private placement deals to be finally tokenized and traded online at HighCastle, the world’s biggest investment marketplace. By proprietary tokenization of private securities of real businesses and creating a secondary market, we aim to achieve liquidity for the private securities market, the same liquidity that was achieved earlier by P2P lending platforms such as Lending Club, which is now a multi-billion USD company.
“If highlighting the three most affecting crypto-trends in 2018, I would name creating new ways of ICO regulation, blockchain-based stocks issuance, and tokenization of traditional securities.2018 will be the year of regulations coming into place. Particularly, these are an introduction of new ICO regulations worldwide, and clarification of ICOs position in regards to the existing crowdfunding legislation in US and UK. Consequently, most of the proper ICOs will be conducted as equity crowdfunding at the licensed fundraising platforms with the blockchain-based stock’s issuance. Stocks and other securities that are issued at the regulated blockchain-based platforms (aka tokenized securities) will become the new most popular type of ICOs, replacing ICOs with the issuance of utility tokens that were popular last year. We will see a growing number of new digital assets trading platforms with different solutions to legally structure the investment deals which are recorded on the blockchain. HighCastle’s SmartNote solution, a blockchain-based financial instrument, which combines DLT with securities-backed notes, and it empowers private and public businesses to raise capital by issuing tradable tokenized securities, is an example of such a solution.” – mentioned Denys Goncharenko, Group CEO at HighCastle at The Fintech Times
While more crypto investors are questioning the usability and liquidity of new utility tokens, HighCastle is pursuing a legally compliant opportunity to issue private security tokens for those small companies and big corporations who want to raise capital in crypto or fiat and offer their equity or bonds to investors. HighCastle has introduced its revolutionary SmartNote protocol solution as an upgrade to outdated crowdfunding and initiate a new era of tokenized investing.
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