The main message of the report is clear: Token-based fundraising is seeing an overall increase in maturity and a move towards more quality projects and STOs.
While token-based fundraising had a quick start in 2018, the number of successful ICOs and the volumes declined sharply during the second half of the year. According to the report, this decline was due to a shift from ICOs to STOs as well as the crypto-bear market.
The total number of successfully conducted ICOs and STOs in 2018 stood at 1,132 ICOs/ STOs globally, twice as much as in 2017. The total amount raised nearly tripled to almost $20bn – that said, the EOS and Telegram ICOs together accounted for $5.8bn of the 2018 volume.
STO volumes still low but increasing
The first STOs were conducted in 2017, raising $22m. The number grew to 28 STOs in 2018, representing a total fundraising volume of $442 million – about 2% of the total token-based fundraising. The lion’s share of STO funds was raised in the second half of 2018, with $232m in Q3 and $106m in Q4.
The largest STO so far was USA-based tZERO, a subsidiary of eCommerce giant overstock.com. tZERO raised $134m in Q3 2018 and was the first STO to enter the list of the top-15 biggest ICOs/STOs in terms of volume.
PWC & CVA expect STO volumes to grow in 2019 and 2020, as the adaption of the funding method will increase. Daniel Diemers, Head of Blockchain EMEA at PwC Strategy, says, “The trend demonstrates that from an investment strategy perspective, ICOs or STOs remain attractive to investors for venture capital financing. However, there is a process of rethinking in favor of more security and transparency for investors.”
Core strengths of STOs
The report identifies five core strengths of STOs:
- Large participation is possible, low barriers of entry, fractional ownership of tokens
- Better cost efficiency than traditional securities issuance
- Regulations based on local securities laws
- Proof of ownership & application of corresponding features and rights
- Legally binding investor rights (e.g., ownership rights, voting rights, dividend rights)
In terms of government regulations, the report identifies Switzerland, Liechtenstein, Germany, USA, and Thailand as attractive STO jurisdictions.
Industry challenges ahead
Despite the overall positive outlook for STOs, the report also points to upcoming challenges. Key elements of a critical market infrastructure are still missing or at least not yet at the required level of quality, states the report.
The report explains that regulated exchanges have not yet moved into the space, and a regulated secondary market is still missing. While that’s correct, some regulated exchanges have already announced to launch security token platforms. Liechtenstein-based LCX and Switzerland-based SDX are just two examples.
Another issue is the lack of flexible custody solutions that offer global 24/7 access combined with the highest security standards. Some banks have started to take on this challenge. Liechtenstein-based Bank Frick, for example, offers crypto custodian services and the bank adheres to EU regulatory standards.
The same goes for the pressing issue of primitive technical standards and APIs. The report notes that industry standards to interlink infrastructure building blocks are missing. That’s correct, and several companies are working on solutions. Bank Frick’s new venture DLT Markets AG, for example, is setting up an institutional platform, granting investors multi-exchange access.
Furthermore, the report identified insufficient market data services and unreliable ratings and quality research as pain-points. Startups like Coin Metrics are addressing this issue. The company has closed a $1.9m funding round, with Fidelity Investments as an anchor investor.
Altogether, the report paints a positive outlook for STOs. The ball is rolling, and multiple startups and established companies are already addressing the market challenges identified by PWC and the CVA. Over the next years, we will see the space maturing, and many of the present-day problems will get solved.