On Security Tokens

Billions of dollars were destroyed in ICOs by the viral myth that tokens have key properties of bitcoins. Why should we doubt now that, by removing exactly these properties (and returning to plain equity) STOs will create value?

Historically, the closer the idea of ICO approached bankruptcy, the denser was the media support of the STO (security token offerings) narrative, i.e. sales of tokens that are meant to bind issuers legally. That’s why people tend to connect these two phenomena, implying they have a similar user base, both from investor and fundraiser sides. STOs are often pushed with the ICO-style irritating persistence.

So far, STO is a deliberately complicated regular placement of equity or debt. It can cut no corners, yet. Crypto-exchanges do not list security tokens on their wonder-apparatuses of manipulation.

Tokenisation itself doesn’t add value to a stock, it creates future liquidity premium. While liquidity is surely coming, the global cross-border liquidity is still a myth. While announcements of soon-to-open regulated security token exchanges became ubiquitous, no one calls a specific path for unification of markets (except for those in the EU). 

So Why Bother?

Digital or Not, Securities are Pretty Dumb; True Forward-thinking is to be Brought by Tokens

By the time securities will be ubiquitously digitised, by the time the regulation will be properly amended, securities may stop being securities as we know them. Stocks-on-blockchain is probably a short-term transition species, something like radio shows on TV or horseless carriages.

Stocks and bonds, although being major concepts, are, to large extent, a forced measure of standardization through primitivization. Liquid investment relations can be and should be more complex (current derivatives are still based on the same primitives). Unfortunately, available “computing power” of accounting has never grown faster than the amount of breeding ground for corruption and distrust that limits the complexity and variety.

True automation will bring complexity and variety as it did in all other fields. Programmable contracts will create obligations for programmable legal entities that will represent legacy legal entities and individuals. Although the invention of the calculator does not change arithmetic, it changes the range of tasks that can be solved by “ordinary” people and the emphasis on education.

As society develops, lower classes gradually gain access to the same things as the rich. Now poor and rich already eat essentially the same food and wear essentially the same clothes. Not too long ago, it wasn’t so. Modern financial instruments for poor are mostly inferior. Libraries of investment modules based on programmable legal entities will radically change this situation.

How Much Money Can Tokenisation Save?

In the diagram above, you can see the typical equity crowdfunding operator’s task. Grey circles are “sub-accounts”; the money goes through a sub-account from the particular investor to the particular project and back (as interest or dividends). Each horizontal line of sub-accounts represents a “project bank” where the money accumulates to reach the cap, to prepare for the quarterly distribution, etc.

This function allows operators to easily manipulate money amongst separate “wallets” and it comes at a cost. But how much? Before we calculate, let’s note one thing: it seems pretty obvious, but we need to emphasize that for the economy, these costs add up with each new operator. In other words, if there are 1,000 operators and each pays $10k annually, the yearly impact for the economy is $10M. Operators pay different providers; there are no standards within countries, less so globally.

There are a bunch of SaaS providers that sell subscriptions to crowdfunding operators. They work on a market mature enough so the supply and demand forces have already made the needed measurements for us. Some providers offer full services, whereas the above task is included as a set of APIs so an operator simply uses a specific accounting system in the cloud and pays regular fees. Some providers offer only basic services such as KYC, payment channels integration, and user UI so that the job described in the diagram needs to be done semi-manually or outsourced elsewhere.

To derive the figure for the cost of the function on the diagram, we should look at the pricing schemes of the two types of providers (full and basic) and deduct one from another. This gives us a ~$10k setup fee plus ~$50k annual fee. Those operators who don’t pay full-service providers still do the job internally; it naturally costs them some similar dollars, otherwise the market for the service wouldn’t be mature and stable. The cost doesn’t depend on investment volumes. It varies slightly based on the number of investors, but the average would stay in the same order of magnitude. It is not $5k annually and it is not $500k.

There are roughly 5,000 operators in the world. So we have global annual cost of $2.5*10⁸ (quarter of a billion dollars each year).

Now for the fun part. How much would the same task cost in a tokenised form? Eventually, zero! And to stay zero, it doesn’t even need to be standardized, in an ordinary sense. Tokens are tokens. They are interoperable by their nature. Remember that “obvious notion” we made above? That’s where the core difference lies. In normal centralised operations, the fees are forced repeatedly in time, onto each actor. In decentralised form, it is some few pioneers who bear the costs; the followers will pay less and less until the entire business function becomes a commodity.

Why does it cost zero and how does it work?

Imagine yourself a grandmaster in the simul.

How much does it cost you to walk from one board to another, pick a chess piece and move it? Nothing. Now imagine a super fancy chess show where figures are projected holograms and you make your move by speaking to an operator through the intercom. What are the costs in this case? This depends on how fancy the setup is, how greedy the organizers of the show are, and can be anything.

Today’s online operations have turned into a mega-complicated “hologram”, in each field owned by a bunch of global quasi-monopolies. In contrast, tokens are digital/physical objects that can be moved by the bearer alone! In a tokenised crowdfunding setup, for example, both investors and projects simply watch their “chess figures” by themselves. Each person is responsible for what is at stake for them. Investors use crypto wallets and go from “board” to “board” (projects) and move their pawns, knights, bishops, and queens.

Quarter of a billion might seem not a dramatic saving, but don’t forget that equity crowdfunding represent a tiny-tiny share of the entire equity issuance market — probably way below a thousandth of a percent. It is just that at this segment we can make a quick and fairly reliable estimation without leaving home. The real costs of the serious big issuance are hardly discoverable at all, at least it’d take not research but an investigation: we wouldn’t be too far from the truth saying those costs are being intentionally distorted.

Present State of Securities Tokenisation Looks Upside-down because of Two Disproportions

For reasons yet to be better understood, it has become common in this crypto culture to sell salacious paradoxes.

Professional tokenisers admit flying cars have a long way to go but they still pitch parking tickets to the roofs of skyscrapers.

While the tokens’ role is purely secondary and the old legal framework continued to define 100% of the exercise, tokenisation is marketed at the forefront, without pukka efforts to produce a new meaningful operational layer.


One imbalance is that legal costs are disproportionately higher than the same for tokenisation. It’s like a grotesquely luxurious villa on a small plot of land.

In the current state of affairs, an expensive full-scale legal setup is an unneeded risk. The entire security token contrivance remains untested, so errors planted in “immutable” software could cost you a pretty penny.

For now, it’s enough if you tokenise a simple and inexpensive equity crowdfunding contract. The token-seeking audience doesn’t really care:

— Is it legal?

— Why, of course.

— Fine, wrap it up.


In a way reminiscent of ICOs, securities tokenisation is ridiculously overpriced. The value one can extract from it doesn’t even remotely reflect the asking price. Discounting would make little sense here, though (see [1] above); however, the product upgrade on the other hand, would.

Security tokens are shamefully primitive, insulting the very idea of capital market digitalisation. Tokens can only track who sells to who and not even all of them can pay dividends.

Not embarrassed by this trivial agenda, the STO industry commits another sin by engaging into standards war!

Crypto is all about interoperability and linking fields that incumbent tech can’t or don’t want to link. Where centralised frameworks clash to compete, cryptos can manage to find the way to proliferate, for each.

The tech to provide an overlay layer between existing blockchains through pegged sidechains exists. There’s no need to sacrifice compatibility with anything — native representation of BTC, ETH, and ERC-20s is already in place. Some designs are advanced enough to allow developers to abstract away the complexity from using different protocols and concentrate on delivering an adequate user experience in which all blockchain projects are severely lacking.

One avenue in which ST standards aficionados largely dumb down the technical opportunities is DAO. In addition to facilitating speculation (which isn’t even in place yet), tokens could:

  1. Create free in-house secondary markets
  2. Build collaboration within the industry sector
  3. Contribute to IPO-style online roadshows (legal pump)
  4. Distribute PR narratives (and cook GR ones under the false bottom)
  5. Form HR pools and simplify outsourcing
  6. Help to withstand unionism

Relevant Socio-economics is Ready: it’s Heated and Fertilized

Companies are atoms of the economy, but only part of their valence is used in interactions obedient to the laws of the market. Inner-company non-market or semi-market forces play an important role as well — think compliance departments, trade unions, post-sale relations.

Before the tokenisation era, minority shareholders or creditors used to only unite in the case of a serious trouble. Barriers to start-ups and costs to run a formal community are high, so only a threat of substantial financial loss was a strong enough stimulus to initiate a group. And, naturally, issuers hate investor activism.

But times are a’changing.

It takes a while for a mainstream entrepreneur to understand and accept that nothing on the Internet can be moved without a third party who is almost always interested in fees and manipulation, except for certain classes of crypto-tokens. But when one does understand how this unique digital substance can be transferred hand-to-hand without intermediaries, like physical cash, the attitude changes drastically.

A blockchain-based DAO imposes almost no maintenance costs, which is a strong enough factor in itself. Add here the avalanche of enlightenments on the magical powers of tokens and investor communities mushrooming like after the rain, even around small and medium-sized issuers. Importantly, this will mostly happen with a positive agenda — to help the company grow its revenue and flourish the token.

Putting Horse before Cart with DAO

The decentralized autonomous organization idea had a nasty false start two years ago (TheDAO), but it surely is one of the very few meaningful applications in the entire decentralisation paradigm. Either DAOs take off or the blockchain/DLT universe itself will implode.

DAO circumvents the de-facto prohibition of uncontrolled communities. In many jurisdictions people can’t form unregistered groups [aka secret societies], especially if there’s a value flow inside them. In some countries, people can’t even physically gather in public places without getting permission beforehand. These sort of “rules” should and will obviously be broken. That’s just what decentralisation is for: to break the rules. The ability to break unfair and wrongful rules is a perfect marker for potential success of a decentralised project.

Remember the explosive growth of BitTorrent and why we have great TV series by Netflix now? No modern DApp is any near to that. Even Bitcoin is truly triumphant only where it explicitly breaks the rules: on the black market and in shit-countries with shit-currencies. In developed countries, there’s no ban on surrogate money if you don’t call it the name an existing fiat uses. BTC doesn’t really compete [to death] with USD not because USD is so great, but because BTC simply doesn’t need to compete with it. Where Bitcoin legally coexists with fiats, its success is modest.

Despite the $14B+ invested in DApps and smart contract platforms, the typical DApp has only hundreds of daily active users. While literally all blockchain-based decentralisation concepts are missing mass adoption, this seems to be the perfect moment to revive the DAO idea, particularly with a focused implementation.

What’s Next? Programmable Legal Entities

In liberal countries, DAOs will probably be regulated in a way similar to self-driving cars. That includes:

  • audited code
  • extra insurance
  • identifying closest responsible legal person

In the process of token-based digitisation, capital markets aren’t likely to remain operating exactly the same legal arrangements as now. Otherwise, no significant improvements are to happen.

Large jurisdictions will start associating DAOs with new, more flexible, programmable legal entities, similar to Maltese “technology arrangements”. It is those perfectly legal DAO tokens that will outgrow the functionality of being mere symbols. Not only will they bind a traditional issuer to the securities it issues, they will serve the company development.