It's not all bad news for security tokens, if you look hard enough

It's not fun being the bearer of bad news, but there seems to be plenty of it when it comes to the security token world.

Just last week, much-hyped Polymath announced a series of layoffs and poor levels of token uptake, while in April, Harbor cancelled its flagship client in Colorado. Meanwhile, on the consumer side, secondary-market demand has been lacklustre according to SecurityTokenCap, suggesting tokenized real estate, equity and debt isn't all that hot yet.

But it's not all bad - there are some positive signs lurking too. We mean news genuinely worth paying attention to; not hype from small-time firms in abstract jurisdictions (of which there is admittedly plenty).

To recap, this month alone:

• Euronext invested €5M into Tokeny, Europe's best-known tokenization platform. Elsewhere, Singapore's national stock exchange announced yesterday that it had become a strategic investor in a security token trading platform called 1X. This is important as there are currently few legitimate trading venues beyond tZero, OpenFinance, and at a stretch, dx.exchange.
• On the regulatory front, UK sandbox graduate Globacap became "the UK's first fully regulated digital security offering and administration platform” after getting the thumbs up from the FCA. Meanwhile, in the U.S., the Securities and Exchange Commission declared Blockstack's token both a regulated security and a utility token for the first time.
• Institutions are also now watching. Latin America's largest standalone investment bank BTG Pactual committed to issuing over $1 billion in security tokens last week.

Now, Securitize, a U.S.-based firm which issues and manages security tokens, has released its own optimistic update. The firm, which raised nearly $13 million in its last raise, revealed to The Block that it saw a record Q2, increasing its total number of clients to 43 and giving a healthy boost to its top line.

"We have a strong business model...We've generated several millions of dollars in revenue since Q1 2018," Carlos Domingo, Securitize's CEO, said in an interview.

"People see news like Polymath's and are like 'security tokens are a joke.' But it's not true. Q2 was our best yet," noting the firm signed 17 new clients in the most recent quarter alone. 

To date, nine of Securitize's clients have issued ERC-20 tokens, distributed across 1,500 individuals and raising nearly $200 million. That constitutes at least 20% of total funding raised in STOs this year, according to Blockstate, although Domingo guesses it's closer to 50%.

At the very least, there's growing demand to issue and invest in digital securities in the U.S. Indeed, Securitize expects to have 100 clients by early next year, Domingo said on an episode of The Scoop - The Block's podcast. [related id="1"]

The 30-person firm is now looking to Japan as a potential area of growth, with lenient regulation in the pipeline.

Securitize is also reportedly working hard on rebranding security tokens to be called "tokenized securities" or "digital securities" in the hope they'll be more appealing to institutions. Domingo said the firm spends ~30% of its budget just on educating the public, investors and legislators about the asset class, which he says is one of the space's major obstacles.

The one bit of bad news that comes with Securitize's success is that, by its own admission, it is creating something of a monopoly as one of the few regulated, revenue-making, established entities.

“I wish we had more competition. It would help the industry grow faster...It's taking a lot longer than anyone expected."

Securitize's clients also are seeing little demand for their tokens once listed, with the number of trades still only in the hundreds. Nonetheless, Domingo is resolute that overall, things are looking up.

"This may seem small, but it’s actually a remarkable number considering that these marketplaces have only really been online for a few months," he said in a statement. "This time last year all this sounded really futuristic. But we've got proof now that the tech works, even if there's not a lot of liquidity," he told The Block.

More good news on the horizon?

It's worth bracing for further breakthroughs, too.

Front-runner Archax is set to launch a regulated trading digital securities platform later this year. In theory, that should bring serious liquidity to accredited European investors.

Meanwhile, Gemini is looking at attaining a broker dealer licence, which could be used to trade digital securities representing private-equity. There are also whispers that Nasdaq is helping build a private blockchain with similar uses. Elsewhere, Bloomberg reported Seychelles' national securities exchange is planning to list a regulated security token "soon," beating the Swiss stock exchange, which isn't due to release its digital securities until 2021.

Step by step, we should start to see investors backing more platforms, trading a myriad of security tokens worldwide - the key to adoption according to Carlos Domingo. 

So, while 2019 may yet not have proven to be the "year of the security token" predicted, it's clearly laying some strong groundwork. It's a positive sign that there is enthusiasm and capital being invested now. Who knows what 2020 could hold?