By
Temitope Olatunji
April 24th, 2024
Last year a piece of Andy Warhols art named ”4 Small Electric Chairs (1980)” was listed on Maecenas’ blockchain platform. Up to 49% ownership interest in the painting was made available for purchase in auction.
Part of Warhol’s acclaimed “Reversal” series, the iconic painting is currently valued at US$5.6m (£4.2m). The auction distributed 31.5% of ownership rights for the 2-meter high painting, raising around $1.7 million. The painting was divided into unchangeable digital certificates based on ethereum. Buyers were able to spend either Bitcoins (BTC), Ethereum (ETH) or platform’s native tokens called ART.
Only 8% of all artwork of the global art marked is sold online. Implementing blockchain even in such a traditional community will undoubtedly boost that figure. Moreover, the technology will help to eradicate cases of fake art dealings, the market which currently makes an astonishing $6 billion a year.
STOs As the New ICOs?
Tokenization makes it possible for anyone to own a piece of artwork. Fracturization allows tokens to be divided into even very small units and sold to individual investors. In other words, you could go see the art piece and own part of it, too.
The security token offering (STO) is already turfing the ICO, but this new coin is following the rules. During the early blockchain boom, the majority of ICOs were raising billions of dollars and issuing tokens to investors that could be immediately traded or cashed out after the ICO finished.
It was pretty obvious that most of those investors, if not all of them, were buying tokens not just because they thought the project was interesting, but because they expected to profit. According to the Securities and Exchange Commission (SEC), that means the tokens are securities. It may just seem so, that STOs are not so revolutionary until they become mass adopted.
The SEC usually uses the “Howey Test” to determine whether an investment is a security or not. Unfortunately, while most of these ICOs met the Howey Test criteria, they did not go through any sort of approval process before their ICOs and were thus technically operating illegally. The SEC cracked the hammer down hard, and rightfully so.
In November 2018, to the excitement of many in the crypto industry, the first ever security token exchange, OpenFinance Network, launched by publicly listing two of the earliest security tokens: Blockchain Capital (BCAP) and SpiceVC.
This event marked a new beginning for the security token industry: one that many believe will grow to become a multi-trillion dollar market.
Even the most aggressive cost savings estimates place security token issuance costs between $600,000 and $1m. This is nearly identical to the costs of issuing traditional securities and may prohibit smaller issuers from launching.
Is That a True Representation?
The reality is that in today’s markets, issuing a security token may actually cost more than a traditional private placement.
Security tokens are kind of a new domain for regulators. As such, the legal costs for issuing a security token can exceed those of a traditional private placement in which legal documents are highly standardized. Prospective issuers will need to coordinate with and pay a whole host of new service providers including security token issuance platforms, custodians, and broker-dealers.
In fact, there are currently around two dozen security token issuance platforms – outnumbering the number of successful security token issuances to date.
The blockchain billionaire and founder of a Blockchain Capital, Brock Pierce, says that security tokens are going to be revolutionary.
He said:
“They’re going to give birth to a quadrillion market. That’s because we’re seeing the tokenization of the world’s fiat money, debt market, equities, real estate, art…”
He concludes with this thought about the upside of down markets:
“We’re going to see big things being built, multiple applications hitting a million users. I love the fact that prices are down. When prices are up, very little gets built because teams don’t stick around. Everyone is getting rich too quick and that de-motivates people. All the best things I’ve seen built in this ecosystem have been built in bear markets.”
The truth behind Brock’s words rang true throughout 2018. The US securities regulatory authority— the Securities and Exchange Commission (SEC)— became increasingly involved in the blockchain space.
The SEC penalized both ICOs and exchanges, and even made fines and arrests as a result of non-compliant custody solutions and general investor fraud.
Security tokens have become attractive to many as a result of their compliance. Since security tokens explicitly declare themselves securities, they are subject to the existing securities laws, at least in the United States. The clear regulatory guidelines have led some companies to cancel ICOs, and turn to the STO as a compliant alternative.
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