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Tightened Regulatory Environment Drives Development of STOs

09/10 – 09/16

Tightened Regulatory Environment Drives Development of STOs
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WEEKLY RECAP

  • Total market cap. reached $201.44bn (a 4.1% increase), and 7-day trading volume slumped 13.4% for top 100 crypto


WEEK AHEAD

  • 19 Sep: The Cboe XBT expiration date for BTC
  • 22 Sep: EOS hosts Global Hackathon in London


THOUGHTS OF THE WEEK

The crypto market slumped early this week following a series of regulatory announcements in the US. A New York federal judge ruled that ICO frauds are to be prosecuted under the US securities law. With 95% of ICO tokens being built on Ethereum (ETH), it comes as no surprise that the price of ETH dropped to a new 2018 low of USD 170.26 following the news.

ICO regulations has also been a hot topic in Europe. In particular, the French government has accepted the article of the Business Growth and Transformation bill (PACTE) on ICO regulation. This article enhances investors’ protection by requiring ICO conducting companies to apply for a license from the Autorité des Marchés Financiers (AMF), disclosing the details of the offer and the issuer. As the first G7 country to legalize ICOs, we expect French regulations to provide a firm point of reference for other G7 and EU nations to follow.

Tightened regulations have led to an increasing interest in security token offerings (STO) as an alternative method for crypto fundraising. STOs present a bigger market potential than ICOs, with the potential of the tokenization of current financial securities instruments (e.g. equities, bonds, options). We believe that STOs provide an edge over ICOs with regards to exchange regulations, which can more effectively guard against unethical trading practices such as front running and wash trades. In comparison with IPOs in traditional finance, investors’ risk can be better diversified as tokenized securities can be divided into smaller units without restrictions, which enhances the transferability of tokens in secondary markets.

The interest for STOs is also growing among crypto exchanges. Following the partnership with OKEx in July, Malta’s stock exchange (MSE) recently signed a Memorandum of Understanding (MOU) with Binance to launch a security token trading platform. Despite Malta’s early effort towards STOs, we believe that its success will depend on the regulatory stance towards STOs from major nations. As noted by Rudolf Medvedev (CEO of Ternion), if Maltese crypto regulations are not widely recognized among nations, then the advantage of performing a Maltese STO over an ICO will be limited. We expect that major nations like the US will publish guidelines on classifying the nature of crypto tokens in the near future, thereby paving the way for the massive adoption of STOs.

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