The State of the Security Token Ecosystem: Token Issuance and Primary Trading Platforms

Authors: Jonas Gross, Philipp Sandner

This article discusses token issuance and primary trading platforms in the security token ecosystem. Token issuance platforms provide services related to the issuance process of security tokens. Primary trading platforms, on the other hand, connect issuers with investors. We determined that 70 token issuance and primary trading platforms for security tokens are currently* active, or have announced the launch of their platforms. Most of the platforms are located in the USA (35%) and the European Union (21%). Within the EU, the clear leader is Germany with four security token platforms.

Introduction

During the research, we have gathered a set of data that includes: General information about the platforms (country of incorporation, contact info, etc.), Status and features of the platforms (online/offline, number of clients, token features, etc.) and token standards. Within this article, we will share the findings of our analysis of security token platforms.

The importance of security token platforms

First, let us discuss why security tokens are highly relevant. Security tokens are issued as Security Token Offerings (STOs) and the tokens are equipped with security-related features. With the help of security tokens, real assets can be converted into digital tokens ( “tokenization”). In this manner, it is possible to transform tradable financial instruments such as stocks or profit-participation certificates into digital assets on the blockchain. In the future, this will happen in a dematerialized fashion without a certificate or commercial register entry.

Payments back to security holders such as dividend payments can be automatically processed via the underlying smart contracts. Thus, security tokens represent an improvement to classical securities as stocks or profit-participation certificates. More information about the benefits of security tokens can be found here.

In order for an STO to tokenize the asset, the token has to be created and distributed to potential investors. In the case of a STO, there are two options, namely to do it in-house or to use security token platforms. Security token platforms can be separated into either issuance platforms or primary trading platforms.

Issuance platforms

For companies considering the issuance of security tokens, security token issuing platforms can be very promising and can ease various processes with respect to the emission. These platforms help by providing different services with respect to the token generation process. Hence, the tokens can be emitted within a shorter time frame. This is an essential advantage of STOs compared to Initial Public Offerings (IPOs).

Primary trading platforms

On primary trading platforms, the issued tokens are traded for the first time. These platforms make it easier to reach more potential investors. As a consequence, clients can receive their respective funding more quickly since the matching process of supply and demand is designed in a more efficient way.

In order for investors to access STOs, the issuance of the token has to be in line with current regulations. Therefore, platforms are responsible for Know-Your-Customer (KYC) procedures, monitor the issuance with respect to anti-money laundering (AML) and investors’ compliance. They are responsible for investor management and securities’ legal compliance to automate the primary issuance and secondary market transferability of any tokenized asset across all borders.

Security token platforms by country of incorporation

Let us now turn to the analysis of existing platforms. When it comes to the global distribution of the token platforms, it can be seen that North America and Europe account for almost 90% of all platforms.

Figure 1: Countries of incorporation of security token platforms

Source: Own analysis.

Both Switzerland and Germany are considered hubs of blockchain technology. Our analysis reveals that leaders with respect to security token platforms are located in the same geographical areas as the country of incorporation of STOs, as concluded in an analysis by Security Token Network.

It is worthwhile to mention that Canada has six registered security token platforms. If we take into account that the EU covers multiple countries, Canada comes countrywise in the second position only behind the USA.

In the analysis by Security Token Network, where 150 STO projects have been analyzed, Canada had only 4 registered STOs (3% of all STOs). It was quite surprising to see six active security token platforms. On the other hand, UK that had 12 STO projects (8%) currently has only two registered security token platforms. Asia once again shows slow adaptation, with seven platforms. Japan, Israel, UAE and India each have one platform and three are registered in Singapore. Clearly, Singapore is becoming a leader in STO adoption, despite the fact that the rest of Asia is still heavily focused on Initial Coin Offerings (ICOs). Certainly, as the general focus starts to shift to STOs, and they become more widespread, we expect these numbers to rise, and the rest of the Asian Tigers to follow in Singapore’s footsteps.

However, it has to be kept in mind that the capitalization of STOs and the trading infrastructure is currently only marginal and that there are only “experimental” projects. Hence, examination of security tokens and the security token environment is yet to come.

Token issuance platform features

20% of security token platforms have announced or have already conducted STOs on their own. Even though the main goal of STOs is to raise funds, it also implies that the platform is capable to successfully issue tokens and raise funds.

11 of the platforms are one-stop-shop platforms that will offer creation of tokens, primary (initial) trading of tokens and secondary trading of tokens, all on a single platform. Out of 70 platforms, which we included in our research, an additional 16 are offering all of the services to their clients, however not directly, but through their partners.

The data shows that security token platforms, specifically token issuance platforms, are starting to realize that they are part of a lifecycle process of STOs and that they have to be compatible with the rest of the participants of the process. This means that token issuance platforms must be sure that tokens created on their platform will be accepted on secondary markets, for example by exchanges.

21 Token platforms already have clients, which means that they are online and operating. The rest of the platforms are yet to find clients or to launch their platform. As concluded in the previous mentioned analysis by Security Token Network, the most used token issuance platforms are DealBox, Swarm Fund, Securitize, Polymath and Neufund. Out of those five platforms, three of them use the Ethereum blockchain to tokenize assets, one is using Stellar blockchain and one is blockchain ‘agnostic’. This is a sign that a lot of platforms are being built to issue tokens on Ethereum blockchain, but Stellar blockchain is starting to show as a serious competitor in the race for the ‘golden’ standard.

Costs related to this process include a kick-off fee, issuance fee (percentage or fixed amount), success fee per amount raised and a success fee per investor. Fixed costs vary from USD 0 to USD 60,000 while costs related to the amount of funds raised could be much higher. Some platforms charge a monthly or yearly retainer, as well. There are different pricing models among security token platforms and some of them do not even charge any fees until fundraising is closed successfully.

As we have previously mentioned, it is extremely important that a token standard is interoperable with exchanges, which means that tokens created on the platform should be compatible with the exchanges. So far, there are only a few active exchanges. It is not that difficult to make sure that interoperability is fulfilled. However, if more exchanges enter the marketplace, the results are difficult to anticipate.

Conclusion

Security token platforms’ dynamics have a lot in common with STOs. Almost 90% of them are located in North America and Europe. Asia is still trying to catch up, even though we can see there is more progress compared to STOs.

One of the key questions is, how to make sure that tokens issued are tradeable on secondary markets. Some platforms are trying to build all-in-one platforms and give their clients ‘full packages’, while other platforms are more keen on specializing only on one specific service and making sure that tokens issued on their platform will be tradeable on secondary markets.

Remarks

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Jonas Gross is a project manager and research assistant at the Frankfurt School Blockchain Center (FSBC). His fields of interest are primarily cryptocurrencies. Besides, in the context of his Ph.D., he analyzes the impact of blockchain technology on monetary policy of worldwide central banks. He mainly studies innovations as central bank digital currencies (CBDC) and other crypto currency projects as “Libra”. You can contact him via mail (jonas.gross@fs-blockchain.de), LinkedIn (https://www.linkedin.com/in/jonasgross94/), Xing (https://www.xing.com/profile/Jonas_Gross4) or follow him on (Twitter Jonas__Gross).

Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” — a ranking by the German business magazine Capital. The expertise of Prof. Sandner in particular includes blockchain technology, crypto assets, distributed ledger technology (DLT), Euro-on-Ledger, initial coin offerings (ICOs), security tokens (STOs), digital transformation and entrepreneurship. You can contact him via mail (email@philipp-sandner.de), via LinkedIn (https://www.linkedin.com/in/philippsandner/) or follow him on Twitter (@philippsandner).

*Data has been aggregated an analyzed in summer 2019.