Stock certificates could someday be endangered, replaced by the new invasive species of security tokens.
A new report, Security Tokens: How Regulated ICOs Could Transform Market Structure, from Greenwich Associates says efforts by the U.S. Securities and Exchange Commission and the Commodities Futures Trading Commission to regulate cryptocurrencies and initial coin offerings (ICO) will pave the way for these still-evolving vehicles to transform financial markets generally, and the U.S. stock market in particular.
“Blockchain-based securities will undoubtedly become a more common feature of U.S. securities markets—we are just at the beginning of this evolution,” says Richard Johnson, Vice President of Market Structure and Technology at Greenwich Associates and author of the new report.
A majority of blockchain experts in financial services believe distributed ledger technology (DLT) will reduce operational costs, shorten settlement time, reduce risk, and create new revenue opportunities. However, traditional financial services companies have mostly steered clear of the crypto space out of concern about the regulatory status of crypto enterprises.
Today, regulators are stepping in to tame the ICO frenzy and ensure investors are protected. Under the framework now being discussed, most ICOs will be categorized as securities and not utility tokens, meaning that ICOs will be required to comply with U.S. securities regulations and evolve into Security Token Offerings (STO).
As regulation comes into the crypto space, it is causing convergence among the industry’s DLT initiatives. For example, an Alternative Trading System for security tokens, will likely share many characteristics with current industry initiatives around trading of private shares on blockchain based networks.
“Institutional participation will grow as the SEC lays out a regulatory framework, so it is important that investors understand the developments occurring in the space and the potential regulatory path forward,” says Richard Johnson.