4 Weeks Ago

The London Stock Exchange (LSE), which is one of the largest regulated exchanges globally, has issued an STO worth £3 million on the LSE’s Turquoise platform.

This is the first STO, or as some are calling it an Equity Token-Offering (ETO), for The LSE, and has been carried out within the Financial Conduct Authority’s (FCA) Fintech Sandbox for a company called 20/30.

Nivaura helped with the 20/30 issue, and had previously been involved in launching a bond on the Ethereum network, claiming that by using Blockchain technology the costs of issuing a bond could fall by as much as 65% to 80%.

Nivaura recently raised over £20 million from Linklaters, Allen Overy, and the LSE to develop their business as they believe that Digitising the issuance of bonds and equities for private and publicly quoted businesses is here to stay.

No doubt other exchanges around the world will be keeping a close watch on the LSE, as they will not want London to steal too big an advantage in this sector, which is attracting considerable institutional interest around the world!

Digital Assets

A Month Ago

In 2014, Mastercoin launched the first Initial Coin Offering (ICO).

It took nearly three years for this capital-raising mechanism to really take off, which subsequently created over 5,000 tokens raising over $22 Billion on a global basis.

As regulators turned their attention to ICOs, arguing that many of them ought to be treated as securities attention has Increasingly focused on the development of Security Tokens (STOs).

STOs are often asset-backed and are subject to security regulations in the jurisdictions in which they are launched and marketed. Making global offerings onerous and practically impossible.

STOs are usually backed/pegged/linked to an asset, examples include private or publicly traded shares, bonds, property (residential and commercial), commodities (gold diamonds), foreign exchange ($, Yen, Euro, £) and even exotic investments like wine, violins, art and other collectables.

STOs, being Digital Assets, mean that they can be listed on Digital Exchanges, which in turn enables them to be traded 24//7 as well as enabling enables smaller investors to buy and sell these assets.

Historically some of these assets, such as real estate and collectables, have proved to be illiquid, and the preserve of the wealthy and institutional investors. However, STOs ought to be able to widen the number of investors who can gain exposure to these previously illiquid assets in the future.

More recently we have seen organisations that want to raise capital by issuing tokens using one of the 300 digital exchanges to launch Initial Exchange Offerings (IEOs). These IEOs are very similar to an ICO, but by being listed on an exchange hopefully have greater liquidity.

Potentially they offer investors a degree of comfort because a third-party (the exchange they are to be listed on), has carried out a degree of due diligence. If the token meets all the tests - including that the company that is creating the it is not intending to use any capital raised to build its infrastructure, IT, or platform etc. it may be classed as an exchange or utility token, so outside of the regulations that capture STOs.

Some exchanges have decided to call their IEOs Direct Premium Offerings (DPOs), usually designed to offer investors access to a cryptocurrency at a discount to the market price. In traditional stock exchanges these are called “rights issues”.

More recently we’re seeing Token Curated Registries (TCR), which are designed to replace centralised lists, eg. a list of the top ten hotels or restaurants in a City. TCR is like an incentivised voting game that creates lists which are maintained by the people who use them. Users collectively vote (using tokens) to decide which submissions are valid, which should be included in the list, and where they will be ranked.All of the above typically use Blockchain technology as part of the process of bringing a company to a wider audience, apart from Direct offers, which simply look at raising capital (much like an Initial Placing Offer (IPO)) but do so without the costly underwriting fees of investment banks.

As Slack have announced they are to launch a Direct Offer, will Pinterest, Zoom, Uber or AirBnb also use Direct...

Capital Markets
This was the message reported from China this week as they confirmed that they are cracking down on organisations raising capital via Initial Coin Offerings (ICOs) and Security Token Offerings (STOs).

It was only in December 2018 that Beijing’s Municipal Bureau of Finance said “The ICO (initial coin offering) model is getting left behind for a new concept called STO. I want to issue a warning to anyone considering running an STO in Beijing,” Xuewen said. “Don’t do it in Beijing – it is illegal. You can only engage in such activities with the approval from the government.” Government approval, what does this mean?

This is at odds with recent promotion of a
book on Crypto assets on a Chinese state-run TV last month that reportedly has an audience of one billion. The presenters telling viewers that Crypto assets could be one of the best investments they could ever make.

It was only in December 2018 that there were rumours that the People’s Bank of China was looking at ways to create its own cryptocurrency. It apparently thought this type of digital asset could replace Bitcoin and perhaps even the U.S. Dollar.
Given these conflicting messages, we spoke to GlenBit in Edinburgh that owns a Digital Asset platform powered by Japanese technology, as they have close contacts in China. GlenBit looked at various Chinese government websites and national publications and could find no mention of this ICO/STO ban. They did find an article on a well known Chinese website that follows Crypto news, called ‘Bi Hu’, which using Google translated this article https://bihu.com/article/1601678341 which said “After the ICO foam was broken, many countries began to ban ICO… Thus, a new form of new currency, STO, was born that will become the main mode to raise money for Chinese blockchain project”

Time will tell the actual stance the Chinese are taking…

Digital Assets
AXA XL, Europe’s second-largest insurance company, who made $2.6 billion profit in 2018, has announced that it is partnering with New York-based Assurely, an Insurtech startup, to offer insurance cover for firms that are involved with Crowdfunding and or Security Token Offerings (STOs).

The new product is called CrowdProtector and provides issuers protection against investor complaints and lawsuits so investors may get their principal investment returned should the issuer misuse the funds, purposefully misrepresent information in their offering documents, or steal the money.

This is significant as institutions, as part of their due diligence process, look for issuers to have insurance arrangements in place prior to investing. Historically investing in small businesses and start-ups had largely been the preserve for wealthy investors and specialist funds. However, with the advent of Crowdfunding and now STOs smaller investors are able to get access to what are often start up companies, so this insurance cover is welcome to potentially offer protection to these often less sophisticated investors.