Cryptocurrencies had a wild 2018, tumbling well below some of the record highs seen toward the end of 2017.
Analysts and executives in the industry are increasingly pointing to a fairly new development that could reinvigorate the space: putting securities like stocks and bonds on the blockchain.
So-called security tokens are becoming a new buzzword in crypto. The term is part of a phenomenon in the industry known as “tokenization” — turning real-world assets into digital tokens.
In the case of security tokens, tradable assets like equity and fixed income are transformed into digital assets that use blockchain technology, the virtual ledger of activity that underpins cryptocurrencies like bitcoin.
Security tokens had been talked about for some time, but now one firm is looking to put them to the test.
On Monday, DX.Exchange, an Estonia-based crypto firm, launched a trading platform that lets investors buy shares of popular Nasdaq-listed companies, including Apple, Tesla, Facebook and Netflix, indirectly through security tokens.
Each token is backed by one share of the company traders want to invest in and entitles them to the same cash dividends.
“The crypto community has been talking about security tokens for well over a year now without much progress, so we think the impact will be huge,” Amedeo Moscato, DX’s chief operating officer, told CNBC by email over the weekend.
“By tokenizing stocks of some of the biggest publicly-traded companies like Google, Amazon, Facebook and more, we are opening an untapped market of millions of old and new traders around the globe cutting out the middleman.”
Investors will be able to trade the digital stocks round-the-clock, even after markets close, DX says.
“The ability to trade around the clock, with a range of currencies, offers investors both convenience and liquidity,” Dan Doney, co-founder and chief executive of fintech firm Securrency told CNBC by email over the weekend.
But Doney questioned whether DX’s exchange was sound on the regulatory front.
“We’re unsure and even skeptical of DX.Exchange’s model because we don’t think that it’s acceptable to list tokenized shares of a company without shareholder consent,” he said.
“However, we do think that the model can meet regulatory standards if executed properly.”
DX stressed that its digital stocks are classed as derivatives — with the underlying asset being equity of 10 Nasdaq-listed firms — and that its platform is regulated under the European Union’s Mifid II directive. Mifid II, a set of reforms to EU investment services regulation, aims to protect investors and increase transparency and confidence in the industry post-crisis.
Cyprus-licensed firm MPS MarketPlace Securities is holding the stocks in a segregated account. It built the platform on top of Nasdaq’s Matching Engine technology, which is used across more than 70 international markets.
Experts are pointing to the model as one that could provide a solid form of investment for traders — versus cryptocurrencies like bitcoin, which have proven at times to be highly volatile — as well as a new potential source of fundraising for start-ups and large firms alike.
New security tokens can be issued and sold to investors, similar to how new digital tokens are sold through a crowdfunding method known as an initial coin offering (ICO). This is what’s known as a security token offering (STO).
ICOs were a source of much controversy in the crypto sphere in both 2017 and 2018, with China and South Korea banning the practice and the U.S. Securities and Exchange Commission rapping a number of ventures and founders over alleged illegal activities.
One supposed cryptocurrency start-up called Giza made off with more than $2 million through a fake ICO scam, a CNBC investigation last year showed.
Dubious as the murky world of ICOs is, the funding method at one point eclipsed early-stage venture capital funding. ICO projects raked in almost $6.6 billion in 2017 and $21.5 billion in 2018, according to data provided by ICO listing site CoinSchedule.
The difference with STOs, experts say, is that security tokens are asset-backed and fall within regulatory parameters.
“Security tokens use blockchain to allow for efficient transactions like cryptocurrencies, but are different in all other ways,” Securrency’s Doney said.
“(They) emphasize regulatory compliance, automated regulatory reporting, and represent share interest in value-producing assets. This ultimately provides stable value versus the volatility of crypto.”
Crowdfunding site Indiegogo delved into the world of STOs last year, hosting a platform that let investors indirectly own shares of a luxury ski resort by buying security tokens. That token sale brought in $18 million, according to VentureBeat.
Security tokens and STOs have been compared to “stablecoins,” cryptocurrencies pegged 1:1 to government-backed currencies to avoid the volatility typically seen in the cryptocurrency market. Stablecoins are seen as another potential area for growth in the crypto industry.
Goldman Sachs-backed fintech start-up Circle launched a stablecoin pegged to the U.S. dollar last year, and Chief Executive Jeremy Allaire has told CNBC he thinks “all fiat currency will be crypto” one day.
“Cryptocurrencies and STOs will continue to evolve, and digital stocks are another step in that process,” Daniel Skowronski, DX’s chief executive, told CNBC by email.
Advocates also say that security tokens could reduce the cost of listing a company on the stock market and that they will make it easier to trade less liquid assets like private equity.
And though it may be early days, one expert thinks the trend of tokenizing securities will become a major theme by mid-2019.
“In terms of timing, we hear that mid-2019 is the time-frame when most STOs will be able to ramp into the market,” Lex Soklin, partner and global director of fintech strategy at Autonomous Research, told CNBC by email.
“Given a longer regulatory approval process for these assets (rather than none for ICOs), entrepreneurs have a slower path to market. But perhaps a more stable one.”
Some even believe that, eventually, everything from artwork to real estate will be transformed into digital tokens.
“Over the next decade, we could very well see the tokenization of the entire financial markets,” Mati Greenspan, senior market analyst at eToro, said in a note last week.
“Essentially, anything that has value and can be traded can also be represented as a digital token and traded on a blockchain.”